Qass. Book nn ! \^\ ^ \ \ yV^iCw: CL^^xrtr-^ ^^^..^^^Z. 3 Idem, pp. 46, 47; cf. " Final Report of Industrial Commission," pp. 463-465. DEFECTS OF THE EXISTING LAND SYSTEM 79 mately prevail in the bituminous coal mines. Iron ore has been brought under the control of the United States Steel Corporation to such an extent that the Commissioner of Corporations writes : *' Indeed, so far as the Steel Cor- poration's position in the entire iron and steel industry is of a monopolistic character, it is chiefly through its control of ore holdings and the transportation of ore." ^ From this statement, however, it is evident that the monopoly depends upon control of transportation as well as upon ownership of the ore beds. If the former were properly regulated by law, the latter would not be so effective in promoting monopoly. Speaking generally, we may say that when a great cor- poration controls a large proportion of the raw material entering into its manufactured products, such control will supplement and reinforce very materially those other special advantages which make for monopoly.^ Prominent examples are to be found in steel, natural gas, petroleum, and water powers. In his " Report on Water Power De- velopment in the United States," the Commissioner of Corporations (March 14, 1912) declared that the rapidly increasing concentration of control might easily become the nucleus of a monopoly of both steam and water power. Ten great groups of interests, he said, already dominated about sixty per cent, of the developed water power, and were pursuing a policy characterised by a large measure of agreement.^ As a rough generalisation, it would be fair to say that in one or two instances, at least, land- ownership is the chief basis, and in several other cases an important contributory cause of monopoly. Even an approximately accurate estimate of the amount of money which consumers are compelled to pay annually 1 " Report of the Commissioner of Corporations on the Steel In- dustry," Part I. p. 60. 2 Cf. Hobson, *' The Industrial System," pp. 192-197. 3 Pp. IS, 16, 29-31. 8o DISTRIBUTIVE JUSTICE for the products of such concerns over and above what they would pay if the raw material were not wholly or partially monopolised, is obviously impossible. It may possibly run into hundreds of millions of dollars. Excessive Gains from Private Land ownership The second evil of private landownership to be consid- ered here, is the general fact that it enables some men to take a larger share of the national product than is con- sistent with the welfare of their neighbours and of society as a whole. As in the matter of monopoly, however, so here, Single Tax advocates are chargeable with a certain amount of overstatement. They contend that the land- owner's share of the national product is constantly increas- ing, that rent advances faster than interest or wages, nay, that all of the annual increase in the national product tends to be gathered in by the landowner, while wages and in- terest remain stationary, if they do not actually decline.^ The share of the product received by any of the four agents of production depends upon the relative scarcity of the corresponding factor. When undertaking ability be- comes scarce in proportion to the supply of land, labour, and capital, there is a rise in the remuneration of the busi- ness man ; when labour decreases relatively to undertaking ability, land, and capital, there is an increase in wages. Similar statements are true of the other two agents and factors. All these propositions are merely particular illus- trations of the general rule that the price of any commodity is immediately governed by the movement of supply and demand. In view of this fact, it is not impossible that rent might increase to the extent described in the preced- ing paragraph. All that is necessary is that land should become sufficiently scarce, and the other factors sufficiently plentiful. As a fact, the supply of land is strictly limited by nature, 1 Cf. *' Progress and Poverty," books III and IV. DEFECTS OF THE EXISTING LAND SYSTEM 8 1 while the other factors can and do increase. There are, however, several forces which neutralise or retard the tend- ency of land to become scarce, and of rent to rise. Mod- ern methods of transportation, of drainage, and of irriga- tion have greatly increased the supply of available land, and of commercially profitable land. During the nine- teenth century, the transcontinental railroads of the United States made so much of our Western territory accessible that the value and rent of New England lands actually declined ; and there are still many millions of acres through- out the country which can be made productive through drainage and irrigation. In the second place, every in- crease of what is called the " intensive use " of land gives employment to labour and capital which otherwise would have to go upon new land. In America this practice is only in its infancy. With its inevitable growth, both in agriculture and mining, the demand for additional land will be checked, and the rise in land values and rents be correspondingly diminished. Finally, the proportion of capital and labour that is absorbed in the manufacturing, finishing, and distributive operations of modern industry is constantly increasing. These processes call for very little land in comparison with that required for the extractive operations of agriculture and mining. An increase of one- fifth in the amount of capital and labour occupied in grow- ing wheat or in taking out coal, implies a much greater demand for land than the same quantity employed in fac- tories, stores, and railroads.^ As a consequence of these counteracting influences, it appears that the share of the landowners has not increased disproportionately. The most comprehensive endeavour yet made to determine the growth and relative size of the different shares of the national product is embodied in Professor W. I. King's volume, " The Wealth and Income of the People of the United States," published in 1915. 1 Cf. Walker, " Land and Its Rent," pp. 168-182, Boston, 1883. 82 DISTRIBUTIVE JUSTICE It estimates that the total annual income of the nation in- creased from a little less than two and one-fourth billions of dollars in 1850 to a little more than thirty and one-half billions in 19 10, or slightly more than fifteen times. During the same period rent, the share of the landowners, advanced from $170,600,000 to $2,673,900,000, or about fifteen and three quarter times. In the year 1910, there- fore, the landowners were receiving but a very small frac- tion more of the national product than their predecessors obtained sixty years earlier.^ As to the relative size of the shares going to the different factors in 19 10, the figures are even more remarkable. Wages and salaries absorbed 46.9 per cent.; profits, 27.5 per cent.; interest, 16.8 per cent. ; and rent, only 8.8 per cent.^ This was exactly the same per cent, that the landowners received in i860. To be sure, these figures are only approximations, but they are probably the most reliable that can be obtained from our notoriously incomplete statistics, and they will deserve respectful consideration until they have been refuted by specific criticism and argument. In the opinion of their compiler : " The figures for wages and salaries are believed to be fairly accurate; those for rent are thought to have an error of not more than twenty per cent. The separa- tion of the share of capital from that of the entrepreneur is very crudely done and no stress should be laid on the results. The total for all shares is thought to be more accurate than the mode of distribution, and for the last three census years should come within ten per cent, of the correct statement of the national income. For earlier years the error should not be over twenty per cent, at the outside." ^ If we make the maximum allowance for error in reference to the share of the landowner, and assume that the rent estimate is twenty per cent, too low, we find that it was still only ten and one-half per cent, of the total product in 1910, which represents an increase of less than 1 Page 158. 2 Page 160. s Page 158; footnote. DEFECTS OF THE EXISTING LAND SYSTEM 83 three per cent, since 1850. It is significant that Dr. Howe, who has no bias toward belittling the share of the land- owner, suggested as his minimum and maximum estimates of the land values of the country in 1910 figures which are respectively fifty per cent, below and only five per cent, above the amount taken by Professor King as the basis for his estimate of rent.^ There is, consequently, a strong presumption that Professor King is right when he stig- matises as " absurd " the contention of the Single Taxer, " that all the improvements of industry result only in the enrichment of the landlord. . . . The value of our prod- ucts has increased since 1850 to the extent of some twenty- eight billions of dollars, while rent has gained less than three billions. Evidently it has captured but a meagre part of the new production." ^ There are strong indications, however, that the per cent, of the product going to the owners of land has increased considerably in the last twenty years, and that this move- ment will continue indefinitely. According to Professor King's calculations, the per cent, of the total product assignable as rent advanced from 7.8 in 19,00 to 8.8 in 1910, which meant that during that period the national income increased only 70 per cent., while the share of the landowner increased 91 per cent.^ It is true that a dis- proportionate advance in rent has occurred between other census years, only to be neutralised by subsequent de- creases; but the present instance seems to include certain features which did not characterise any of the former gains in the relative share of the landowner. Since 1896 the prices of food products " rose most rapidly in the case of meat, dairy products, and cereals, which were derived directly from the land. The prices of raw materials show a like relation. Timber, grain, and other raw materials 1 " Privilege and Democracy," p. 307. 2 Page 160. 3 Op. cit, pages 160, 158. 84 DISTRIBUTIVE JUSTICE obtained directly from the land have risen rapidly in price, while semi-manufactured articles have increased less rap- idly, or have decreased in price. . . . There is no parallel in any other field to the advance in those land values upon which civilisation most directly depends — timber lands, fertile agricultural land, and land in large commercial and industrial centres. The recent rise in land values has been little short of revolutionary." ^ Between 1900 and 19 10 the value of farm lands per acre in the United States advanced 108.1 per cent.^ During the eight years beginning with July i, 1906, the value of land in Greater New York increased something more than one-third; in the principal cities of New Jersey, and in Worcester, Washington, Boston, and Buffalo, somewhat less; in Springfield and Holyoke, considerably more. In the most recent ten years for which figures are available (since 1900 in every case) the land values of Milwaukee, St. Louis and San Francisco averaged only a slight degree of expansion, while those of Kansas City doubled, and those of Houston, Dallas, Los Angeles, and Seattle trebled. To quote Professor Nearing, from whose compilations these estimates have been summarised : ** The total extent of the increase in American city land values may be hinted at rather than stated with any certainty. The scattering instances in which land and improvements are separately assessed led to the conclusion that in a large, well-estab- lished city, growing at approximately the same rate as the other portions of the United States, the land value is doubling in from ten to twenty-five years. In the new, rapidly growing city of the middle and far West and in some of the smaller cities of the East, the ratio of increase in land values is far greater, amounting to two-fold or 1 Professor Nearing in " The Annals of the American Academy of Political and Social Science," March, 191 5. 2 Thirteenth Census, Bulletin on " Farms and Farm Property," page I. DEFECTS OF THE EXISTING LAND SYSTEM 85 even three- fold in a decade. In a few instances the rate of increase is much smaller, and in one case, Jersey City, land values over a period of seven years have actually decreased. . . . Nevertheless, the few available long range figures indicate a widespread and considerable increase in American city land values." ^ The rise in the value of timber lands during the last thirty years has been, in the words of the federal investi- gators, " enormous." For the ten-year period ending in 1908, " the value of a given piece of southern pine taken at random is likely to have increased in any ratio from three-fold to ten-fold." About the same ratio of increase obtained in the Pacific Northwest, and a somewhat smaller increase in the region of the Great Lakes.^ While a con- siderable decline has taken place since 1908, it is only tem- porary ; for the demand for timber is notoriously increasing several times as fast as the supply. That this upward movement in the value of all three kinds of land will continue without serious interruption, seems to be as nearly certain as any economic proposition that is dependent upon the future. Although millions of acres of arable lands are still unoccupied in the United States and Canada, the far greater part of them require a comparatively large initial outlay for draining, clearing, irrigation, etc., in order to become productive. Hence there is no likelihood that they can be brought under culti- vation fast enough to halt or greatly retard the advancing values which follow upon the growth of population and the increased demand for agricultural products. In all prob- ability the greater part of them will not come into use until the prices of farm products have risen above the present level. Obviously this supposes an increase in the value of 1 The Public, Nov. 26, 1915. For an account of increases in the principal European cities, see Camille-Husymans, " La plus-value immobiliere dans les communes beiges " ; Gand, 1909. 2 " Report of the Commissioner of Corporations on the Lumber Industry," Part I, pp. 214-216. 86 DISTRIBUTIVE JUSTICE all farm land, old and new. Nor is the adoption of better methods of farming likely to check seriously the upward movement. Between 1900 and 19 10 the urban population of America increased 34.8 per cent., as against a gain of only 21 per cent, in the total population. This dispropor- tionate growth in the number of the city dwellers will if continued make certain what is in any case extremely prob- able, a steady and considerable advance in urban land values and rents. The circumstance that these remarkable increases in land values are a comparatively recent phenomenon has pre- vented them from receiving the attention that they deserve, either from the general public or from the students of economic and social problems. The total value of the land of the country has increased steadily from decade to decade, but so has the total value of capital, and even between 1900 and 1 9 10 the increase in the share of the capitalist was exactly equal to the increase in the share of the landowner, that is, 91 per cent.-^ Those persons who complacently make such comparisons overlook the new and significant feature of the more recent advances in land value; namely, that they are due in only a slight degree to an expansion of the area of land under consideration. The increases of value quoted in the foregoing paragraphs are increases per acre and per urban lot, not increases derived from bringing new land under cultivation or new tracts within municipal limits. On the other hand, the increases in the value of capital, now as always, represent for the most part con- crete additions to the existing stock of productive instru- ments. Except where monopoly holds sway, particular capital instruments, unlike particular pieces of land, do not increase in value. Hence the owner of a given amount of capital does not profit by the advance in the total value of capital as the owner of the average parcel of land profits by the general increase in the value of land. This means that * 1 King, op. cit, p. 158. DEFECTS OF THE EXISTING LAND SYSTEM 8/ all those consumers of products who are not landowners must pay an increasing tribute to those who are landed proprietors. So much for the proportion of the national product which goes to the landowning class. Let us next inquire how the landowner's share, or rent, is distributed throughout the population. If it were equally divided among all persons, its increase relatively to the shares of the other factors would, from the social viewpoint, be a matter of consid- erable indifference. On the other hand, if it is secured by a minority of the population, and if that minority tends to become smaller as the share itself becomes larger, we have a socially undesirable condition. In the twenty years between 1890 and 19 10, the pro- portion of farm families in the United States owning farm land, mortgaged or unmortgaged, declined from 65.9 per cent, to 62.8 per cent.; the proportion of urban families owning their homes, encumbered or unencumbered, in- creased from 36.9 to 38.4 per cent., and the proportion of all families owning homes, encumbered or unencumbered, fell from 47.8 to 45.8 per cent. Of the homes owned by their occupiers, 28 per cent, were mortgaged in 1890, and 32.8 per cent, in 1910.^ While a decline of two per cent, in the home owning and landowning families in twenty years, and an increase of almost five per cent, in the number of those families who hold their property subject to encum- brance, may not seem very serious in themselves, they in- dicate a definitely unhealthy trend. Not only are the land- owning families in a minority, but the minority is becoming smaller. Nevertheless, when we consider the amount of gains accruing to the average member of the landowning class, we do not find that it is unreasonably large. The great majority of landed proprietors have not received, nor are they likely to receive, from their holdings incomes suffi- 1 Thirteenth Census, Vol. I, p. 1295. 88 DISTRIBUTIVE JUSTICE ciently large to be called excessive shares of the national product. Their gross returns from land have not ex- ceeded the equivalent of fair interest on their actual in- vestment, and fair wages for their labour. The landown- ers who have been enabled through their holdings to rise above the level of moderate living constitute a compara- tively small minority. And these statements are true of both agricultural and urban proprietors. It is true that a considerable number of persons, abso- lutely speaking, have amassed great wealth out of land. It is a well known fact that land was the principal source of the great mediaeval and post-mediaeval fortunes, down to the end of the eighteenth century. " The historical foundation of capitalism is rent." ^ Capitalism had its beginning in the revenue from agricultural lands, city sites, and mines. A conspicuous example is that of the great Fugger family of the sixteenth century, whose wealth was mostly derived from the ownership and exploitation of rich mineral lands.^ In the United States very few large fortunes have been obtained from agricultural land, but the same is not true of mineral lands, timber lands, or urban sites. " The growth of cities has, through real es- tate speculation and incremental income, made many of our millionaires." ^ " As with the unearned income of city land, our mineral resources have been conspicuously prolific producers of millionaires." ^ The most striking instance of great wealth derived from urban land is the fortune of the Astor family. While gains from trading ventures formed the beginning of the riches of the orig- inal Astor, John Jacob, these were " a comparatively in- significant portion of the great fortune which he trans- iHobson, "The Evolution of Modern Capitalism," p. 4; London, 1907. 2 Harper's Monthly Magazine, Jan., 1910. sWatklns, "The Growth of Large Fortunes," p. 75; N. Y., 1907. ^Idem, p. 93. DEFECTS OF THE EXISTING LAND SYSTEM 89 mitted to his descendants." ^ At his death, in 1848, John Jacob Astor's real estate holdings in New York City were valued at eighteen or twenty million dollars. To-day the Astor estate in that city is estimated at between 450 and 500 millions, and within a quarter of a century will not improbably be worth one billion dollars.^ According to an investigation made in 1892 by the New York Tribune, 26.4. per cent, of the millionaire fortunes of the United States at that time were traceable to landownership, while 41.5 per cent, were derived from competitive industries which were largely assisted by land possessions.^ The proportion of such fortunes that is due, directly or indi- rectly, in whole or in part, to landownership has undoubt- edly increased considerably since 1892. With regard to great individual or corporate land hold- ings, there exist no adequate statistics. A few conspicu- ous instances may be cited. The United States Steel Cor- poration owns lands yielding iron ore, coal, coke, and timber which are valued by the' Commissioner of Cor- porations at nearly 250 million dollars, and by the Steel Corporation itself at more than 800 million dollars.* Three companies own nearly eleven per cent., and 195 in- dividuals or corporations own 48 per cent, of all the pri- vately owned timber in the United States.^ The United States Census of 1910 shows that the number of farms containing 500 acres or over was about 175,000, and com- prised ten per cent, of the total farm acreage. One hun- dred and fifty persons and corporations are said to own 1 Youngman, " The Economic Causes of Great Fortunes," p. 45 ; N. Y., 1909. 2 Howe, op. cit., pp. 125, 126. 3 Cf. Commons, "The Distribution of Wealth," pp. 252, 257; N. Y., 1893. * *' Report of the Commissioner of Corporations on the Steel In- dustry," Part I, p. 314, 5 " Summary of Report of the Commissioner of Corporations on the Lumber Industry," pp. 3-8. 90 DISTRIBUTIVE JUSTICE 220,000,000 acres of various kinds of land. None of these holders has less than ten thousand acres, and two of the syndicates possess fifty million acres each.^ Exclusion from the Land One of the most frequent charges brought against the present system of land tenure is that it keeps a large proportion of our natural resources out of use. It is con- tended that this evil appears in three principal forms: owners of large estates refuse to break up their holdings by sale; many proprietors are unwilling to let the use of their land on reasonable terms; and a great deal of land is held at speculative prices, instead of at economic prices. So far as the United States are concerned, the first of these charges does not seem to represent a condition that is at all general. Although many holders of large mineral and timber tracts seem to be in no hurry to sell portions of their holdings, they are probably moved by a desire to obtain higher prices rather than to continue as large land- owners. As a rule, the great landholders of America are without those sentiments of tradition, local attachment, and social ascendency which are so powerful in maintain- ing intact the immense estates of Great Britain. On the contrary, one of the common facts of to-day is the per- sistent effort carried on by railroads and other holders of large tracts to dispose of their land to settlers. While the price asked by these proprietors is frequently higher than that which corresponds to the present productiveness of the land, it is generally as low as that which is demanded by the owners of smaller parcels. To be sure, this is one way of unreasonably hindering access to the land, but it falls properly under the head of the third charge enu- merated above. There is no sufificient evidence that the large landholders are exceptional offenders in refusing to sell their holdings to actual settlers. 1 From articles in " The Single Tax Review," vol. 9, nos. 5, 6. DEFECTS OF THE EXISTING LAND SYSTEM 9 1 The assertion that unused land cannot be rented on reasonable terms is in the main unfounded, so far as it refers to land which is desired for agriculture. As a rule, any man who wishes to cultivate a portion of such land can fulfil his desire if he is willing to pay a rent that cor- responds to its productiveness. After all, landowners are neither fools nor fanatics: while awaiting a higher price than is now obtainable for their land, they would prefer to get from it some revenue rather than none at all. As a matter of fact, almost all the agricultural land that is im- mediately available for renting, is constantly under culti- vation. This refers to land that is already under the plough, and is provided with buildings and other neces- sary improvements. Practically none of this is out of use. New land which is without buildings is not wanted by tenants, unless it is convenient to their residences, be- cause they do not desire to expend money for permanent improvements upon land that they do not own. True, the present owners of such land might erect buildings, and then let it to tenants. In so far as new land might profitably be improved and cultivated, and in so far as the owners are unwilling or unable to provide the improve- ments, the present system does keep out of use agricultural land that could be cultivated by tenants. Mineral and tim- ber lands are sometimes withheld from tenants because the owners wish to limit the supply of the product, or because they fear that a long-term lease would prevent them from selling the land to the best advantage. As to urban sites, the contention that we are now examining is generally true. The practice of leasing land to persons who wish to build thereon does not, with the exception of a very few cities, obtain in the United States for other than very large business structures. As a rule, it does not apply to sites for residences. The man who wants a piece of urban land for a dwelling or for a moderately sized business build- ing cannot obtain it except by purchase. 92 DISTRIBUTIVE JUSTICE Cannot the land be bought at a reasonable price ? This brings us to the third and most serious of the charges con- cerning exclusion from the land. Since the value of land in most cities is rising, and apparently will continue to rise more or less steadily, the price at which it is held and purchasable is not the economic price but a speculative price. It is higher than the capitalised value of the present revenue or rent. For example: if five per cent, be the prevailing rate of interest, a piece of land which returns that rate on a capital of one thousand dollars cannot be bought for one thousand dollars. The purchaser is will- ing to pay more because he hopes to sell it for a still higher price within a reasonable time. He knows that he cannot immediately obtain five per cent, on the amount (say, 1,200 dollars) that he is ready to pay for the land, but his valu- ation of it is not determined merely by its present income- producing power, but by its anticipated revenue value and selling value. ^ The buyer will pay more for such land than for a house which yields the same return; for he knows that the latter will not, and hopes that the former will, bring a higher return and a higher price in the future. Wherever this discounting of the future obtains, the price of land is unreasonably high, and access to vacant land is unreasonably difficult. This condition undoubtedly exists most of the time in the great majority of our larger cities. Men will not sell vacant land at a price which will enable the buyer to ob- tain immediately a reasonable return on his investment. They demand in addition a part of the anticipated increase in value. In the rural regions this evil appears to be smaller and less general. The owners of unused or un- economically used arable land are more eager to sell their 1 " In a growing city, an advantageous site will command a price more than in proportion to its present rent, because it is expected that the rent will increase still further as the years go on." Taussig, ** Principles of Economics," II, 98; N. Y., 191 1. DEFECTS OF THE EXISTING LAND SYSTEM 93 holdings than the average proprietor of a vacant lot. So far as this sort of land is concerned, it is probable that most of the denunciation of " land speculators " and " land monopolists " overshoots the mark. Not the high price at vi^hich unused arable lands are held, but the great initial cost of draining, clearing, or irrigating them, is the main reason why they are not purchased by cultivators. While no general and precise estimate can be given of the extent to which the speculative exceeds the actual rent-producing value of land in growing cities, twenty-five per cent, would not improbably be a fair conjecture. Even when a reaction occurs after a period of excessive *' land- booming," the lower prices do not bring the manless land any nearer to the landless men. Only the few who possess ready money or excellent credit can take advantage of such a situation. On the whole the evil that we are now con- sidering is probably greater than any other connected with the private ownership of land. All the tendencies and forces that have been described in the present chapter under the heads of Monopoly, Ex- cessive Gains, and Exclusion from the Land, are in some degree real defects and abuses of the existing system of land tenure. Most of them do not seem to be sufficiently understood or appreciated by the more ardent defenders of private ownership. To recognise them, and to seek ade- quate correctives of them would seem to be the task of both righteousness and expediency. In the next and final chapter of this Section, we shall consider certain remedies that seem to be at once effective and just. CHAPTER VIII METHODS OF REFORMING OUR LAND SYSTEM In economic and social discussion the word reform is commonly opposed to the word revolution. It implies modification rather than abolition, gradual rather than vio- lent change. Hence reforms of the system of land tenure do not include such radical proposals as those of land na- tionalisation or the Single Tax. On the other hand, some extension of State ownership of land, and some increase in the proportion of taxes imposed upon land, may quite properly be placed under the head of reform, inasmuch as they are changes in rather than a destruction of the exist- ing system. In general, the reform measures needed are such as will meet the defects described in the last chapter; namely, monopoly, excessive gains, and exclusion from the land. Obviously they can be provided only by legislation; and they may all be included under two heads, ownership and taxation. By far the greater part of the more valuable lands of the country are no longer under the ownership of the State. Urban land is practically all in the hands of private pro- prietors. While many millions of acres of land suitable for agriculture are still under public ownership, almost all of this area requires a considerable outlay for irrigation, clearing, and draining before it can become productive. Forty years ago, three-fourths of the timber now standing was public property; at present about four-fifths of it is 94 METHODS OF REFORMING OUR LAND SYSTEM 95 owned by private persons or corporations.^ The bulk of our mineral deposits, coal, copper, gold, silver, etc., have likewise fallen under private ownership, with the exception of those of Alaska. The undeveloped water power re- maining under government ownership has been roughly estimated at fourteen million horse power in the national forests, and considerably less than that amount in other parts of the public domain.^ This is a gratifying propor- tion of the whole supply, developed and undeveloped, of this national resource, which is said to be somewhere be- tween 27 and 60 millions horse power.^ Only about seven million horse power has yet been developed, almost all of which is privately owned. The Leading System In many countries of Europe it has long been the policy of governments to retain ownership of all lands containing timber, minerals, oil, natural gas, phosphate, and water power. The products of these lands are extracted and put upon the market through a leasing system. That is; the user of the land pays to the State a rental according to the amount and quality of raw material which he takes from the storehouse of nature. Theoretically, the State could sell such lands at prices that would bring in as much rev- enue as does the leasing system ; practically, this result has never been attained. The principal advantages of the leas- ing arrangement are : to prevent the premature destruction of forests, the private monopolisation of limited natural resources (which has happened in the case of the anthracite coal fields of Pennsylvania) and the private acquisition of exceptionally valuable land at ridiculously low prices ; and to enable the State to secure just treatment for the con- 1 " Summary of Report of the Commissioner of Corporations on the Timber Industry in the United States," p. 3. 2 " Report of the Commissioner of Corporations on Water Power Development in the United States," pp. 193-195. 3 Idem, pp. 4, 5. g6 DISTRIBUTIVE JUSTICE sumer and the labourer by stipulating that the former shall obtain the product at fair prices, and that the latter shall receive fair wages. This example should be followed by the United States. All timber, mineral, gas, oil, and water power lands which have not been alienated to private persons should remain under government ownership, and be brought into use through a leasing arrangement which would enable the private operators to obtain the rates of profit and interest which are ordinarily yielded by enterprises subject to the same degree of risk. Happily this policy now seems likely to be adopted. In 19 13 a law was passed by the United States providing for the operation of the coal mines of Alaska on leases. The amount that can be leased by any person or corporation is limited to 2560 acres, and the penalty for attempting to monopolise the product is for- feiture of tenure. The Secretary of the Interior has urged a similar arrangement for the development and extraction of water power, coal, oil, gas, phosphate, sodium, and potassium on the public domain of Continental United States, and his recommendation will probably be adopted by Congress. Thus the rent of these lands will go to the whole people instead of to a comparatively small number of individuals, monopoly of the products will be made im- possible, and our remaining public resources will be pro- tected from rapid and ruinous exploitation. To the objection that capitalists will not invest their money in nor carry on extractive enterprises on a leasing basis, the sufficient answer is that they are doing it now. In 1909, 24.5 per cent, of all the lands producing minerals, precious metals, and stone ; 94.6 per cent, of the lands pro- ducing petroleum and gas; and 61.2 per cent, of the two groups of lands combined, were operated under leases from private owners or from the government.^ If the rental or royalty demanded is not unreasonably high capitalists will 1 " Abstract of the Thirteenth Census," p. 552. METHODS OF REFORMING OUR LAND SYSTEM 97 be quite as willing to produce raw materials of these kinds from leased land as they are to manufacture or sell goods in a rented building. Not the leasing system, but the terms of the particular lease are the important consideration. Public grazing lands should remain government prop- erty until such time as they become available for agricul- ture. Cattle owners could lease the land from the State on equitable terms, and receive ample protection for money invested in improvements. Public Agricultural Lands The leasing system cannot well be applied to agricultural lands. In order that they may be continuously improved and protected against deterioration, they must be owned by the cultivators. The temptation to wear out a piece of land quickly, and then move to another piece, and all the other obstacles that stand in the way of the Single Tax as applied to agricultural land, show that the government cannot with advantage assume the function of landlord in this domain. In the great majority of cases the State would do better to sell the land in small parcels to genuine settlers. There are, indeed, many situations, especially in connection with government projects of irrigation, clear- ing, and drainage, in which the leasing arrangement could be adopted temporarily. It should not be continued longer than is necessary to enable the tenants to become owners. With this end in view the State should make loans to cul- tivators at moderate rates of interest, as is done in New Zealand and Australia. Whether the State ought to purchase undeveloped land from private owners in order to sell it to settlers, may well be doubted. The only lands to which such a scheme would be at all applicable are large estates which are held out of use by their proprietors. Even here the transfer of the land to cultivators could be accomplished indirectly, through an extra heavy tax. This method has been 98 DISTRIBUTIVE JUSTICE adopted with success by Australia and New Zealand. The only other action by the State that seems necessary or wise in order to place settlers upon privately owned agricultural land, is the establishment of a comprehensive system of rural credits. The need of cheaper food products, and the desirability of checking the abnormal growth of our urban populations, are powerful additional reasons for the adop- tion of this policy. The Hollis Rural Credits Bill recently enacted into law by Congress goes a considerable way to- ward meeting these needs. Public Ownership of Urban Land No city should part with the ownership of any land that it now possesses. Since capitalists are willing to erect costly buildings on sites leased from private owners, there is no good reason why any one should refuse to put up or purchase any sort of structure on land owned by the municipality. The situation differs from that presented by agricultural land; for the value of the land can easily be distinguished from that of improvements, the owner of the latter can sell them even if he is not the owner of the land, and he cannot be deprived of them without full compensa- tion. While the lessee paid his annual rent, his control of the land would be as complete and certain as that of the landowner who continues to pay his taxes. On the other hand, the leaseholder could not permit or cause the land to deteriorate if he would; for the nature of the land renders this impossible. Finally, the official activities involved in the collection of the rent and the periodical revaluation of the land, would not differ essentially from those now re- quired to make assessments and gather taxes. The benefits of this system would be great and manifest. Persons who were unable to own a home because of their inability to purchase land, could get secure possession of the necessary land through a lease from the city. Instead of spending all their lives in rented houses, thousands upon METHODS OF REFORMING OUR LAND SYSTEM 99 thousands of families could become the owners and occu- piers of homes. The greater the amount of land thus owned and leased by the city, the less would be the power of private owners to hold land for exorbitant prices. Com- petition with the city would compel them to sell the land at its revenue-producing value instead of at its speculative value. Finally, the city would obtain the benefit of every increase in the value of its land by means of periodical re- valuation, and periodical readjustment of rent. Unfortunately the amount of municipal land available for such an arrangement in our American cities is negli- gible. If they are to establish the system they must first purchase the land from private owners. Undoubtedly this ought to be done by all large cities in which the housing problem has become acute, and the value of land is con- stantly rising.. This policy has been adopted with happy results by many of the municipalities of France and Ger- many.^ At the state election of 191 5 the voters of Massa- chusetts adopted by an overwhelming majority a constitu- tional amendment authorising the cities of the common- wealth to acquire land for prospective home builders. In Savannah, Georgia, no extension of the municipal limits is made until the land to be embraced has passed into the ownership of the city. Another method is to refrain from opening a new street in a suburban district until the city has become the proprietor of the abutting land. Whatever be the particular means adopted, the objects of municipal purchase and ownership of land are definite and obvious : to check the congestion of population in the great urban cen- tres, to provide homes for the homeless, and to secure for the whole community the socially occasioned increases in land values. Indeed, it is probable that no comprehensive scheme of housing reform can be reaHsed without a con- siderable amount of land purchase by the municipalities. Cities must be in a position to provide sites for those home 1 ,Cf . Marsh, " Land Value Taxation in American Cities," p. 95* lOO DISTRIBUTIVE JUSTICE builders who cannot obtain land on fair conditions from private proprietors.^ Turning now from the direct method of public owner- ship to the indirect method of reform through taxation, we reject the thoroughgoing proposals of the Single Taxers. To appropriate all economic rent for the public treasury would be to transfer all the value of land without compen- sation from the private owner to the State. For example : a piece of land that brought to the owner an annual revenue of one hundred dollars would be taxed exactly that amount; if the prevailing rate of interest were five per cent, the pro- prietor would be deprived of wealth to the amount of two thousand dollars; for the value of all productive goods is determined by the revenue that they yield, and benefits the person who receives the revenue. Thus the State would become the beneficiary and the virtual owner of the land. Inasmuch as we do not admit that the so-called social crea- tion of land values gives the State a moral right to these values, we must regard the complete appropriation of eco- nomic rent through taxation as an act of pure and simple confiscation.^ Appropriating Future Increases of Land Value Let us examine, then, the milder suggestion of John Stuart Mill, that the State should impose a tax upon land sufficient to absorb all future increases in its value.^ This scheme is commonly known as the appropriation of future unearned increment. Either in whole or in part it is at least plausible, and is to-day within the range of practical 1 Municipal purchase and ownership of land have been advocated by such a conservative authority as the Rev. Heinrich Pesch, S. J. " Lehrbuch der Nationaloekonomie," I, 203. 2 As we shall see in a later chapter, the confiscation and injustice would be smaller if the State should simultaneously abohsh interest. In any case, the decline in land value resulting from complete con- fiscation of rent should be made up to the private owner by public compensation. 3 ** Principles of Political Economy," book V, ch. 2, sect. v. METHODS OF REFORMING OUR LAND SYSTEM lOI discussion. It is expected to obtain for the whole commu- nity all future increases in land values, and to wipe out the speculative, as distinguished from the revenue-producing value of land. Consequently it would make land cheaper and more accessible than would be the case if the present system of land taxation were continued. Before discussing its moral character, let us see briefly whether the ends that it seeks may properly be sought by the method of taxation. For these ends are mainly social rather than fiscal. To use the taxing power for a social purpose is neither unusual nor unreasonable. " All governments," says Professor Seligman, '* have allowed social considerations in the wider sense to influence their revenue policy. The whole system of productive duties has been framed not merely with reference to revenue considerations, but in order to produce results which should directly affect social and national prosperity. Taxes on luxuries have often been mere sumptuary laws designed as much to check con- sumption as to yield revenue. Excise taxes have as fre- quently been levied from a wide social, as from a narrow fiscal, standpoint. From the very beginning of all tax sys- tems these social reasons have often been present." ^ Our Federal taxes on imports, on intoxicating liquors, on oleo- margarine, and on white phosphorus matches, and many of the license taxes in our municipalities, as on pedlars, saloon keepers, and dog owners, are in large part intended to meet social as well as fiscal ends. They are in the inter- est of domestic production, public health, and public safety. The reasonableness of effecting social reforms through tax- ation cannot be seriously questioned. While the mainte- nance of government is the primary object of taxation, its ultimate end, the ultimate end of government itself, is the welfare of the people. Now if the public welfare can be promoted by certain social changes, and if these in turn can be effected through taxation, this use of the taxing power 1 " Progressive Taxation in Theory and Practice," 1908, p. 130. 102 DISTRIBUTIVE JUSTICE will be quite as normal and legitimate as though it were employed for the upkeep of government. Hence the moral- ity of taxing land for purposes of social reform will de- pend entirely upon the nature of the particular tax that is imposed. Some Objections to the Increment Tax The tax that we are now considering can be condemned as unjust on only two possible grounds : first, that it would be injurious to society; and, second, that it would wrong the private landowner. If it were fairly adjusted and ef- ficiently administered it could not prove harmful to the community. In the first place, landowners could not shift the tax to the consumer. All the authorities on the subject admit that taxes on land stay where they are put, and are paid by those upon whom they are levied in the first in- stance. ■'• The only way in which the owners of a commod- ity can shift a tax to the users or consumers of it, is by limiting the supply until the price rises sufficiently to cover the tax. By the simple device of refusing to erect more buildings until those in existence have become scarce enough to command an increase in rent equivalent to the new tax, the actual and prospective owners of buildings can pass the tax on to the tenants thereof. By refusing to put their money into, say, shoe factories, investors can limit the sup- ply of shoes until any new tax on this commodity is shifted upon the wearers of shoes in the form of higher prices. IJntil these rises take place in the rent of buildings and the price of shoes, investors will put their money into enter- prises which are not burdened with equivalent taxes. But r.othing of this sort can follow the imposition of a new tax upon land. The supply of land is fixed, and cannot be af- fected by any action of landowners or would-be landown- ers. The users of land and the consumers of its products 1 Cf. Taussig, "Principles of Economics," II, 516: Seligman, "The Shifting and Incidence of Taxation," p. 223. METHODS OF REFORMING OUR LAND SYSTEM IO3 are at present paying all that competition can compel them to pay. They would not pay more merely because they were requested to do so by landowners who were labouring under the burden of a new tax. If all landowners were to carry out an agreement to refrain from producing, and to withhold their land from others until rents and prices had gone up sufficiently to offset the tax, they could, indeed, shift the latter to the renters of land and the consumers of its products. Such a monopoly, however, is not within the range of practical achievement. In its absence, individual landowners are not likely to withhold land nor to discon- tinue production in sufficient numbers to raise rents or prices. Indeed, the tendency will be all the other way ; for all landowners, including the proprietors of land now vacant, will be anxious to put their land to the best use in order to have the means of paying the tax. Owing to this increased production, and the increased willingness to sell and let land, rents and prices must fall. It is axiomatic that new taxes upon land always make it cheaper than it would have been otherwise, and are beneficial to the com- munity as against the present owners. In the second place, the tax in question could not injure the community on account of discouraging investment in land. Once men could no longer hope to sell land at an advance in price, they would not seek it to the extent that they now do as a field of investment. For the same reason many of the present owners would sell their holdings sooner than they would have sold them if the tax had not been levied. From the viewpoint of the public the outcome of this situation would be wholly good. Land would be cheaper and more easy of access to all who desired to buy or use it for the sake of production, rather than for the sake of speculation. Investments in land which have as their main object a rise in value are an injury rather than a benefit to the community ; for they do not increase the prod- ucts of land, while they do advance its price, thereby keep- 104 DISTRIBUTIVE JUSTICE ing it out of use.. Hence the State should discourage in- stead of encouraging mere speculators in land. Whether it is or is not bought and sold, the supply of land remains the same. The supreme interest of the community is that it should be put to use, and made to supply the wants of the people. Consequently the only land investments that help the community are those that tend to make the land pro- ductive. Under a tax on future increases in value, such investments would increase for the simple reason that land would be cheaper than it would have been without the tax. Men who desired land for the sake of its rent or its product would continue as now to pay such prices for it as would enable them to obtain the prevailing rate of interest on their investment after all charges, including taxes, had been paid. Men who wanted to rent land would continue as now to get it at a rental that would give them the usual return for their capital and labour. So much for the effect of the tax upon the community. Would it not, however, be unjust to the landowners ? Does not private ownership of its very nature demand that in- creases in the value of the property should go to the owners thereof ? " Res fructificat domino : " a thing fructifies to its owner; and value-increases may be classed as a kind of fruit. In the first place, this formula was originally a dictum of the civil law merely, the law of the Roman Empire. It was a legal rather than an ethical maxim. Whatever validity it has in morals must be established on moral grounds, by moral arguments. It cannot forthwith be assumed to be morally sound on the mere authority of legal usage. In the second place, it was for a long time applied only to natural products, to the grain grown in a field, to the off- spring of domestic animals. It simply enunciated the policy of the law to defend the owner of the land in his claim to such fruits, as against any outsider who should attempt to set up an adverse title tlirough mere appropria- METHODS OF REFORMING OUR LAND SYSTEM IO5 tion or possession. Thus far, the formula was evidently in conformity with reason and justice. Later on it was extended, both by lawyers and moralists, to cover com- mercial '' fruits," such as, rent from lands and houses, and interest from loans and investments. Its validity in this field will be examined in connection with the justifica- tion of interest. More recently the maxim has received the still wider application which we are now considering. Obviously increases in value are quite a different thing from the concrete fruit of the land, its natural product. A right to the latter does not necessarily and forthwith imply a right to the former. In the third place, the formula in question is not a self evident, fundamental principle. It is merely a summary conclusion drawn from the considera- tion of the facts and principles of social and industrial life. Consequently its validity as applied to any particular situation will depend on the correctness of these premises, and on the soundness of the process by which it has been deduced. The increment tax is sometimes opposed on the ground that it is new, in fact, revolutionary. In some degree the charge is true, but the conditions which the proposal is intended to meet are likewise of recent origin. The case for this legislation rests mainly on the fact that, for the first time in the world's history, land values everywhere show an unmistakable tendency to advance indefinitely. This means that the landowning minority will be in a posi- tion to reap unbought and continuous benefits at the ex- pense of the landless majority. This new fact, with its very important significance for human welfare, may well require a new limitation on the right of property in land. It is also objected that to deprive men of the opportu- nity of profiting by changes in the value of their land would be an unfair discrimination against one class of propri- etors. But there are good reasons for making the dis- tinction. Except in the case of monopoly, increases in I06 DISTRIBUTIVE JUSTICE the value of goods other than land are almost always due to expenditures of labour or money upon the goods them- selves. The value increases that can be specifically traced to external and social influences are intermittent, uncer- tain, and temporary. Houses, furniture, machinery, and every other important category of artificial goods are per- ishable, and decline steadily in value. Land, however, is substantially imperishable, becomes steadily scarcer rela- tively to the demand, and its value-increases are on the whole constant, certain, and permanent. Moreover, it is the settled policy of most enlightened governments to ap- propriate or to prevent all notable increases in the value of monopoHstic goods, either through special taxation or through regulation of prices and charges. Taking the increment values of land is, therefore, not so discrimina- tive as it appears at first glance.^ iThe "discrimination" objection is put in a somewhat different form by the Rev. Sydney F. Smith, S. J., in an article in The Month, Sept., 1909, entitled " The Theory of Unearned Increment." His argument is in substance that if the people of a city can claim the increases in land values which their presence and activity have oc- casioned, the purchasers of food, clothes, books, or concert tickets are equally justified in claiming that, "having added to the value of the shops and music halls, they had acquired a co-proprietary right in the increased value of the owners' stock, and the owners' premises." While this argument is specifically directed against those who main- tain that the " social production " of values confers a right thereto, it affects to some extent our thesis that there is a vast difference be- tween value-increases in land and in other goods. Father Smith seems to confuse the origination of value with the increase of value. The presence of consumers is an obvious prerequisite to the existence of any value at all in any kind of goods, but labour and financial outlay on the part of the producers of the goods are an equally indispensable prerequisite. The reason why the value is appropriated by the latter rather than the former is that this is clearly the only rational method of distribution. What we are concerned with here, however, is not this initial or cost-of-production-value of artificial goods, but the in- creases in value above this level which are brought about by external and social influences. Theoretically, the State could as reasonably take these as the increases in the value of land; practically, such a performance is out of the question, for the simple reason that such increases are spasmodic and exceptional. If Father Smith thinks that " food or clothes, or books, or concert tickets " regularly advance above METHODS OF REFORMING OUR LAND SYSTEM IO7 Another objection is that the proposal would violate the canons of just taxation, since it would impose a specially heavy burden upon one form of property. The general doctrine of justice in taxation which is held by substan- tially all economists to-day, and which has been taught by Catholic moralists for centuries, is that known as the " faculty " theory.^ Men should be taxed in proportion to their ability to pay, not in accordance with the benefits that they may be assumed to receive from the State. And it is universally recognised that the proper measure of " ability " is not a man's total possessions, productive and unproductive, but his income, his annual revenue. Now, the increment tax does seem to violate the rule of taxation according to ability, inasmuch as it would take all of one species of revenue, while all other incomes and properties pay only a certain percentage. All the adherents of the faculty theory maintain, how- ever, that it is subject to certain modifications. Incomes from interest, rent, and socially occasioned increases in the value of property should be taxed at a higher rate than incomes that represent expenditures of labour; for to give up a certain per cent, of the former involves less sacrifice than to give up the same per cent, of the latter. Therefore, increments of land- value may be fairly taxed at a higher rate than salaries, personal property, or even rent and interest. When, however, the law absorbs the whole of the value increments, it seems to be something more than a tax. The essential nature of a tax is to take the cost-of-production-value, he is simply mistaken. Since these and other artificial goods bring to their owners as a rule no socially oc- casioned increments of value, they and their owners are in quite a different situation from l^nd and the owners of land. 1 Cf. Seligman, " Progressive Taxation in Theory and Practice," part II, chs. ii and iii ; also the classic^ refutation of the " benefit " theory by John Stuart Mill in " Principles of Political Economy," book V, ch. ii, sec. 2. The traditional Catholic teaching on the sub- ject is compactly stated by Cardinal de Lugo in " De Justitia et Jure," disp. 36; cf. Devas, " Political Economy," p. 594, 2d ed. I08 DISTRIBUTIVE JUSTICE only a portion of the particular class of income or prop- erty upon which it is imposed. The nearest approach to the plan of taking all future increases in land value is to be found in the special assessments that are levied in many American cities. Thus, the owners of urban lots are fre- quently compelled to defray the entire cost of street im- provements on the theory that their land is thereby and to that extent increased in value. In such cases the con- tribution is levied not on the basis of the faculty theory, but on that of the benefit theory; that is, the owners are required to pay in proportion to benefits received. All adherents of the faculty theory admit that the benefit theory is justifiably applied in situations of this kind. It might be argued that the latter theory can also be fairly applied to increments of land value that are to arise in the future. In both cases the owner returns to the State the equivalent of benefits which have cost him nothing. There is, however, a difference. In the former case the value increases are specifically due to expenditures made by the State, while in the latter they are indirectly brought about by the general activities of the community. We do not admit with the Single Taxers that this " social production " of value increments creates a right thereto on the part of either the community or the civil body; but even if we did we should be compelled to admit that the two situations are not exactly parallel ; for the social pro- duction of increases in the value of land involves no special expenditure of labour or money. Hence it is very ques- tionable whether the appropriation of the whole of the future value increments can be harmonised with the re- ceived conceptions and applications of the canons of tax- ation. . The Morality of the Proposal However, it is neither necessary nor desirable to justify the proposal on the mere ground of taxation. Only in METHODS OF REFORMING OUR LAND SYSTEM IO9 form and administration is it a tax; primarily and in es- sence it is a method of distribution. It resembles the action by which the State takes possession of a newly dis- covered territory by the title of first occupancy. The future increases of land value may be regarded as a sort of no man's property which the State appropriates for the benefit of the community. And the morality of this pro- ceeding must be determined by the same criterion that is applied to every other method or rule of distribution; namely, social and individual consequences. No principle, title, or practice of ownership, nor any canon of taxation, has intrinsic or metaphysical value. All are to be evalu- ated with reference to human welfare. Since the right of property is not an end in itself, but only a means of human welfare, its just prerogatives and limitations are deter- mined by their conduciveness to the welfare of human beings. By human welfare is meant not merely the good of society as a whole, but the good of all individuals and classes of individuals. For society is made up of individ- uals, all of whom are of equal worth and importance, and have equal claims to consideration in the matter of liveli- hood, material goods, and property. In general, then, any method of distribution, any modification of property rights, any form of taxation, is morally lawful which promotes the interests of the whole community, without causing undue inconvenience to any individual. Whether a given rule of ownership or method of distribution which is evidently conducive to the public good is, nevertheless, unduly severe on a certain class of individuals, is a ques- tion that is not always easily answered. Some of the methods and practices appearing in history were clearly fair and just, others clearly unfair and unjust, and still others of doubtful morality. Frequently the State has compelled private persons to give up their land at a lower price than they paid for it; in more than one country freebooters and kingly favourites robbed the people of the no DISTRIBUTIVE JUSTICE land, yet their heirs and successors are recognised by both moralists and statesmen as the legitimate owners of that land; in Ireland stubborn landlords are to-day compelled by the British government to sell their holdings to the tenants at an appraised valuation ; in many countries rnen may become owners of their neighbours' lands by the title of prescription, without the payment of a cent of com- pensation. All these practices and titles inflict consider- able hardship upon individuals, but most of them are held to be justified on grounds of social welfare. Now the public appropriation of all future increments of land value would evidently be beneficial to the commu- nity as a whole. It would enable all the people to profit by gains that now go to a minority, and it would enable the landless majority to acquire land more easily and more cheaply. We have in mind, of course, only those value increases that are not due to improvements in or on the land, and we assume that these could be distinguished in practice from the increments of value that represent im- provements. Would the measure in question inflict undue hardship upon individuals? Here we must make a dis- tinction between those persons who own land at the time that, and those who buy land after, the law is enacted. The only inconvenience falling upon the latter class would be deprivation of the power to obtain future in- creases in value. The law would not cause the value of the land to decline below their purchase price. Other forces might, indeed, bring about such a result; but, as a rule, such depreciation would be relatively insignificant, for the simple reason that it would already have been " discounted " in the reduction of value w-hich followed the law at the outset. The very knowledge that they could not hope to profit by future increases in the value of the land would impel purchasers to lower their price accordingly. While taking away the possibility of gaining, the law enables the buyers to take the ordinary precautions against losing. METHODS OF REFORMING OUR LAND SYSTEM III Therefore, it does not, as sometimes objected, lessen the SO called " gambler's chances." On the other hand, the tax does not deprive the owners of any value that they may add to the land through the expenditure of labour or money, nor in any w^ay discourage productive effort. Now it is, as a rule, better for individuals as well as for society that men's incomes should represent labour, ex- penditure, and saving instead of being the result of '* wind- falls," or other fortuitous and conjunctural circumstances. And the power to take future value increments is not an intrinsically essential element of private property in land. Like every other condition of ownership, its morality is determined by its effects upon human welfare. But we have seen in the last paragraph that human welfare in the sense of the social good is better promoted by a system of landownership which does not include this element; and we have just shown that such a system causes no undue hardship to the individual who buys land after its estab- lishment. Such is the answer to the contention, noticed a few pages back, that the landowner has a right to future increments of value because they are a kind of fruit of his property. It is more reasonable that he should not enjoy this particular and peculiar *' fruit." Were the in- crement tax introduced into a new community before any one had purchased land, it would clearly be a fair and valid limitation on the right of ownership. Those who should become owners after the regulation went into ef- fect in an old community would be in exactly the same moral and economic position. Finally, there exists some kind of legal precedent for the proposal in the present policy of efficient governments with regard to the only im- portant increases that occur in the value of goods other than land; namely, increases due to the possession of monopoly power. By various devices these are either prevented or appropriated by the State. Those persons who are landowners when the increment 112 DISTRIBUTIVE JUSTICE tax goes into effect are in a very different situation from those that we have just been considering. Many of them would undoubtedly suffer injury through the operation of the measure, inasmuch as their land would reach and main- tain a level of value below the price that they had paid for it. The immediate effect of the increment tax would be a de- cline in the value of all land, caused by men's increased de- sire to sell and decreased desire to buy. In all growing communities a part of the present value of land is specula- tive ; that is, it is due to demand for the land by persons who want it mainly to sell at an expected rise, and also to the disinclination of present owners to sell until this expecta- tion is realised. The practical result of the attitude of these two classes of persons is that the demand for, and therefore the value of land is considerably enhanced. Let a law be enacted depriving them of all hope of securing the anticipated increases in value, and the one group will cease to buy, while the other will hasten to sell, thus caus- ing a decline in demand relatively to supply, and therefore a decline in value and price. All persons who had paid more for their land than the value which it came to have as a result of the increment tax law, would lose the difference. For, no matter how much the land might rise in value subsequently, the in- crease would all be taken by the State. And all owners of vacant land the value of which after the law was passed did not remain sufficiently high to provide accumulated in- terest on the purchase price, would also lose accordingly. To be sure, both these kinds of losses would exist even if the law should cause no decline in the value of land, but they would not be so great either in number or in volume. Landowners who should suffer either of these sorts of losses would have a valid moral claim against the State for compensation. Through its silence on the subject of increment-tax legislation, the State virtually promised them at the time of their purchases that it would not thus METHODS OF REFORMING OUR LAND SYSTEM II3 interfere with the ordinary course of values. Had it given any intimation that it would enact such a law at a future time, these persons would not have paid as much for their land as they actually did pay. When the State passes the law, it violates its implicit promise, and con- sequently is under obligation to make good the resulting losses. Is it not obliged to go further, and pay for the positive gains that many of the owners would have reaped in the absence of the law? For example: a piece of land is worth one thousand dollars the day after the tax goes into effect, and that was exactly the price paid for it by the present owner; another piece has the same value, but was bought by the present owner for eight hundred dollars. While neither of these men suffer any loss on their invest- ments, they are deprived of possible gains; for had the law not been enacted their holdings would be worth, say, eleven hundred dollars. Nevertheless, they are no worse off in this respect than those persons who buy land after the increment tax goes into effect, and have no greater claim to compensation for abolished opportunities of posi- tive gain. As we have seen above, the certain advantages of the measure to the community, the doubtful advantages to individuals of profiting by changes in price which do not represent labour, expense, or saving, show that the owners have no strict right to compensation. And it is still clearer that no landowner has a valid claim on ac- count of value increases that would have taken place sub- sequent to the time that the measure was enacted. There is no way by which owners who would have held their land long enough to profit by these increments can be distin- guished from owners who would not have availed them- selves of this conjectural opportunity, nor any method by which the amount of such gains can be determined. On the other hand, it might be objected that, in reim- bursing all owners who suffer the positive losses above 114 DISTRIBUTIVE JUSTICE described, the State is unduly generous; for if the law had not been enacted many of the reimbursed persons would have sold their holdings at a price insufficient to cover their losses. But these cannot be distinguished from those who would have sold at a remunerative price. Hence the State must compensate all or none. The former alterna- tive is not only the more just all round, but in the long run the more expedient. In view of the social benefits of the increment tax, espe- cially the removal of many of the inequities of the present taxing system, the State might sometimes be justified in making good only a part of the losses that we have been dis- cussing. But this could probably occur only for adminis- trative reasons, such as the difficulty of determining the persons entitled to and the amounts of compensation. It would not be justified merely to enable the State to profit at the expense of individuals. And, in any case, there seems to be no good reason why the unpaid losses should amount to more than a small fraction of the whole. In the foregoing pages we have been considering a law which would from the beginning of its operation take all the future increments of land value. There is, however, no likelihood that any such measure will soon be enacted in any country, least of all, in the United States. What we shall probably see is the spread of legislation designed to take a part, and a gradual groMng- part, of value in- creases, after the example of Germany and Great Britain. Let us glance at the laws in force in these two countries. The German and British Increment Taxes The first increment tax (Werthzuwachssteuer) was es- tablished in the year 1898 in the German colony of Kiaut- schou, China. In 1904 the principle of the tax was adopted by Frank fort-am-Main, and in 1905 by Cologne. By April, 1910, it had already been enacted in 457 cities and towns of Germany, some twenty of which had a popu- METHODS OF REFORMING OUR LAND SYSTEM II5 lation of more than 100,000 each, in 652 communes, sev- eral districts, one principaUty, and one grand duchy. In 191 1 it was inserted in the imperial fiscal system, and thus extended over the whole German Empire. While these laws are all alike in certain essentials, they vary greatly in details. They agree in taking only a per cent, of the value increases, and in imposing a higher rate on the more rapid increases. The rates of the imperial law vary from ten per cent, on increases of ten per cent, or less to thirty per cent, on increases of 290 per cent, or over. In Dortmund the scale progresses from one to I2}4 per cent. Inas- much as the highest rate in the imperial law is 30 per cent., and in any municipal law (Cologne and Frankfort) 25 per cent. ; inasmuch as all the laws allow deductions from the tax to cover the interest that was not obtained while the land was unproductive; and inasmuch as only those increases are taxed, which are measured from the value that the land had when it came into the possession of the present owner, — it is clear that landowners are not obliged to undergo any positive loss, and that they are per- mitted to retain the lion's share of the " unearned incre- ment." ^ It is to be noted that most of the German laws are re- troactive, since they apply not merely to future value in- creases, but to some of those that occurred before the law was enacted. Thus, the Hamburg ordinance measures the increases from the last sale, no matter how long ago that transaction took place. The imperial law uses the same starting point, except in cases where the last sale occurred before 1885. Accordingly, a man who had in 1880 paid 2500 marks for a piece of land which in 1885 was worth 1 Cf . Fallon, " Les Plus-Values et V Impot," pp. 455, sq. ; Paris, 1914; Fillebrown, "A Single Tax Handbook for 1913"; Boston, 1912; Marsh, " Taxation of Land Values in American Cities," pp. 90-92 ; New York, 1911 ; "The Quarterly Journal of Economics," vols. 22, ^4, 25; "The Single Tax Review," March- April, 1912; " Stimmen aus Maria-Laach," Oct., 1907. Il6 DISTRIBUTIVE JUSTICE only 200O marks, and who sold it for 3000 marks after the law went into effect, would pay the increment tax on 1000 marks, — unless he could prove that his purchase price was 2500 marks. In all such cases the burden of proof is on the owner to show that the value of the land in 1885 was lower than when he had bought it at the earlier date. Obviously this retroactive feature of the German legislation inflicts no wrong on the owner, since it does not touch value increases that he has paid for. Indeed, the value of the land when it came into the present owner's possession seems to be a fairer and more easily ascertained basis from which to reckon increases than any date subsequent to the enactment of the law. On the one hand, persons whose lands had fallen in value during their ownership would be automatically excluded from the opera- tion of the law until such time as the acquisition value was again reached; on the other hand, those owners whose lands had increased in value before the law went into effect would be taxed as well as those whose gains began after that event; thus the law would reach a greater proportion of the existing beneficiaries of " unearned increment." Moreover, it would bring in a larger amount of revenue. The British law formed a part of the famous Lloyd- George budget of 1909. It taxes only those increments that occur after its enactment. These are ^^ubject to a tax of twenty per cent, on the occasion of the next transfer of the land, by sale, bequest, or otherwise.^ In some cases this arrangement will undoubtedly cause hardship. For example: if land which was bought for 1,000 pounds in 1900 had fallen to 800 pounds in 1909, and were sold for 1,000 pounds in 191 5, the owner would have to pay a tax of twenty per cent, on 200 pounds. This would mean a net loss of forty pounds, to say nothing of the loss of interest in case the land was unproductive. It would seem that some compensation ought to be given here; yet the 1 See the references in the second last paragraph. METHODS OF REFORMING OUR LAND SYSTEM II7 rarity of such instances, the administrative difficuUies, and the general advantages of this sort of legislation quite con- ceivably might forbid the conclusion that the owner was made to suffer certain injustice. The compensating social advantages of the increment tax as well as of other special taxes on land, will receive adequate discussion presently. Transferring Other Taxes to Land Another taxation plan for reducing the evils of our land system consists in the imposition of special taxes on the present value of land. As a rule, these imply, not an addi- tion to the total tax levy, but a transfer of taxes from other forms of property. The usual practice is to begin by exempting either partly or wholly buildings and other kinds of improvements from taxation, and then to apply the same measure to certain kinds of personal property. In most cases the transfer of such taxes to land is gradual, extending over a period of five, ten, or fifteen years. The plan is in operation in Canada and Australasia, and to a slight extent in the United States. It has received its greatest development in the western provinces of Canada ; namely, British Columbia, Alberta, Saskatchewan, and Manitoba. The cities of Edmonton, Medicine Hat, and Red Deer; Vancouver, Victoria, and thirteen others of the thirty-three cities of British Columbia ; all the towns of Alberta except two; all but one of the villages of Alberta, and one-fourth of those in Saskatche- wan; all the rural municipalities and local improvements districts in Alberta, Manitoba, and Saskatchewan, and 24 of the 28 in British Columbia, — exempt improvements entirely from taxation. The three cities in Alberta whicli retain some taxes on improvements; all the cities and towns and three- fourths of the villages in Saskatchewan; the four largest cities in Manitoba; and a considerable number of the municipalities in Ontario (by the device of illegal under-assessment in this instance), — tax improve- Il8 DISTRIBUTIVE JUSTICE ments at less than full value, in some cases as low as fifteen per cent. Land is invariably assessed at its full value. It is to be observed that these special land taxes provide only local revenues; they do not contribute anything to the maintenance of either the provincial or the dominion governments. The reason why the local jurisdictions have adopted these taxes so much more extensively in Alberta than in the other provinces is to be found in a provincial law enacted in 19 12, which requires all towns, villages, and rural areas to establish within seven years the practice of exempting from taxation personal property and buildings. Saskatchewan permits cities and towns to tax improvements up to sixty per cent, of their value, while British Columbia and Manitoba leave the matter entirely in the hands of the local authorities. The provincial revenues are derived from many sources, chiefly real estate, personal property, and incomes; but British Columbia, Saskatchewan, and Alberta levy a special tax on unim- proved and only slightly improved rural land. The rate of this " wild lands tax " is in British Columbia four per cent., and in the other two provinces one per cent. Some of the municipalities of British Columbia and Saskatche- wan also impose a " wild lands tax." By a law passed in 191 3 Alberta levies a provincial tax of five per cent, on the value increases of non-agricultural lands. A move- ment for the reduction of the tax on buildings has devel- oped considerable strength in the eastern provinces of Ontario, Nova Scotia, and New Brunswick.^ New Zealand and most of the states of Australia have for several years levied special taxes on land, consisting mainly of general rates on estates of moderate size, and a iThe most comprehensive and reliable account of the special land taxes in Canada is contained in the report prepared for the Committee on Taxation of the City of New York, by Robert Murray Haig, Ph.D., entitled, " The Exemption of Improvements from Taxation in Canada and the United States"; New York, 1915. See also Fallon, op. cit., pp. 452-455. METHODS OF REFORMING OUR LAND SYSTEM IIQ progressive super tax on large estates. The Common- wealth of Australia also imposes a tax of one penny in the pound on the value of land. A considerable proportion of the cities and towns in both New Zealand and Australia derive practically all their revenues from land, exempting improvements entirely. In both countries, however, the bulk of the total revenue is obtained from other sources than land taxes. In New Zealand they yield less than thirteen per cent, of the national receipts.-^ Pittsburgh and Scranton were required by a law enacted in 19 1 3 to reduce the local tax rate on buildings at such a pace that in 1925 and thereafter it would be only one-half the highest rate on other forms of property. Everett, Wash., and Pueblo, Col., within recent years adopted by popular vote more sweeping measures of the same char- acter, but the Everett law has never gone into effect, and the Pueblo statute was repealed two years after it had been passed. In many cities of the United States, buildings are undervalued relatively to land by the informal and illegal action of assessors. The most pronounced and best known instance of this kind is Houston, Texas, where in 19 14 land was assessed at seventy per cent, of its value and buildings at only twenty-five per cent. In 191 5, however, the practice was forbidden by the courts as contrary to the Texas constitution. At more than one recent session of the New York legislature, bills have been introduced pro- viding for the gradual reduction of the tax on buildings in New York City to a basis of fifty per cent, of their value. While none of them has been passed, the senti- ment in favour of some such measure is probably increas- ing. A similar movement of opinion is apparent in many other sections of the country. On the whole, the special land taxes of Canada and Australasia are not remarkably high. They seem to be as low or lower than the average rates imposed on land, as iCf. Fallon, op. cit., pp. 443-452. I20 DISTRIBUTIVE JUSTICE well as on other forms of general property, in the United States. In the provinces, the special land taxes provide only a small portion of the total revenues ; in the cities and towns, there are, as a rule, other sources of revenue as well as land, and the expenses of municipal government are probably not as high as in this country. Hence the land taxes of Canada have not reached an abnormally high level, and are probably lower than most persons who have heard of them would be inclined to expect. The chief exceptions to the foregoing statements are to be found in the '* wild lands tax " of British Columbia, and in the land taxes of some of the towns (not the cities) of Alberta. A rate of four per cent, on unimproved and slightly im- proved rural land is extraordinary in fiscal annals, and is scarcely warranted by any received principle of taxation, although it may possibly be justified by peculiar social and administrative conditions in the province of British Co- lumbia. Some of the smaller towns of Alberta which adopted the land tax during the recent period of depression have been compelled to impose even higher rates, the maxi- mum being reached by Castor in 19 12, with a rate of 8^ per cent. As a natural consequence, a large proportion of the land in this town was surrendered by its owners to the municipality. While this amazing tax rate is probably temporary, and is likely to be lowered after the return of the average conditions of prosperity, it inflicts unfair hard- ship upon those owners whose circumstances are such that they must give up their land, instead of awaiting the hoped for decline in the rate of taxation. The Morality of the Plan The losses of various kinds that would result from the transfer of other taxes to land may be thus summarised. Land would depreciate in value by an amount equal to the capitalised tax. For example; if the rate of interest were five per cent., an additional tax of one per cent, would METHODS OF REFORMING OUR LAND SYSTEM 121 reduce land worth one hundred dollars an acre to eighty dollars. This decline might, indeed, be partly, wholly, or more than offset by a simultaneous rise due to economic forces. In any case, however, the land would be worth twenty dollars less than it would have been worth had the tax not been imposed. For some owners this would mean a positive loss; for others it would signify mere failure to gain. The latter would happen in the case of all those owners who at any time after the imposition of the tax sold their land at as high a price as they had paid for it. Not all of the owners whose land was forced by the tax to a figure below their purchase price would suffer positive loss; for the land might subsequently rise in value suffi- ciently to wipe out the unfavourable difference. In this respect a special tax on the present value of land has a different effect from a tax that appropriates all the future value increases. Only those owners who actually sold their land below their purchase price could charge the former tax with inflicting upon them positive losses. In the case of the land exemplified above, the owner who sold at ninety dollars per acre could properly attribute to the tax a loss of ten dollars; the owner who sold at eighty dollars would have a grievance amounting to twenty dollars; and a loss would be suffered by any owner who sold for less than eighty dollars. In the second place, all owners of vacant land who sold at a price insufficient to provide for accumu- lated interest on the purchase price, could justly hold the tax responsible, so long as the deficiency did not exceed the value-depreciation caused by the tax. Thirdly, all per- sons whose land had an unusually high value relatively to the value of their exempted property, would suffer losses as taxpayers. They would lose more through the heavier land taxes than they would gain through the lighter taxes, or the absence of taxes, on their other property. To compensate all owners who underwent these three kinds of losses would be practically impossible. The num- 122 DISTRIBUTIVE JUSTICE ber of persons would be too large, the difficulty of proving many of the claims would be too expensive, and the com- pensation process would be too long drawn out, since it would have to continue until the death of all persons who had owned land when the last instalment of the increased land taxes went into effect. Therefore, the losses in ques- tion must be counterbalanced by other and indirect methods. These will be found mainly in the following considerations : the amount of the new taxes; the gradual method of im- posing them ; and their socially beneficial results. Amount of Taxes Practically Transferable According to Professor King's computations, the total rent of land in the United States in 1910 was $2,673,- 900,000, while the total expenditures of national, state, county and city governments were $2,591,800,000.^ In his opinion (p. 162) "the rent would have been barely sufficient to pay off the various governmental budgets as at present constituted, and with the growing concentration of activities in the hands of the government, it appears that rent will soon be a quantity far too small to meet the required changes. With increasing pressure on our natural resources, however, it is probable that the percentage of the total income paid for rent will gradually increase and, since this is true, the lag behind the growing governmental expenses will be considerably less than would otherwise be the case." A change in our fiscal system providing for the imme- diate derivation of all revenues from land taxes would, therefore, involve the confiscation of all rent, and the de- struction of all private land values. Land would be worth nothing to the owners when its entire annual return was taken by the State in the guise of taxes. Even if the process of imposing the new taxes on land were extended 1 " The Wealth and Income of the People of the United States," pp. 158, 143. METHODS OF REFORMING OUR LAND SYSTEM 1 23 over a long term of years the same result would be reached in the end; for whatever increase had taken place in the economic value of land during the process would in all probability have been neutralised by the increase in govern- mental expenditures. It is evident, therefore, that the proposal to put all taxes on land must be rejected on grounds of both morals and expediency. Let us suppose that all national revenues continued, as now, to be raised from other sources than land, and that all state, county, and city revenues remained as they are, except those derived from the general property tax. This would mean that all the following taxes would be un- changed : all federal taxes, the taxes on licenses of all kinds, all taxes on business, incomes, and inheritances, and all special property taxes. If, then, the whole of the gen- eral property tax were concentrated on land; that is, if all the taxes on improvements and on all forms of personal property were legally shifted to land, — the entire revenue to be raised from land would in 19 12 have amounted to $1,349,841,038.^ This is slightly more than one-half of Professor King's estimate of the total rent for 1910, which was $2,673,900,000. But this figure equals four per cent, of the land values of the country; hence the concentration of the general property tax on land would mean a tax rate of two per cent, on the full value of the land. How much would this change increase the present rate of land taxes, and decrease existing land values? While no accurate and definite answer can be given to either of these questions, certain approximations can be attempted which should be of considerable service. In 19 12 the average tax rate on the assessed valuation of all goods subject to the general property tax was .0194, or $19.40 per thousand dollars.^ The assessed valuation of 1" Abstract of Bulletins on Wealth, Debt, and Taxation," p. 16; U. S. Census, 1913. 2 Idem, p. 15. 124 DISTRIBUTIVE JUSTICE taxed real property and improvements (land, buildings, and other improvements) was nearly fifty-two billion dol- lars, while the true value of the same property was nearly ninety-eight and one-half billions.^ Consequently, the actual tax rate of .0194 on the assessed valuation was exactly one per cent, on the true value of real estate. On the assumption that both land and improvements were undervalued to the same extent, the land tax was one per cent, of the full value of the land. If now we take Thomas G. Shearman's estimate, that land values form sixty per cent, of the total value of real estate, we find that the taxes derived from land constituted only forty- four per cent, of the total revenues raised by the general property tax. To concentrate the whole of the general property tax on land, by transferring thereto the taxes on improvements and on personal property, would, accordingly, cause the land tax to be somewhat more than doubled. It would be slightly above two per cent, on the full value of the land. This is the same estimate that we obtained above by a different process ; that is, by comparing Professor King's estimate of land value and rent with the total revenues derived from the general property tax. However, it is not improbable that sixty per cent, is too low an estimate of the ratio of land values to entire real estate values. In 1900, farm land and improvements, exclu- sive of buildings, formed 78.6 per cent, of the value of real estate, i.e., land, improvements, and buildings. In 19 10, the per cent, was a little less than 82. Now it is quite unlikely that the value of non-building improvements on farms amounted to the difference between sixty per cent, and sev- enty-eight per cent, in 1900, or between sixty per cent, and eighty-two per cent, in 19 10. Hence the value of farm land is something more than sixty per cent, of farm real estate. On the other hand, the value of factory land in 1900 1 Idem, p. 16; and Bulletin of the Census on "Estimated Valuation of National Wealth," p. 15. METHODS OF REFORMING OUR LAND SYSTEM 1 25 formed only 41.5 per cent, of the total value of factory- land and buildings, while the value of city and town lots in five rural states varied from 34 to 62 per cent, of this species of real estate.^ In Greater New York land consti- tutes 61 per cent, of real estate values.^ Owing to the lack of data, the average ratio for all kinds of real estate for the whole country is impossible of determination. If the estimate of seventy per cent, be adopted, which is probably the upper limit of the average proportion between land values and real estate values throughout the country, the portion of the general property tax now paid by land amounts to about fifty-two per cent. Consequently the imposition of the whole general property tax on land would not quite double the present rate on land. To the first of the two questions raised above the answer can be given with a fair amount of confidence that the transfer of im- provement and personal property taxes to land would cause land taxes to be about twice what they are at present. To the second question, concerning the extent to which land values would fall in consequence of the heavier taxes, the answer must be somewhat less definite. The added land taxes would be about one-half the present general property taxes, or $675,000,000. This is about one per cent, the total land values of the country. One per cent, of land values capitalised at five per cent, represents a de- preciation of twenty per cent, in the value of land; capi- talised at four per cent., it represents a depreciation of twenty-five per cent. For example ; if land worth one hun- dred dollars an acre returns to its owner a net income of five dollars annually, the appropriation of one dollar by a new tax will leave a net revenue of only four dollars; capitalised at the current rate of five per cent., this repre- 1 " Special Report of the Twelfth Census on Wealth, Debt, and Taxation," pp. 12, 13. 2 Haig, " Probable Effects of Exemption of Improvements . . . ", p. 23. 126 DISTRIBUTIVE JUSTICE sents only eighty dollars of land value, or a depreciation of twenty per cent. If the land has the same value of one hundred dollars, and still yields only four dollars revenue, a deduction of one dollar in new taxes will leave only three dollars net ; capitalised at the current rate of four per cent., this represents only seventy-five dollars of land value, or a depreciation of twenty-five per cent. Using the other method of calculation, which estimated the present tax rate on the full value of land at one per cent., we get exactly the same results ; namely, the new tax is one per cent., which is equivalent to a depreciation of twenty per cent, or of twenty-five per cent., according as we assume an interest rate of five per cent, or of four per cent. Suppose, how- ever, that the assessors do not undervalue land to the ex- tent that we have been assuming; suppose that the present rate of .0194 on assessed valuation is equivalent to, not merely one per cent., but one and one-half per cent, of the full value of land. In that hypothesis the additional tax would likewise be one and one-half per cent., which capi- talised at five per cent, would represent a depreciation of thirty per cent., and at four per cent, a depreciation of thirty-seven and one-half per cent. Combining in one gen- eralisation the various suppositions made in this paragraph, we estimate the depreciation of land values resulting from the proposed tax transfer as somewhere between twenty and forty per cent. We have considered two hypothetical transfers of taxes to land. The first we found to be out of the question because it would appropriate the whole of the rent and destroy all private land values. The second would appar- ently amount to two per cent, of the value of land, and cause land values to depreciate from twenty to forty per cent. It is unnecessary to consider the probable effects of any plan that would involve heavier land taxes than the second; that is, the scheme of imposing all the general property tax on land ; for it represents the extreme feasible METHODS OF REFORMING OUR LAND SYSTEM 1 27 and fair limit of the movement within, at any rate, the next fifteen or twenty years. Even this degree of tax transference would be unjust to the landowners if it were brought about at once. No social or other considerations exist that would justify a deprecia- tion in land values of from twenty to forty per cent. If, however, the process were extended over a period of, say, twenty years, the decline would be only one or two per cent, annually, which is considerably less than the rate at which farm lands and the land in large cities have risen in value during recent years. Under such an arrangement the great majority of owners would probably find that the de- preciation caused by the heavier land taxes, had been more than offset by the upward tendency resulting from the in- creased demand for land. Nevertheless, there would still be positive losses of the three kinds described a few pages back ; namely, to owners who sold land below the price that they had paid for it; to owners who sold vacant land at a price insufficient to cover accumulated interest on the investment; and to owners whose aggregate tax burdens were increased. Some degree of each of these sorts of losses would be due specifically to the new land taxes. As noted above, public compensation in all such cases would be impracticable. Consequently the justification of a law that inflicts such losses must be found, if it exists, in social considerations. The Social Benefits of the Plan These may be summed up under three heads: making land easier to acquire ; cheapening the products and rent of land; and reducing the burdens of taxation borne by the poorer and middle classes. An increase in the tax on land would reduce its value and price, or at least cause the price to be lower than it would have been in the absence of the tax. This does not mean that land would be more profit- able to the purchaser, since he is enabled to buy it at a 128 DISTRIBUTIVE JUSTICE lower price only because it yields him less net revenue, or because it is less likely to increase in value. The value of land is always determined by its revenue-producing power, and by its probabilities of price-appreciation. Conse- quently, what the purchasers would gain by the lower price resulting from the new tax, they would lose when they came to pay the tax itself, and when they found the chances of value increases diminished. If a piece of land which brings a return of five dollars a year costs one hundred dollars before the new tax of one per cent, is imposed, and can be bought for eighty dollars afterward, the net interest on the purchase price has not changed. It is still five per cent. Hence the only advantage to the prospective pur- chaser of land in getting it cheaper consists in the fact that he can obtain it with a smaller outlay of capital. For persons in moderate circumstances this is a very important consideration. In the second place, higher taxes would cause many existing owners either to improve their land, in order to have the means of meeting the added fiscal charges, or to sell it to persons who would be willing to make improve- ments. And the desire to erect buildings and other forms of improvements would be reinforced by the reduction or abolition of taxes on those kinds of personal property which consist of building materials. An increase in the rapidity of improvements on land would mean an increase in the rate at which land was brought into use, and there- fore an unusual increase in the volume of products. This virtual increase in the supply of land, and actual increase in the supply of products, would cause a fall in three kinds of prices: the price of products, the rent of land, and the price of land. The last named reduction would be distinct from the reduction of land value caused in the first instance by the imposition of the tax. In the third place, the reduction, and finally the abolition, of taxes on improvements and personal property would be METHODS OF REFORMING OUR LAND SYSTEM 1 29 especially beneficial to the poorer and middle classes be- cause they now pay a disproportionate share of these charges. Lower taxes on dwellings would mean lower rents for all persons who did not own their homes, and lower taxes for all owners whose residence values were unusually large relatively to their land values. And the tendency to lower rents on dwellings would be reinforced by the lower cost of building materials resulting, as noted above, from the increased supply and the lower tax on this form of personal property. Lower taxes on that species of personal property which consists of consumers' goods, such as household furniture and wearing apparel, would lessen the present inequity of taxation because this class of goods is reached to a much greater extent in the case of the poor than in the case of the rich. It is not easy to conceal or to undervalue a relatively small number of simple and standard articles; but diamonds, costly furni- ture, and luxurious wardrobes can be either hidden, or certified to the assessor at a low valuation. As for those forms of personal property which are of the nature of capital and other profit producing goods, such as machinery and tools of all kinds, productive animals, money, mort- gages, securities, the stocks of goods held by manufacturers and merchants, and likewise buildings which are used for productive purposes, — the taxes on all these kinds of prop- erty are for the most part shifted to the consumer. The latter ultimately pays the tax in the form of higher prices for food, clothing, shelter, and the other necessaries and comforts of life.^ Now a tax on consumption is noto- riously unfair to the poorer and middle classes because it affects a greater portion of their total expenditures, and takes a larger per cent, of their income than in the case of the rich. Hence the removal of the taxes specified in this 1 Cf. Seligman, " The Shifting- and Incidence of Taxation," pp. 187, 24s, 272, and all of part II; N. Y., 1899; Taussig, "Principles of Economics," II, 518-549, and chs. 67-69. 130 DISTRIBUTIVE JUSTICE paragraph would be at once the abohtion of a fiscal in- justice, and a considerable assistance to the less fortunate classes. All those landowners who occupied rented dwellings would benefit by the reduction in house rent, and all land- owners without exception would reap some advantage from the reduction or abolition of the taxes on consumers' goods and on the various forms of producers' goods. It is not improbable that a considerable proportion of them would gain as much in these respects as they would lose in the capacity of landowners. Would the social benefits summarily described in the foregoing paragraphs be sufficient to justify the increased land taxes in the face of the losses that would be under- gone by some landowners in the three ways already speci- fied? In view of our ignorance concerning the probable amount of benefits on the one hand and losses on the other, it is impossible to give a dogmatic answer. However, when we reflect on the manifold social evils that are threat- ened by a rapid and continuous increase in land values, and the resulting decrease in the proportion of the population that can hope to participate in the ownership of land, we are forced to conclude that some means of checking both tendencies is urgently necessary for the sake of social jus- tice and social peace. The project that we have been con- sidering; namely, the transfer of taxes on improvements and on personal property to land by a process extending over twenty years, seems to involve a sufficiently large amount of advantage and a sufficiently small amount of disadvantage to justify systematic and careful experiment. A Supertax on Large Holdings Every estate containing more than a maximum number of acres, say, ten thousand, whether composed of a single tract or of several tracts, could be compelled to pay a spe- cial tax in addition to the ordinary tax levied on land of METHODS OF REFORMING OUR LAND SYSTEM I3I the same value. The rate of this supertax should increase with the size of the estate above the fixed maximum. Through this device large holdings could be broken up, and divided among many owners and occupiers. For several years it has been successfully applied for this purpose in New Zealand and Australia.^ Inasmuch as this tax exemplifies the principle of progression, it is in accord with the principles of justice ; for relative ability to pay is closely connected with relative sacrifice. Other things being equal, the less the sacrifice involved, the greater is the ability of the individual to pay the tax. Thus, the man with an in- come of ten thousand dollars a year makes a smaller sacri- fice in giving up two per cent, of it than the man whose income is only one thousand dollars ; for the latter case the twenty dollars surrendered represent a privation of the necessaries or the elementary comforts of life, while the two hundred dollars taken from the rich man would have been expended for luxuries or converted into capital. While the incomes of both are reduced in the same propor- tion, their satisfactions are not diminished to the same de- gree. The wants that are deprived of satisfaction are much less important in the case of the richer than in that of the poorer man. Hence the only way to bring about anything like equality of sacrifice between them is to in- crease the proportion of income taken from the former. This means that the rate of taxation would be progressive.^ It is in order to object that the principle of progression should not be applied to the taxation of great landed estates, since a considerable part of them is unproductive, and con- sequently does not directly affect sacrifice. But the same objection can be urged against any taxation of unoccupied land. The obvious reply is that the equal taxation of un- 1 Cf. Fallon, op. cit., pp. 442, sq. 2 Cf. Vermeersch, " Quaestiones de Justitia," pp. 94-126; Seligman, "Progressive Taxation in Theory and Practice," pp. 210, 211; Mill, " Principles of Political Economy," book V, ch. ii, sec. 3. 132 DISTRIBUTIVE JUSTICE productive with productive land is justified by social rea- sons, chiefly, the unwisdom of permitting land to be held out of use. The same social reasons apply to the question of levying an exceptionally high tax on large estates, even though they may at present produce no revenue. While the tax is sound in principle, it is probably not much needed in America in connection with agricultural or urban land. Its main sphere of usefulness would seem to be certain great holdings of mineral, timber, and water power lands. ** There are many great combinations in other industries whose formation is complete. In the lum- ber industry, on the other hand, the Bureau now finds in the making a combination caused, fundamentally, by a long standing public policy. The concentration already exist- ing is sufficiently impressive. Still more impressive are the possibilities for the future. In the last forty years concentration has so proceeded that 195 holders, many interrelated, now have practically one-half of the privately owned timber in the investigation area (which contains eighty per cent, of the whole) . This formidable process of concentration, in timber and in land, clearly involves grave future possibilities of impregnable monopolistic conditions, whose far reaching consequences to society it is now difficult to anticipate fully or to overestimate." ^ In January, 191 6, the Secretary of Agriculture called the attention of Congress to the fact that a small number of corporations closely associated in a policy of community of interest were threatening to secure and exercise a monopoly over the developed water power of the country. Ninety per cent, of the anthracite coal lands of Pennsylvania are owned or controlled by some nine railroads acting as a unit in all important matters. For situations of this kind a supertax on large estates would seem to hold the promise of a large measure of relief. 1 " Summary of Report of the Commissioner of Corporations on the Lumber Industry in the United States," p. 8. METHODS OF REFORMING OUR LAND SYSTEM 1 33 To sum Up the main conclusions of this very long chap- ter : Exceptionally valuable lands, as those containing tim- ber, minerals, oil, gas, phosphate, and water power, which are still under public ownership should remain there. Through a judicious system of loans, deserving and effi- cient persons should be assisted to get possession of some land. Municipalities should lease rather than sell their lands, and should strive to increase their holdings. To take all the future increases in the value of land would be morally lawful, provided that compensation were given to owners who thereby suffered positive losses of interest or principal. To take a small part of the increase, and to transfer very gradually the taxes on improvements and on personal property to land, would probably be just, owing to the beneficial effects upon public welfare. A supertax on large holdings of exceptionally valuable and scarce land would likewise be beneficial and legitimate.^ REFERENCES ON SECTION I Ashley: The Origin of Property in Land. London; 1892. Laveleye: Primitive Property. London; 1878. Whittaker: The Taxation, Tenure, and Ownership of Land. London; 1914. Preuss : The Fundamental Fallacy of Socialism. St. Louis ; 1908. George: Progress and Poverty; and A Perplexed Philosopher. Marsh: Land Value Taxation in American Cities. N. Y. ; 191 1. FiLLEBROWN : A Single Tax Handbook for 1913. Boston ; 1912. Young: The Single Tax Movement in the United States. Prince- ton; 1916. Shearman : Natural Taxation. N. Y. ; 1898. Mathews: Taxation and the Distribution of Wealth. N. Y. ; 1914. 1 Probably the most concrete and satisfactory discussion of the increment tax and the project to transfer improvement taxes to land, is that presented in the *' Final Report of the Committee on Taxation of the City of New York"; 1916. It contains brief, though complete, statements of all phases of the subject, together with concise argu- ments on both sides, majority and minority recommendations, a great variety of dissenting individual opinions, and considerable testimony by experts, authorities, and other interested persons. 134 DISTRIBUTIVE JUSTICE Cathrein : Das Privatgrundeigenthum und seine Gegner. Freiburg ; 1909. Fallon: Les Plus-Values et 1' Impot. Paris; 1914. Nearing: Anthracite. Philadelphia; 1916. Haig: Final Report of the Committee on Taxation of the City of New York; 1916. The exemption of Improvements from Taxation in Canada and U. S. ; 1915. Some Probable Effects of Exemption in City of New York; 1915. Kelleher: Private Ownership. Dublin; 1911. Proceedings of the 1913 Meeting of the American Economic Associa- tion. U. S. Commissioner of Corporations: Reports on the Lumber, Pe- troleum, Steel, and Water Power of the United States. Seligman : Essays in Taxation; Shifting and Incidence of Taxation; and Progressive Taxation in Theory and Practice. Also the works of Taussig, Devas, Carver, Pesch, King, Vermeersch, Willoughby, and the Commission on Industrial Relations, all of which are cited at the end of the introductory chapter. SECTION II THE MORALITY OF PRIVATE CAPITAL AND INTEREST CHAPTER IX THE NATURE AND THE RATE OF INTEREST Interest denotes that part of the product of industry which goes to the capitahst. As the ownership of land commands rent, so the ownership of capital commands interest ; as rent is a price paid for the use of land, so in- terest is a price paid for the use of capital. However, the term capital is less definite and unambig- uous, both in popular and in economic usage, than the word land. The farmer, the merchant, and the manufacturer often speak of their land, buildings, and chattels as their capital, and reckon the returns from all these sources as equivalent to a certain per cent, of interest or profit. This is not technically correct; when we use the terms capital and interest we should exclude the notions of land and rent. Meaning of Capital and Capitalist Capital is ordinarily defined as, wealth employed directly for the production of new wealth. According as it is con- sidered in the abstract or the concrete, it is capital-value or capital-instruments. For example, the owner of a wagon factory may describe his capital as having a value of 100,000 dollars, or as consisting of certain buildings, machines, tools, office furniture, etc. In the former case he thinks of his capital as so much abstract value which, through a sale, he could take out of the factory, and put into other concrete capital forms, such as a railroad or a jobbing house. In the latter case he has in mind the par- ticular instruments in which his capital is at present em- bodied. The capital-value concept is the more convenient, and is usually intended when the word capital is used with- out qualification. It is also the basis upon which interest 137 138 DISTRIBUTIVE JUSTICE is reckoned; for the capitalist does not measure his share of the product as so many dollars of rent on his capital- instruments, but as so many per cent, on his capital-value. Capitalists are of two principal kinds : those who employ their own money in their own enterprises; and those who lend their money to others for use in industry. The for- mer may be called active capitalists, the latter loan-capi- talists. Perhaps a majority of active capitalists use some borrowed money in their business. To the lenders of this borrowed money or capital they turn over a part of the product in the form of interest. When, therefore, interest is defined as the share of the product that goes to the capi- talist, it is the owner of capital- value rather than of capital- instruments that is meant. For the man who has loaned 50,000 dollars at five per cent, to the wagon manufacturer is not, except hypothetically, the owner of the buildings which have been erected with that money. These are owned (subject possibly to a mortgage) by the borrower, the active capitalist. But the abstract value which has gone into them continues to be the property of the lender. As owner thereof, he, instead of the active capitalist, re- ceives the interest that is assigned to this portion of the total capital. Hence interest is the share of the product that is taken by the owner of capital, whether he employs it himself or lends it to some one else. While the funda- mental reason of interest is the fact that certain concrete instruments are necessary to the making of the product, interest is always reckoned on capital-value, and goes to the owner of the capital-value. It goes to the man whose money has been put into the instruments, whether or not he is the owner of the instruments. Meaning of Interest Interest is the share of the capitalist as capitalist. The man who employs his own capital in his own business re- THE NATURE AND THE RATE OF INTEREST 1 39 ceives therefrom in addition to interest other returns. Let us suppose that some one has invested 100,000 dollars of borrowed money and 100,000 dollars of his own money in a wholesale grocery business. At the end of the year, after defraying the cost of labour, materials, rent, repairs, and replacement, his gross returns are 15,000 dollars. Out of this sum he must pay five thousand dollars as interest on the money that he has borrowed. This leaves him a total amount of ten thousand dollars, as his share of the product of the industry. Since he could command a salary of three thousand dollars if he worked for some one else, he regards his labour of directing his own business as worth at least this sum. Deducting it from ten thousand dollars, he has left seven thousand dollars, which must in some sense be accredited as payment for the use of his own capital. However, it is not all pure interest; for he runs the risk of losing his capital, and also of failing to get the normal rate of interest on it during future unprosperous years. Hence he will require a part of the seven thousand dollars as insurance against these two contingencies. Two per cent, of his capital, or two thousand dollars, is not an excessive allowance. If the business did not provide him with this amount of insurance he would probably regard it as unsafe, and would sell it and invest his money else- where. Subtracting two thousand dollars from seven thousand, we have five thousand left as pure interest on the director's own capital. This is equivalent to five per cent., which is the rate that he is paying on the capital that he has borrowed. If he could not get this rate on his own money he would probably prefer to become a lender him- self, a loan capitalist instead of an active capitalist. This part of his total share, then, and only this part, is pure interest. The other two sums that he receives, the three thousand dollars and the two thousand dollars, are respec- tively wages for his labour and insurance against his risks. 140 DISTRIBUTIVE JUSTICE Sometimes they are classified together under the general name of profits. Let us suppose, however, that the gross returns are not 15,000 dollars, but 17,000. How is the additional sum to be denominated? In strict economic language it would probably be called net profits, as distinguished from normal or necessary profits, which comprise wages of direction and insurance against loss. Sometimes it is called interest. In that case the owner of the store would receive seven in- stead of five per cent, on his own capital. Whether the extra two per cent. (2,000 dollars) be called net profits or surplus interest, is mainly a matter of terminology. The important thing is to indicate clearly that these terms designate the surplus which goes to the active capitalist in addition to necessary profits and necessary interest. At the risk of wearisome repetition, one more example will be given to illustrate the distinction between interest and the other returns that are received in connection with capital. The annual income from a railway bond is in- terest on lender's capital, and consequently pure interest. Ordinarily the bondholder is adequately protected against the loss of his capital by a mortgage on the railroad. On the other hand, the holder of a share of railway stock is a part owner of the railroad, and consequently incurs the risk of losing his property. Hence the dividend that he receives on his stock comprises interest on capital plus insurance against loss. It is usually one or two per cent, higher than the rate on the bonds. Since the officers and directors are the only shareholders who perform any labour in the management of the railroad, only they receive wages of management. Consequently the gross profits are divided into interest and dividends at fixed rates, and fixed salaries. When a surplus exists above these requirements it is not, as a rule, distributed among the stockholders an- nually. In railroads, therefore, and many other corpora- tions, interest is easily distinguished from those other THE NATURE AND THE RATE OF INTEREST I4I returns with which it is frequently confused in partnerships and enterprises carried on by individuals. The Rate of Interest Is there a single rate of interest throughout industry? At first sight this question would seem to demand a nega- tive answer. United States bonds pay about two per cent. ; banks about three per cent. ; municipal bonds about four per cent. ; railway bonds about five per cent. ; the stocks of stable industrial corporations about six per cent, net ; real estate mortgages from five to seven per cent. ; promissory notes somewhat higher rates ; and pawnbrokers' loans from twelve per cent, upwards. Moreover, the same kind of loans brings different rates in different places. For example, money lent on the security of farm mortgages yields only about five per cent, in the states of the East, but seven or eight per cent, on the Pacific coast. These and similar variations are differences not so much of interest as of security, cost of negotiation, and mental attitude. The farm mortgage pays a higher rate than the government bond partly because it is less secure, partly because it involves greater trouble of investment, and partly because it does not run for so long a time. For the same reasons a higher rate of interest is charged on a promissory note than on a bank deposit certificate. Again, the lower rates on government bonds and bank deposits are due in some degree to the peculiar attitude of that class of in- vestors whose savings are small in amount, who are not well aware of the range of investment opportunities, and to whom security and convenience are exceptionally im- portant considerations. If such persons did not exist the rates on government bonds and savings deposits would be higher than they actually are. The higher rates in a new country on, say, farm mortgages are likewise due in part to psychical peculiarities. Where men are more specula- tive and more eager to borrow money for industrial pur- 142 DISTRIBUTIVE JUSTICE poses, the demand for loans is greater relatively to the supply than in older and more conservative communities. Therefore, the price of the loans, the rate of interest, is higher. In one sense it v^ould seem that the lowest of the rates cited above, namely, that on United States bonds, repre- sents pure interest, and that all the other rates are interest plus something else. Nevertheless, the sums invested in these bonds form but a very small part of the whole amount of money and capital drawing interest, and they come from persons who do not display the average degree either of iDUsiness ability or of willingness to take risks. Hence it is more convenient and more correct to regard as the standard rate of interest in any community that which is obtained on first class industrial security, such as the bonds of railroads and other stable corporations, and mortgages on real estate. Loans to these enterprises are subject to what may properly be called the average or prevailing in- dustrial risks, are negotiated in average psychical condi- tions, and embrace by far the greater part of all money drawing interest ; consequently the rate that they command may be looked upon as in a very real and practical sense normal. While this conception of the normal rate is in a measure conventional, it accords with popular usage. It is what most men have in mind when they speak of the pre- vailing rate of interest. The prevailing or standard rate in any community can usually be stated with a sufficient approach to precision to be satisfactory for all practical purposes. In all the Eastern States it is now about five per cent. ; in the Middle West it is somewhere between five and six per cent. ; on the Pacific coast it is between six and seven per cent. The supreme court of Minnesota decided in 1896 that, in view of the actual rates of interest then obtaining, five per cent, on the reproduction cost of railroads was a fairly liberal return, and could be adopted by the state authorities in fixing THE NATURE AND THE RATE OF INTEREST I43 charges for carrying freight and passengers.^ A few years later the Michigan tax commission allowed the railroads four per cent, on the reproduction cost of their property, on the ground that investments which yielded that rate in addition to the usual tax of one per cent, (or five per cent, before the deduction of the tax) stood at par on the stock market.^ In other w^ords, the prevailing rate was five per cent. At the beginning of the year 1907, the railroad com- mission of Wisconsin fixed six per cent, as the return to which the stockholders of railroads were entitled, because this was about the return which investors generally were able to get on that kind of security. In the view of the Commission, the current rate of interest on railroad bonds, and similar investments, was about five per cent.^ The significance of these decisions by the public authorities of three states is found not so much in the particular rates which they sanctioned as in the fact that they were able to determine a standard or prevailing rate. Therefore a standard rate exists. At the same time it is interesting to note that in all three states the rate of industrial interest was declared to be about the same, that is, five per cent. Perhaps it is safe to say that, throughout the greater part of the industrial field of America, five or six per cent, is the prevailing rate of interest. What causes the rate to be five per cent., or six per cent., or any other per cent. ? Briefly stated, it is the interplay of supply and demand. Since interest is a price paid for the use of a thing, i.e., capital, its rate or level is determined by the same general forces that govern the price of wheat, or shoes, or hats, or any other commodity that is bought and sold in the market. The rate is five or six per cent, because at that rate the amount of money offered by lenders 1" Final Report of the Industrial Commission," pp. 410, 411. 2 "Report of the Industrial Commission," vol. IX, p. 380. 3 " Publication No. 32 of the Railroad Commission of Wisconsin," pp. 165, 166. 144 DISTRIBUTIVE JUSTICE equals the amount demanded by borrowers. Should the amount offered at that rate increase without a correspond- ing increase in the amount demanded, the rate would fall, just as it would rise under opposite conditions. Supply and demand, however, are merely the immediate forces. They are themselves the outcome or resultant of factors more remote. On the side of supply, the principal remote forces which regulate the rate of interest are : the industrial resources of the community, and the relative strength of its habits of saving and spending. On the side of demand, the chief ultimate factors are: the productivity of capital-instruments, the comparative intensity of the social desires of investing and lending, and the supplies of land, business ability and labour. Each of these factors exercises upon the rate of interest an influence of its own, and each of them may be assisted or counteracted by one or more of the others. Precisely what rate will result from any given condition of the factors, cannot be stated beforehand, for the factors cannot be measured in such a way as to provide a basis for this kind of forecast. All that can be said is that, when changes occur on the side of either demand or supply, there will be a corresponding change in the rate of interest, provided that no neutralising change takes place on the other side. CHAPTER X THE ALLEGED RIGHT OF LABOUR TO THE ENTIRE PRODUCT OF INDUSTRY In a preceding chapter we saw that Marxian Socialism is logically debarred from passing moral judgment upon any social institution or practice.^ If social institutions are produced necessarily by socio-economic forces they are neither morally good nor morally bad. They are quite as unmoral as rain and snow, verdure and decay, tadpoles and elephants. Consistent Socialists cannot, therefore, censure on purely ethical grounds the system of private capital and interest. This logical requirement of the theory of economic de- terminism is exemplified in much of the rigidly scientific discussions of Socialists. Marx maintained that the value of commodities is all determined and created by labour, and that interest is the surplus which the labourer pro- duces above the cost of his keep; nevertheless Marx did not formally assert that the labourer has a moral right to the whole product, nor that interest is theft. He set forth his theories of value and surplus value as positive explana- tions of economic facts, not as an ethical evaluation of human actions. His object was to show the causes and nature of value, wages, and interest, not to estimate the moral claims of the agents of production, or the morality of the distributive process. In his formal discussion of the theory of value and of surplus value, Marx said noth- ing that implied a belief in genuine moral responsibility, or 1 Cf . Engels, " Socialism : Utopian and Scientific," pp. 45, 46 ; and Hillquit-Ryan, '* Socialism : Promise or Menace," 103, 104, 143-145. 145 146 DISTRIBUTIVE JUSTICE that contradicted the principles of philosophical material- ism and economic determinism. It is, therefore, quite erroneous to infer that, since the Marxian theory attrib- utes all value and products to the action of labour, Marx- ian Socialists must condemn the interest-taker as a robber. Neither Marx nor any other Socialist authority, how- ever, has always held consistently to this purely positive method of economic exposition. When they declare that the labourer is " exploited," that surplus value is " filched " from him, that the capitalist is a " parasite," etc., they are expressing and conveying distinct moral judgments. In their more popular writings Socialist authors do not seri- ously attempt to observe the logical requirements of their necessitarian philosophy. They assume the same ethical postulates, and give expression to the same ethical intui- tions as the man who believes in the human soul and free will.^ And the great majority of their followers likewise regard the question of distribution as a moral question, as a question of justice. In their view the labourer not only creates all value, but has a just claim to the whole product. The Labour Theory of Value This doctrine is sometimes formally based upon the Marxian theory of value, and is sometimes defended inde- pendently of that theory. In the former case its ground- work is about as follows : By eliminating the factors of utility and scarcity, Marx found that the only element common to all commodities is labour, and then concluded that labour is the only possible explanation, creator, and determinant of value.^ Since capital, that is, concrete capital, is a commodity, its value is likewise determined and created by labour. Since it cannot create value, for only labour has that power, it can contribute to the product of the productive process in which it is engaged only as 1 Cf. Hillqitit-Ryan, op. cit., pp. 75, 76, 2 " Capital," pp. 1-9. ALLEGED RIGHT OF LABOUR TO ENTIRE PRODUCT 1 47 much value as it originally received. Since it is only a reservoir of value, it cannot transfer more value than it holds and possesses. In the words of Marx, '' the means of production transfer value to the new product, so far only as during the labour-process they lose value in the shape of the old use-value. The maximum loss of value that they can suffer in the process is plainly limited by the amount of the original value with which they came into the process, or, in other words, by the labour time neces- sary for their production. Therefore, the means of pro- duction can ever add more value to the product than they themselves possess independently of the process in which they assist. However useful a given kind of raw material, or a machine, or other means of production may be, though it may cost 150 pounds, or say 500 days' labour, yet it cannot, under any circumstances, add to the value of the product more than 150 pounds." ^ To view the matter from another angle: capital con- tributes to the product only sufficient value to pay for its own reproduction. When, as is the normal usage, the undertaker has deducted from the product sufficient value or money to replace the deteriorated or worn out machine, or other concrete capital, all the remaining value in the product is due specifically to labour. When, therefore, the capitalist goes further, and appro- priates from the product Interest and profits, he takes a part of the value that labour has created. He seizes the surplus value which labour has produced in excess of the wages that it receives. In ethical terms, he robs the labourers of a part of their product. It Is not necessary to Introduce any extended refutation of this arbitrary, unreal, and fantastic argument. *' The theory that labour is the sole source of value has few de- fenders to-day. In the face of the overwhelming criti- cism which has been directed against it, even good Marx- iQp. cit, p. 117; Humboldt Edition. 148 DISTRIBUTIVE JUSTICE ists are forced to abandon it, or to explain it away." ^ It may, however, be useful to recount very briefly the facts which disprove the theory. Labour creates some things which have no value, as wooden shoes in a community that does not desire wooden shoes; some things have value, exchange value, although no labour has been expended upon them, as land and minerals; the value of things is sometimes greater, sometimes less, proportionately, than the labour embodied in them; for example, paintings by the old masters, and last year's styles of millinery; and, finally, the true determinants of value are utility and scarcity. If it be objected that Marx was aware of these two factors, the reply is that he either restricted them to the function of conditions rather than efficient causes of value, or attributed to them an influence that is inconsist- ent with his main theory that labour is the sole determinant of value. Indeed, the contradictions into which Marx was led by the theory are its sufficient refutation.^ With the destruction of the labour theory of value, the Marxian contention that capital contributes only its own original value to the product is likewise overthrown. The same conclusion is reached more directly by recalling the obvious facts of experience that, since the joint action of both capital and labour is required to bring into being every atom of the product, each is in its own order the cause of the whole product, and the proportion of the whole that is specifically due to the casual influence of either is as incapable of determination as the procreative contribution of either parent to their common offspring. The productive process carried on by labour and capital is virtually an organic process, in which the precise amount contributed by either factor is unknown and unknow- able. In so far, therefore, as the alleged right of labour to the 1 Skelton, " Socialism : A Critical Analysis," pp. 121, 122. 2 Cf. Skelton, loc. cit. ALLEGED RIGHT OF LABOUR TO ENTIRE PRODUCT I49 whole product is based upon the Marxian theory of value, it has not a shadow of validity. The Right of Productivity But the claim is not necessarily dependent upon this foundation. Those Socialists who have abandoned the labour theory of value can argue that the labourer (in- cluding the active director of industry) is the only human producer, that the capitalist as such produces nothing, and consequently has no moral claim to any part of the prod- uct. Whatever theory of value we may adopt, or whether we adopt any, we cannot annul the fact that interest does not represent labour expended upon the product by the capitalist. Nevertheless, this fact does not compel the conclusion that the share of the product now taken by the capitalist belongs of right to the labourer. Productivity does not of itself create a right to the product. It is not an in- trinsic title. That is to say, a right to the product is not inherent in the relation between product and producer. It is determined by certain extrinsic relations. When Brown makes a pair of shoes out of materials that he has stolen, he has not a right to the whole product; when Jones turns out a similar product from materials that he has bought, he becomes the exclusive owner of the shoes. The intrinsic relation of productivity is the same in both cases. It is the difference of extrinsic relation, namely, the relation between the producer and the material, that begets the difference between the moral claims of the two producers upon the product. The right of the producer is conditioned by certain other and more fundamental relations. Why has Jones a right to the shoes that he has made out of materials that he has bought? Not because he needs them; he is not alone in this condition. The ultimate reason and basis of his ownership is to be sought in the practical requirements 150 DISTRIBUTIVE JUSTICE of an equitable social distribution. Unless men receive an adequate return for their labour, they will not be able to satisfy their wants in a regular and sufficient manner. If they are forced to labour for others without compen- sation, they are deprived of the opportunity to develop their personality. They are treated as mere instruments to the welfare of beings who are not their superiors, but their moral and juridical equals. Their intrinsic worth and sacredness of personality is outraged, their essential equality with their fellows is disregarded, and their inde- structible rights are violated. On the other hand, when a producer, such as Jones, gets possession of his product, he subordinates no human being to himself, deprives no man of the opportunity to perform remunerative labour, nor appropriates an unreasonable share of the common bounty of the earth. He has a right to his product because this is one of the reasonable methods of distribution. In fact, it is the exigencies of reasonable distribution that constitute the fundamental justification of every title of ownership. The title of purchase by which a man claims the hat that he wears; the title of inheritance by which a son claims the house that once belonged to his father; the title of contract through which a labourer gets wages, a merchant "prices, and a landlord rent, — are all valid simply because they are reasonable devices for enabling men to obtain the goods of the earth for the sat- isfaction of their wants. All titles of property, produc- tivity included, are conventional institutions which reason and experience have shown to be conducive to human welfare. None of them possesses intrinsic or metaphysi- cal validity.^ Therefore, the Socialist cannot establish the right of 1 The exaggerated claims made on behalf of social productivity in the matter of land values have been examined in a previous chapter. Similar exaggerations with regard to capital will be considered in chapter xii. ALLEGED RIGHT OF LABOUR TO ENTIRE PRODUCT I5I labour to the full product of industry until he proves that this so-called right could be reduced to practice consistently with individual and social v^elfare. In other words, he must show that to give the entire product to the labourer would be a reasonable method of distribution. Now the arrangement by which the Socialist proposes to award the whole product of labour is the collective ownership and operation of the means of production, and the social dis- tribution of the product. If this system would not enable the labourer and the members of society generally to sat- isfy their wants to better advantage than is possible under the present system, the contention that the labourer has a right to the entire product of industry falls to the ground. The question will be considered in the following chapter. CHAPTER XI THE SOCIALIST SCHEME OF INDUSTRY " Never has our party told the workingman about a * State of the future/ never in any way than as a mere Utopia. If anybody says: *I picture to myself society after our programme has been realised, after wage labour has been abolished, and the exploitation of men has ceased, in such and such a manner, — ' well and good; ideas are free, and everybody may conceive the Socialist State as he pleases. Whoever believes in it may do so; whoever does not, need not. These pictures are but dreams, and Social Democracy has never understood them otherwise.'' ^ Such is the official attitude of Socialism toward de- scriptions of its contemplated industrial organisation. The party has never drawn up nor approved any of the various outlines of this sort which have been defended by individual Socialists. It maintains that it cannot antici- pate even the essential factors in the operation of a social and industrial system which will differ so widely from the one that we have to-day, and which will be so profoundly determined by events that are in the nature of the case impossible to prognosticate. Socialist Inconsistency From the viewpoint of all but convinced Socialists, this position is indefensible. We are asked to believe that the collective ownership and operation of the means of pro- duction would be more just and beneficial than the present 1 Wilhelm Liebknecht, cited in Hillqult's " Socialism in Theory and Practice," p. 107. 152 THE SOCIALIST SCHEME OF INDUSTRY 1 53 plan of private ownership and operation. Yet the Social- ist party refuses to tell us how the scheme would bring about these results; refuses to give us, even in outline, a picture of the machine at work. As reasonably might we be expected to turn the direction of industry over to a Rockefeller or a Morgan, making an act of faith in their efficiency and fairness. We are in the position of a man who should be advised to demolish an unsatisfactory house, without receiving any solid assurance that the proposed new one would be as good. To our requests for specific information about the working of the new industrial order the Socialists, as a rule, answer in terms of prophesied re- sults. They leave us in the dark concerning the causes by which these wonderful results are to be produced. From the viewpoint of the confirmed Socialist, how- ever, this failure to be specific is not at all unreasonable. He can have faith in the Socialist system without knowing beforehand how it will work. He believes in its efficacy because he believes that it is inevitable. In the words of Kautsky, " what is proved to be inevitable is proved not only to be possible, but to be the only possible outcome." ^ The Socialist believes that his scheme is inevitable be- cause he thinks that it is necessarily included in the out- come of economic and social evolution. Neither the premises nor the conclusion of this reason- ing is valid. The doctrines of economic determinism, the class struggle, the concentration of capital, the disappear- ance of the middle classes, the progressive pauperisation of the working classes, and all the other tenets of the Socialist philosophy, have been thoroughly discredited by the facts of psychology, the experience of the last half century, and the present trend of industrial and social forces.^ Even if the Socialist outcome were inevitable, it would not necessarily be an improvement on the present 1 '* Das Erfurter Program," cited by Skelton, op. cit., p. 178. 2 Cf . Skelton, op. cit., ch. vii ; Bernstein, " Evolutionary Socialism," 154 DISTRIBUTIVE JUSTICE system. It might illustrate the principle of retrogression. Since we cannot make an act of faith in either the in- evitableness or the efficacy of the Socialist industrial scheme, we are compelled to submit it to the ordinary tests of examination and criticism. We must try to see what would be the essential structure, elements, and opera- tion of a system in which the means of production were owned and managed collectively, and the product socially distributed. In attempting to describe the system, we shall be guided by what seems to be inherently necessary to it, and by the prevalent conception of it among present day Socialists. In this connection we have to observe that some of the criticisms of the Socialist order attribute to it elements that are not essential, nor any longer de- manded by the authoritative spokesmen of the movement; for example, complete confiscation of capital, compulsory assignment of men to the different industrial tasks, equal- ity of remuneration, the use of labour checks instead of money, the socialisation of all capital down to the smallest tool, and collective ownership of homes. Expropriating the Capitalists The first problem confronting a SociaHst administra- tion would be the method of getting possession of the in- struments of production. In the early years of the Social- ist movement, most of its adherents seemed to favour a policy of outright confiscation. Professor Nearing esti- mates the total property income now paid in the United States as, " well above the six-billion-dollar mark." ^ Were the Socialist State to seize all land and capital with- out compensation, it could conceivably transfer more than six billion dollars annually from landowners and capital- ists to the community. Not all of it, however, would be pp. 1-94; Simkhovitch, "Marxism vs. Socialism/' passim; Walling, " Progressivism and After," passim; Hillquit-Ryan, op. cit., ch. iv. 1 " Income," p. 152. THE SOCIALIST SCHEME OF INDUSTRY 1 5$ available for diversion to the labourers. According to the computations of Professor King, about two billion dollars were in 1910 saved and converted into capital.^ A progressive Socialist regime would want to appropriate at least that sum for the renewal and increase of the in- struments of production. Consequently, it would have only four billion dollars to add to the present total income of labour. This would be equivalent to $43.50 for every person in the United States. Desirable as would be such an addition to the remunera- tion of labour, it could never be realised through the process of confiscation. The owners of land and capital would be sufficiently powerful to defeat any such simple scheme of setting up the collectivist commonwealth. They constitute probably a majority of the adults of our popu- lation, and their economic advantages would make them much stronger relatively than their numbers.^ Ethically the policy of confiscation would be, on the whole, sheer robbery. To be sure, not all owners of land and capital have a valid claim to all their possessions, but practically all of them hold the greater part of their wealth by some kind of just title. Much land and capital that was orig- inally acquired by unjust means has become morally legiti- matised by the title of prescription. The majority of present day Socialists seem to advo- cate at least partial compensation.^ But this plan does not seem to offer any considerable advantage over com- plete confiscation. As regards morality, it would differ only in the degree of its injustice ; as regards expediency, it would be at best of doubtful efficacy. If the capitalists were given only a small fraction of the value of their holdings they would oppose the change with quite as much 1 " The Wealth and Income of the People of the United States," p. 132. 2 Cf. Hillqult-Ryan, op. cit, pp. 107, 136. 3 Cf. Hillquit-Ryan, op. cit., pp. 7Z-77') Skelton, op. cit., p. 183; Wall- ing, " Socialism as It Is," p. 429. 156 DISTRIBUTIVE JUSTICE determination as though they were offered nothing; if they were paid almost the full value of their possessions there would be no substantial gain to the community from the transfer; if they were compensated at a figure some- where between these two extremes their resistance would still be more costly to the State than the extra amount re- quired to make full compensation. Finally, if full compensation were offered it would have to take the form of government obligations, securities, or bonds. If these did not bear interest the great majority of capital owners would regard the scheme as partial and considerable confiscation, and would fight it with deter- mination and effectiveness. If the State bound itself to pay interest on the bonds it would probably find itself giv- ing the dispossessed capitalists as high a rate of return on their capital, as large a share of the national product, as they receive under the present system. Consequently, the expropriation of the capitalists would bring no direct and pecuniary gain to the labouring classes. Indeed, the latter would suffer positive loss by the change, owing to the fact that the State would be required to withdraw from the national product a considerable amount for the mainte- nance, renewal, and expansion of the instruments of pro- duction. At present the capitalist class performs the greater part of this function through the reinvestment of the incomes that it receives in the form of interest and rent. The average Socialist entirely ignores this capital- istic service, when he draws his pessimistic picture of the vast share of the national product which now goes to " idle capitalists." So far as the larger capitalist incomes are concerned; that is, those in excess of twenty-five thou- sand dollars annually, it is probable that the greater part is not consumed by the receivers, but is converted into socially necessary capital instruments. Since this would not be permitted in a Socialist order, the capitalists would strive to consume the whole of the incomes received from THE SOCIALIST SCHEME OF INDUSTRY 1 57 the public securities, and the State would be compelled to provide the required new capital out of the current na- tional product. In a word, society would have to give the capitalists as much as it does at present, and to with- hold from the labourers for new capital an immense sum which is now furnished by the capitalists. It is undoubtedly true that the richest capitalists would be unable to expend the whole of their incomes upon themselves and their families. If they turned a consid- erable part of it over to the State, the surrendered sum would be available as capital, thereby reducing the amount that the State would need to take out of the national product for this purpose. Were all those possessing in- comes in excess of fifty thousand dollars per family to give up all above that amount, the total thus accruing to the State would be a little more than one billion dollars.^ But this would be only one-half the required new capital. A part of the additional one billion is now provided out of wages and salaries, but the greater part probably comes out of rent and interest. Under Socialism this latter por- tion would have to be deducted from that part of the na- tional product which at present goes to the workers and is consumed by them. Hence they would undergo a loss of several hundred million dollars. One reply to this difficulty is that the total product of industry would be much increased under SociaUsm. Un- doubtedly an efficient organisation of industry on collec- tivist lines would be able to effect economies by combining manufacturing plants, distributive concerns, and transpor- tation systems, and by reducing unemployment to a mini- mum; but it could not possibly make the enormous econo- mies that are promised by the Socialists. The assertion that under Socialism men would be able to provide abun- dantly for all their wants on a basis of a working day of four, or even two, hours is seductive and interesting, but 1 Cf . King, op. cit., pp. 224-226. 1 58 DISTRIBUTIVE JUSTICE it has no support in the ascertainable facts of industrial resources. Even if the SociaHst organisation were operat- ing with a fair degree of efficiency, the gains that it could effect over the present system would probably not more than offset the social losses resulting from increased con- sumption by the compensated capitalists. But the proposed industrial organisation would not operate with a fair degree of efficiency. According to present Socialist thought, industries that are national in scope, such as the manufacture of petroleum, steel, and tobacco, would be carried on under national direction, while those that supplied only a local market, such as laundries, bakeries, and retail stores, would be managed by the municipalities. This division of control would be undoubtedly wise and necessary. Moreover, the majority of Socialists no longer demand that all tools and all indus- tries should be brought under collective or governmental direction. Very small concerns which employed no hired labour, or at most one or two persons, could remain under private ownership and operation, while even larger enter- prises might be carried on by co-operative associations. ■*■ Nevertheless the attempt to organise and operate collec- tively the industries of the country, even with these limita- tions, would encounter certain insuperable obstacles. These will be considered under the general heads of in- efficient industrial leadership, inefficient labour, and inter- ference with individual liberty. Inefficient Industrial Leadership Under Socialism the boards of directors or commissions which exercised supreme control in the various industries, would have to be chosen either by the general popular vote, by the government, or by the workers in each par- ticular industry. The first method may be at once ex- 1 Cf. Kautsky, "The Social Revolution," pp. 166, 167; Hillquit-Ryan, op. cit., p. 72. THE SOCIALIST SCHEME OF INDUSTRY 1 59 eluded from consideration. Even now the number of of- ficials chosen directly by the people is far too large ; hence the widespread agitation for the " short ballot." Public opinion is coming to realise that the voters should be re- quired to select only a few important officials, whose qualifications should be general rather than technical, and therefore easily recognised by the masses. These su- preme functionaries should have the power of filling all administrative offices, and all positions demanding expert or technical ability. If the task of choosing administrative experts cannot be safely left to the mass of the voters at present, it certainly ought not to be assigned to them under Socialism, when the number and qualifications of these functionaries would be indefinitely increased. If the boards of industrial directors were selected by the government, that is, by the national and municipal au- thorities, the result would be industrial inefficiency and an intolerable bureaucracy. No body of officials, whether legislative or executive, would possess the varied, exten- sive, and specific knowledge required to pick out efficient administrative commissions for all the industries of the country or the city. And no group of political persons could safely be entrusted with such tremendous power. It would enable them to dominate the industrial as well as the political life of the nation or the municipality, to establish a bureaucracy that would be impregnable for a long period of years, and to revive all the conceivable evils of governmental absolutism. The third method is apparently the one now favoured by most Socialists. " The workers in each industry may periodically select the managing authority," says Morris Hillquit.^ Even if the workers were as able as the stock- holders of a corporation to select an efficient govern- ing board, they would be much less likely to choose men who would insist on hard and efficient work from all sub- 1 Hillquit-Ryan, op. cit, p. 80; cf. Spargo, "Socialism," pp. 225-227. l6d DISTRIBUTIVE JUSTICE ordinates. The members of a private corporation have a strong pecuniary interest in selecting directors who will secure the maximum of product at the minimum of cost, while the employes in a Socialist industry would want managing authorities who were willing to make working conditions as easy as possible. The dependence of the boards of directors upon the mass of the workers, and the lack of adequate pecuniary motives, would render their management much less effi- cient and progressive than that of private enterprises. In the rules that they would make for the administration of the industry and the government of the labour force, in their selection of subordinate officers, such as superin- tendents, general managers, and foremen, and in all the other details of management, they would have always be- fore them the abiding fact that their authority was derived from and dependent upon the votes of the majority of the employes. Their supreme consideration would be to con- duct the industry in such a way as to satisfy the men who elected them. Hence they would strive to maintain an administration which would permit the mass of the labour force to work leisurely, to be provided with the most ex- pensive conditions of employment, and to be immune from discharge except in rare and flagrant cases. Even if the members of the directing boards were sufficiently cour- ageous or sufficiently conscientious to exact reasonable and efficient service from all their subordinates and all the workers, they would not have the necessary pecuniary motives. Their salaries would be fixed by the govern- ment, and in the nature of things could not be promptly adjusted to reward efficient and to punish inefficient man- agement. So long as their administration of industry maintained a certain routine level of mediocrity, they would have no fear of being removed; since they would be supervised and paid by public officials who would have neither the extraordinary capacity nor the necessary in- THE SOCIALIST SCHEME OF INDUSTRY l6l centive to recognise and reward promptly efficient manage- ment, they would lack the powerful stimulus which is pro- vided by the hope of gain. In the large private corpora- tions, the tenure of the boards of directors depends not upon the workers but upon the stockholders, whose main interest is to obtain a maximum of product at a minimum of cost, and who will employ and discharge, reward and punish, according as this end is attained. Moreover, the members of the boards, and the executive officers gen- erally, are themselves financially interested in the business and in the maintenance of the policy demanded by the other stockholders. All the subordinate officers, such as department man- agers, superintendents, foremen, etc., would exemplify the same absence of efficiency. Knowing that they must carry out the prudent policy of the board of directors, they would be slow to punish shirking or to discharge incom- petents. Realising that the board of directors lacked the incentive to make promotions promptly for efficient serv- ice, or to discharge promptly for inefficient service, they would devote their main energies to the task of holding their positions through a policy of indifferent and routine administration. Invention and progress would likewise suffer. Men who were capable of devising new machines, new processes, new methods of combining capital and labour, would be slow to convert their potencies into action. They would be painfully aware that the spirit of inertia and routine prevailing throughout the industrial and political organi- sation would prevent their efforts from receiving quick recognition and adequate rewards. Inventors of mechan- ical devices particularly would be deprived of the stimulus which they now find in the hope of indefinitely large gains. Boards of directors, general managers, and other persons exercising industrial authority would be very slow to in- troduce new and more efficient financial or technical l62 DISTRIBUTIVE JUSTICE methods when they had no certainty that they would re- ceive adequate reward in the form of either promotion or money compensation. They would see no sufficient reason for abandoning the established and pleasant policy of routine methods and unprogressive management. Inefficient Labour The same spirit of inefficiency and mediocrity would permeate the rank and file of the workers. Indeed, it would operate even more strongly among them than among the officers and superiors ; for their intellectual limitations and the nature of their tasks would make them less responsive to other than material and pecuniary mo- tives. They would desire to follow the line of least re- sistance, to labour in the most pleasant conditions, to re- duce irksome toil to a minimum. Since the great bulk of their tasks would necessarily be mechanical and monoto- nous, they would demand the shortest possible working day, and the most leisurely rate of working speed. And because of their numerical strength they would have the power to enforce this policy throughout the field of indus- try. They would have the necessary and sufficient votes. In a general way they might, indeed, realise that the prac- tice of universal shirking and laziness must sooner or later result in such a diminution of the national product as to cause them great hardship, but the workers in each in- dustry would hope that those in all the others would be more efficient ; or doubt that a better example set by them- selves would be imitated by the workers in other indus- tries. They would not be keen to give up the certainty of easy working conditions for the remote possibility of a larger national product. Attempted Replies to Objections All the attempts made by Socialists to answer or ex- plain away the foregoing difficulties may be reduced to THE SOCIALIST SCHEME OF INDUSTRY 1 63 two: the achievements of government enterprises in our present system; and the assumed efficacy of altruism and public honour in a regime of Socialism. Under the first head appeal is made to such publicly owned and managed concerns as the post office, railroads, telegraphs, telephones, street railways, water works, and lighting plants. It is probably true that all these enter- prises are on the whole carried on with better results to the public than if they were in private hands. It is like- wise probable that these and all other public utility monop- olies will sooner or later be taken over by the State in all advanced countries. Even if this should prove in all cases to be a better arrangement from the viewpoint of the general public welfare than private ownership and man- agement, the fact would constitute no argument for a Socialist organisation of all industry. In the first place, the efficiency of labour, management, and technical organ- isation is generally lower in public than in private enter- prises, and the cost of operation higher. Despite these defects, government ownership of public utilities, such as street railways and lighting concerns, may be socially pref- erable because these industries are monopolies. Inasmuch as their charges and services cannot be regulated by the automatic action of competition, the only alternative to public ownership is public supervision. Inasmuch as the latter is often incapable of securing satisfactory service at fair prices, public ownership and management becomes on the whole more conducive to social welfare. In other words, the losses through inefficient operation are more than offset by the gains from better service and lower charges. Three cent fares and adequate service on an in- efficiently managed municipal street railway are preferable to five cent fares on a privately owned street railway whose management is superior. On the other hand, all those in- dustries which are not natural monopolies can be prevented from practising extortion upon the public through regu- 164 DISTRIBUTIVE JUSTICE lated competition. In them, therefore, the advantages of private operation, of which competition itself is not the least, should be retained. In the second place, practically all the public service monopolies are simpler in structure, more routine in opera- tion, and more mature in organisation and efficiency than the other industries. The degree of managerial ability required, the necessity of experimenting with new methods and processes, and the opportunity of introducing further improvements in organisation are relatively less. Now, it is precisely in these respects that private has shown itself superior to public operation. Initiative, inventiveness, and eagerness to effect economies and increase profits are the qualities in which private management excels. When the nature and maturity of the concern have rendered these qualities relatively unimportant, public management can exemplify a fair degree of efficiency. In the third place, the ability of the State to operate a few enterprises, does not prove that it could repeat the performance with an equal degree of success in all indus- tries. I can drive two horses, but I could not drive twen- ty-two. No matter how scientific the organisation and departmentalisation of industries under Socialism, the final control of and responsibility for all of them would rest with one organ, one authority, namely, the city in municipal industries, and the nation in industries having national scope. This would prove too great a task, too heavy a burden, for any body of officials, for any group of human beings. Finally, it must be kept in mind that the publicly oper- ated utilities are subject continuously to the indirect com- petition of private management. By far the greater part of industry is now under private control, which sets the pace for efficient operation in a hundred particulars. As a consequence, comparisons are steadily provoked between public and private management, and the former is subject THE SOCIALIST SCHEME OF INDUSTRY 1 65 to constant criticism. The managers of the State con- cerns are stimulated and practically compelled to emulate the success of private management. This factor is prob- ably more effective in securing efficiency in public indus- tries than all other causes put together. In the words of Professor Skelton : '' A limited degree of public ow^ner- ship succeeds simply because it is a limited degree, suc- ceeds because private industry, in individual forms or in the socialised joint stock form, dominates the field as a vv^hole. It is private industry that provides the capital, pri- vate industry that trains the men and tries out the methods, private industry that sets the pace, and — not the least of its services — private industry that provides the ever-pos- sible outlet of escape." ^ The Socialist expectation that altruistic sentiments and public honour w^ould induce all industrial leaders and all ordinary w^orkers to exert themselves as effectively as they nov^ do for the sake of money, is based upon the very shallov^ fallacy that what is true of a few men may very readily become true of all men. There are, indeed, per- sons in every walk of life who work faithfully under the influence of the higher motives, but they are and always have been the exceptions in their respective classes. The great majority have been affected only feebly, intermit- tently, and on the whole ineffectively by either love of their kind or the hope of public approval. A Socialist order could generate no forces which would be as productive of unselfish conduct as the motives that are drawn from religion. History shows nothing comparable either in extent or intensity to the record of self surrender and service to the neighbour which are due to the latter influence. Yet religion has never been able, even in the periods and places most thoroughly dominated by Christianity, to induce more than a small minority of the population to adopt that life of altruism 1" Socialism: A Critical Analysis," p. 2ig. 1 66 DISTRIBUTIVE JUSTICE which would be required of the great majority under SociaHsm. Moreover, the efficacy of the higher motives is much greater among men devoted to scientific, intellectual, and religious pursuits than in either the leaders or the rank and file engaged in industrial occupations. The cause of this difference is to be sought in the varying nature of the two classes of activity : the first necessarily develops an appre- ciation of the higher goods, the things of the mind and the soul; the second compels the attention of men to rest upon matter, upon the things that appeal to the senses, upon the things that are measurable in terms of money. There is a special fallacy underlying the emphasis placed by Socialists on the power of public honour. It consists in the failure to perceive that this good declines in efficacy according as the number of its recipients in- creases. Even if all the industrial population were will- ing to work as hard for public approval as they now do for money, the results expected by Socialists would not be forthcoming. Public recognition of unselfish service is now available in relatively great measure because the persons qualifying for it are relatively few. They easily stand out conspicuous among their fellows. Let their numbers vastly increase, and unselfishness would become commonplace. It would no longer command popular recognition, save in those who displayed it in exceptional or heroic measure. The public would not have the time nor take the trouble to notice and honour adequately every floor walker, retail clerk, factory operative, street cleaner, agricultural labourer, ditch digger, etc., who might become a candidate for such recognition. When the Socialists point to such examples of disinter- ested public service as that of Colonel Goethals in building the Panama Canal, they confound the exceptional with the average. They assume that, since an exceptional man performs an exceptional task from high motives, all men THE SOCIALIST SCHEME OF INDUSTRY 167 can be got to act likewise in all kinds of operations. They forget that the Panama Canal presented opportunities of self satisfying achievement and fame which do not occur once in a thousand years; that the traditions and training of the army have during many centuries deliberately and consistently aimed and tended to produce an exceptionally high standard of honour and disinterestedness; that, even so, the majority of army officers have not in their civil assignments shown the same degree of faithfulness to the public welfare as Colonel Goethals; that the Canal was built under a regime of " benevolent despotism," which placed no reliance tipon the " social mindedness " of the subordinate workers; and that the latter, far from show- ing any desire to qualify as altruists or public benefactors, demanded and received material recognition in the form of wages, perquisites, and gratuities which greatly surpassed the remuneration received by any other labour force in history.^ In a word, wherever in the construction of the Canal notable disinterestedness or appreciation of public honour was shown, the circumstances were exceptional; where the situation was ordinary, the Canal builders were unable to rise above the ordinary motives of selfish advan- tage. Beneath all the Socialist argument on this subject lies the assumption that the attitude of the average man toward the higher motives can by some mysterious process be completely revolutionised. This is contrary to all experi- ence, and to all reasonable probability. Only a small minority of men have ever, in any society or environment, been dominated mainly by altruism or the desire of public honour. What reason is there to expect that men will act differently in the future? Neither legislation nor educa- tion can make men love their neighbours more than them- selves, or love the applause of their neighbours more than their own material welfare. 1 Cf . " The Panama Gateway," by Joseph Bucklin Bishop, p. 26Z. l68 DISTRIBUTIVE JUSTICE Restricting Individual Liberty Even though human nature should undergo the degree of miraculous transformation necessary to maintain an efficient industrial system on Socialist lines, such a social organisation must soon collapse because of its injurious effect upon individual liberty. Freedom of choice would be abolished in the most vital economic transactions; for there would be but one buyer of labour, and one seller of commodities. And these two would be identical, namely, the State. With the exception of the small minority that might be engaged in purely individual avocations, and in co-operative enterprises, men would be compelled to sell their labour to either the municipality or the national gov- ernment. As competition between these two political agencies in the matter of wages and other conditions of labour could not be permitted, there would be virtually only one employer. Practically all material goods would have to be purchased from either the municipal or the national shops and stores. Since the city and the nation would produce different kinds of goods, the purchaser of any given article would be compelled to deal with one seller. His freedom of choice would be further restricted by the fact that he would have to be content with those kinds and grades of commodities which the seller saw fit to produce. He could not create an effective demand for new forms and varieties of goods, as he now does, by stimulating the ingenuity and acquisitiveness of compet- ing producers and dealers. Prices and wages would, of course, be fixed beforehand by the government. The supposition that this function might be left to the workers in each industry is utterly im- practicable. Such an arrangement would involve a grand scramble among the different industries to see which could pay its own members the highest wages, and charge its neighbours' members the highest prices. The final result THE SOCIALIST SCHEME OF INDUSTRY 169 would be a level of prices so high that only an alert and vigorous section of the workers in each industry could find employment. Not only wages and prices but hours, safety requirements, and all the other general conditions of employment, would be regulated by the government. The individuals in each industry could not be permitted to determine these matters any more than they could be permitted to determine wages. Moreover, all these regu- lations would from the nature of the case continue un- changed for a considerable period of time. The restriction of choice enforced upon the sellers of labour and the buyers of goods, the utter dependence of the population upon one agency in all the affairs of their economic as well as their political life, the tremendous social power concentrated in the State, would produce a diminution of individual liberty and a perfection of politi- cal despotism surpassing anything that the world has ever seen. It would not long be tolerated by any self respect- ing people. To reply that the Socialist order would be a democracy, and that the people could vote out of existence any dis- tasteful regulation, is to play with words. No matter how responsive the governing and managing authorities might be to the popular will, the dependence of the indi- vidual would prove intolerable. Not the manner in which this tremendous social power is constituted, nor the per- sonnel of those exercising it, but the fact that so much power is lodged in one agency, and so little immediate con- trol of his affairs left to the individual, — is the heart of the evil situation. In a word, it is a question of the lib- erty of the individual versus the all pervading control of his actions by an agency other than himself. Moreover, the people in a democracy means a majority, or a compact minority. Under Socialism the controlling section of the voting population would possess so much power, political and economic, that it could impose whatever conditions it 170 DISTRIBUTIVE JUSTICE pleased upon the non-controlling section for an almost in- definite period of time. The members of the latter part of the population would not only be deprived of that im- mediate liberty which consists in the power to determine the details of their economic life, but of that remote lib- erty which consists in the power to affect general condi- tions by their votes. In the last chapter we saw that the claim to the full product of industry, made on behalf of labour by the So- cialists, cannot be established on intrinsic grounds. Like all other claims to material goods, it is valid only if it can be realised consistently with human welfare. Its validity depends upon its feasibility, upon the possibility of con- structing some social system that will enable it to work. The present chapter has shown that the requirements of such a system are not met by Socialism. A Socialist or- ganisation of industry would make all sections of the pop- ulation, including the wage earning class, worse off than they are in the existing industrial order. Consequently, neither the private ownership of capital nor the individual receipt of interest can be proved to be immoral by the Socialist argument. Since private ownership and management of capital are superior to Socialism, the State is obliged to maintain, pro- tect, and improve the existing industrial system. This is precisely the conclusion that we reached in chapter iv with reference to private ownership of land. In chapter v we found, moreover, that individual ownership of land is a natural right. The fundamental considerations there ex- amined lead to the parallel conclusion that the individual has a natural right to own capital. But we could not im- mediately deduce from the right to own land the right to take rent. Neither can we immediately deduce from the right to own capital the right to take interest. The posi- tive estabhshment of the latter right will occupy us in the two following chapters. CHAPTER XII ALLEGED INTRINSIC JUSTIFICATIONS OF INTEREST In his address as President of the American Sociologi- cal Society at the annual meeting, Dec. 2J, 191 3, Professor Albion W. Small denounced '' the fallacy of treating cap- ital as though it were an active agent in human processes, and crediting income to the personal representatives of capital, irrespective of their actual share in human serv- ice." According to his explicit declaration, his criticism of the modern interest-system v^as based primarily upon grounds of social utility rather than upon formally ethical considerations. A German priest has attacked interest from the purely moral viewpoint.^ In his view the owner of any sort of capital who exacts the return of anything beyond the principal, violates strict justice.^ The Church, he main- tains, has never formally authorised or permitted interest, either on loans or on producing capital. She has merely tolerated it as an irremovable evil. Is there a satisfactory justification of interest? If there is, does it rest on individual or on social grounds? That is to say: is interest justified immediately and in- trinsically by the relations existing between the owner and the user of capital? Or, is rendered morally good owing to its effects upon social welfare? Let us see what light is thrown on these questions by the anti-usury legislation of the Catholic Church. iHohoff, "Die Bedeutung der Marxschen Kapltalkritik " ; Pader- born, 1908. 2 Pp. 64-67, 88, 89. 96. 171 172 DISTRIBUTIVE JUSTICE Attitude of the Church Toward Interest on Loans During the Middle Ages all interest on loans was for- bidden under severe penalties by repeated ordinances of Popes and Councils.^ Since the end of the seventeenth century the Church has quite generally permitted interest on one or more extrinsic grounds, or " titles." The first of these titles was known as " lucrum cessans/' or relin- quished gain. It came into existence whenever a person who could have invested his money in a productive ob- ject, for example, a house, a farm, or a mercantile enter- . prise, decided instead to lend the money. In such cases the interest on the loan was regarded as proper compen- sation for the gain which the owner might have obtained from an investment on his own account. The title created by this situation was called '' extrinsic " because it arose out of circumstances external to the essential relations of borrower and lender. Not because of the loan itself, but because the loan prevented the lender from investing his money in a productive enterprise, was interest on the former held to be justified. In other words, interest on the loan was looked upon as merely the fair equivalent of the interest that might have been obtained on the invest- ment. During the seventeenth, eighteenth, and nineteenth cen- turies, another title or justification of loan-interest found some favour among Catholic moralists. This was the " praemium legale," or legal rate of interest allowed by civil governments. Wherever the State authorised a definite rate of interest, the lender might, according to these writers, take advantage of it with a clear conscience. To-day the majority of Catholic authorities on the sub- ject prefer the title of virtual productivity as a justifica- tion. Money, they contend, has become virtually pro- 1 Cf . Van Roey, " De Jiisto Auctario ex Contractu Crediti " ; and Ashley, ** English Economic History." ALLEGED INTRINSIC JUSTIFICATIONS OF INTEREST 1 73 ductive. It can readily be exchanged for income-bearing or productive property, such as, land, houses, railroads, machinery, and distributive establishments. Hence it has become the economic equivalent of productive capital, and the interest which is received on it through a loan is quite as reasonable as the annual return to the owner of pro- ductive capital. Between this theory and the theory con- nected with " lucrum cessans " the only difference is that the former shifts the justification of interest from the circumstances and rights of the lender to the present na- ture of the money itself. Not merely the fact that the individual will suffer if, instead of investing his money he loans it without interest, but the fact that money is gen- erally and virtually productive, is the important element in the newer theory. In practice, however, the two explana- tions or justifications come to substantially the same thing. Nevertheless, the Church has given no positive approval to any of the foregoing theories. In the last formal pro- nouncement by a Pope on the subject, Benedict XIV ^ condemned anew all interest that had no other support than the intrinsic conditions of the loan itself. At the same time, he declared that he had no intention of denying the lawfulness of interest which was received in virtue of the title of " lucrum cessans," nor the lawfulness of in- terest or profits arising out of investments in productive property. In other words, the authorisation that he gave to both kinds of interest was merely negative. He re- frained from condemning them. In the Responses given by the Roman Congregations from 1822 onward to questions relating to the lawfulness of loan- interest, we may profitably consider four principal features. First, they declare more or less specifically that interest may be taken in the absence of the title of " lucrum cessans " ; second, some of them definitely admit the title of " praemium legale," or civil authorisation, as sufficient 1 Encyclical, " Vix Pervenit," 1745. 174 DISTRIBUTIVE JUSTICE to give the practice moral sanction; third, they express a genuine permission, not a mere toleration, of interest tak- ing; fourth, none of them expHcitly declares that any of the titles or reasons for receiving loan-interest will neces- sarily or always give the lender a strict right thereto. None of them contains a positive and reasoned approval of the practice. Most of them merely decide that per- sons who engage in it are not to be disturbed in conscience, so long as they stand ready to submit to a formal decision on the subject by the Holy See. The insertion of the latter condition clearly intimates that some day interest taking might be formally and officially condemned. Should such a condemnation ever appear, it would not contradict any moral principle contained in the " Roman Responses," nor in the present attitude of the Church and of Catholic moralists. Undoubtedly it could come only as the result of a change in the organisation of industry, just as the existing ecclesiastical attitude has followed the changed economic conditions since the Middle Ages. All the theological discussion on the subject, and all the authoritative ecclesiastical declarations indicate, therefore, that interest on loans is to-day regarded as lawful because a loan is the economic equivalent of an investment. Evi- dently this is good logic and common sense. If it is right for the stockholder of a railway to receive dividends, it is equally right for the bondholder to receive interest. If it is right for a merchant to take from the gross returns of his business a sum sufficient to cover interest on his capi- tal, it is equally right for the man from whom he has bor- rowed money for the enterprise to exact interest. The money in a loan is economically equivalent to, convertible into, concrete capital. It deserves, therefore, the same treatment and the same rewards. The fact that the in- vestor undergoes a greater risk than the lender, and the fact that the former often performs labour in connection with the operation of his capital, have no bearing on the ALLEGED INTRINSIC JUSTIFICATIONS OF INTEREST I75 moral problem; for the investor is repaid for his extra risk and labour by the profits which he receives, and which the lender does not receive. As a mere recipient of in- terest, the investor undergoes no more risk nor exertion than does the lender. His claim to interest is no better than that of the latter. Interest on Productive Capital On what ground does the Church or Catholic theological opinion justify interest on invested capital? on the shares of the stockholders in corporations? on the capital of the merchant and the manufacturer ? In the early Middle Ages the only recognised titles to gain from the ownership of property were labour and *'isk.^ Down to the beginning of the fifteenth century substantially all the incomes of all classes could be ex- plained and justified by one or other of these two titles; for the amount of capital in existence was inconsiderable, and the number of large personal incomes insignificant. When, however, the traffic in rent charges and the oper- ation of partnerships, especially the " contractus trinus," or triple contract, had become fairly common, it was ob- vious that the profits from these practices could not be cor- rectly attributed to either labour or risk. The person who bought, not the land itself, but the right to receive a por- tion of the rent thereof, and the person who became the silent member of a partnership, evidently performed no labour beyond that involved in making the contract. And their profits clearly exceeded a fair compensation for their risks, inasmuch as the profits produced a steady income. How then were they to be justified? A few authorities maintained that such mcomes had no justification. In the thirteenth century Henry of Ghent condemned the traffic in rent charges; in the sixteenth Dominicus Soto maintained that the returns to the silent 1 Cf . St. Thomas, " Summa Theologica," 2a 2ae, q. 78, a. 2 et 3. \iy6 DISTRIBUTIVE JUSTICE partner in an enterprise ought not to exceed a fair equiva- lent for his risks ; about the same time Pope Sixtus V de- nounced the triple contract as a form of usury. Never- theless, the great majority of writers admitted that all these transactions were morally lawful, and the gains therefrom just. For a time these writers employed merely negative and a pari arguments. Gains from rent charges, they pointed out, were essentially as licit as the net rent received by the owner of the land; and the inter- est received by a silent partner, even in a triple contract, had quite as sound a moral basis as rent charges. By the beginning of the seventeenth century the leading authori- ties were basing their defence of industrial interest on positive grounds. Lugo, Lessius, and Molina adduced the productivity of capital goods as a reason for allowing gains to the investor. Whether they regarded productiv- ity as in itself a sufficient justification of interest, or merely as a necessary prerequisite to justification, cannot be determined with certainty. At present the majority of Catholic writers seem to think that a formal defence of interest on capital is un- necessary. Apparently they assume that interest is justi- fied by the mere productivity of capital. However, this view has never been explicitly approved by the Church. While she permits and authorises interest, she does not define its precise moral basis. So much for the teaching of ecclesiastical and ethical authorities. What are the objective reasons in favour of the capitalist's claim to interest? In this chapter we con- sider only the intrinsic reasons, those arising wholly out of the relations between the interest-receiver and the in- terest-payer. Before taking up the subject it may be well to point out the source from which interest comes, the class in the community that pays the interest to the capi- talist. From the language sometimes used by Socialists it might be inferred that interest is taken from the la- ALLEGED INTRINSIC JUSTIFICATIONS OF INTEREST 1 77 bourer, and that if it were abolished he would be the chief if not the only beneficiary. This is incorrect. At any given time interest on producing capital is paid by the consumer. Those who purchase the products of industry must give prices sufficiently high to provide interest in addition to the other expenses of production. Were in- terest abolished and the present system of private capital continued, the gain would be mainly reaped by the con- sumer in the form of lower prices; for the various capi- talist directors of industry would bring about this result through their competitive efforts to increase sales. Only those labourers who were sufficiently organised and suffi- ciently alert to make effective demands for higher wages be- fore the movement toward lower prices had got well under way, would obtain any direct benefit from the change. The great majority of labourers would gain far more as con- sumers than as wage earners. Speaking generally, then, we may say that the capitalist's gain is the consumer's loss, and the question of the justice of interest is a ques- tion between the capitalist and the consumer. The intrinsic or individual grounds upon which the capitalist's claim to interest has been defended are mainly three: productivity, service, and abstinence. They will be considered in this order. The Claims of Productivity It is sometimes asserted that the capitalist has as good a right to interest as the farmer has to the offspring of his animals. Both are the products of the owner's prop- erty. In two respects, however, the comparison is inade- quate and misleading. Since the owner of a female ani- mal contributes labour or money or both toward her care during the period of gestation, his claim to the offspring is based in part upon these grounds, and only in part upon the title of interest. In the second place, the offspring is the definite and easily distinguishable product of its par- 178 DISTRIBUTIVE JUSTICE ent. But the sixty dollars derived as interest from the ownership of ten shares of railway stock, cannot be iden- tified as the exact product of one thousand dollars of railway property. No man can tell whether this amount of capital has contributed more or less than sixty dollars of value to the joint product, i.e., railway services. The same is true of any other share or piece of concrete capital. All that we know is that the interest, be it five, six, seven, or some other per cent., describes the share of the product which goes to the owner of capital in the present condi- tions of industry. It is the conventional not the actual and physical product of capital. Another faulty analogy is that drawn between the pro- ductivity of capital and the productivity of labour. Fol- lowing the terminology of the economists, most persons think of land, labour, and capital as productive in the same sense. Hence the productivity of capital is easily assumed to have the same moral value as the productive action of human beings; and the right of the capitalist to a part of the product is put on the same moral basis as the right of the labourer. Yet the differences between the two kinds of productivity, and between the two moral claims to the product are more important than their resemblances. In the first place, there is an essential physical differ- ence. As an instrument of production, labour is active, capital is passive. As regards its worth or dignity, labour is the expenditure of human energy, the output of a person, while capital is a material thing, standing apart from a personality, and possessing no human quality or human worth. These significant intrinsic or physical differences forbid any immediate inference that the moral claims of the owners of capital and labour are equally valid. We should logically expect to find that their moral claims are unequal. This expectation is realised when we examine the bear- ing of the two kinds of productivity upon human welfare. ALLEGED INTRINSIC JUSTIFICATIONS OF INTEREST 1 79 In the exercise of productive effort the average labourer undergoes a sacrifice. He is engaged in a process that is ordinarily irksome. To require from him this toilsome expenditure of energy without compensation, v^ould make him a mere instrument of his fellows. It would subordi- nate him and his comfort to the aggrandisement of beings who are not his superiors but his moral equals. For he is a person ; they are no more than persons. On the other hand, the capitalist as such, as the recipient of interest, performs no labour, painful or otherwise. Not the capi- talist, but capital participates in the productive process. Even though the capitalist should receive no interest, the productive functioning of capital would not subordinate him to his fellows in the way that wageless labour would subordinate the labourer. The precise and fundamental reason for according to the labourer his product is that this is the only rational rule of distribution. When a man makes a useful thing out of materials that are his, he has a strict right to the product simply because there is no other reasonable method of distributing the goods and opportunities of the earth. If another individual, or society, were permitted to take this product, industry would be discouraged, idleness fostered, and reasonable life and self development rendered impos- sible. Direful consequences of this magnitude would not follow the abolition of interest. Perhaps the most important difference between the moral claims of capitalist and labourer is the fact that for the latter labour is the sole means of livelihood. Unless he is compensated for his product he will perish. But the capitalist has in addition to the interest that he receives the ability to work. Were interest abolished he would still be in as good a position as the labourer. The prod- uct of the labourer means to him the necessaries of life; the product of the capitalist means to him goods in excess of a mere livelihood. Consequently their claims to the l80 DISTRIBUTIVE JUSTICE product are greatly unequal in vital importance and moral value. The foregoing considerations show that even the claim of the labourer to his product is not based upon merely intrinsic grounds. It does not spring entirely from the mere fact that he has produced the product, from the mere relation between producer and thing produced. If this is true of labour-productivity we should expect to find it even more evident with regard to the productivity of capital; for the latter is passive instead of active, non rational instead of human. The expectation is well founded. Not a single con- clusive argument can be brought forward to show that the productivity of capital directly and necessarily confers upon the capitalist a right to the interest-product. All the attempted arguments are reducible to two formulas : "res fructificat domino" {" sl thing fructifies to its owner") and "the effect follows its cause." The first of these was originally a legal rather than an ethical maxim; a rule by which the title was determined in the civil law, not a principle by which the right was deter- mined in morals. The second is an irrelevant platitude. As a juristic principle, neither is self evident. Why should the owner of a piece of capital, be it a house, a ma- chine, or a share of railway stock, have a right to its prod- uct, when he has expended neither time, labour, money, nor inconvenience of any kind? To answer, " because the thing which produced the product belongs to him," is merely to beg the question. To answer, " because the effect follows the cause," is to make a statement which has nothing to do with the question. What we want to know is why the ownership of a productive thing gives a right to the product; why this particular effect should follow its cause in this particular way. To answer by repeating under the guise of sententious formulas the thesis to be proved, is scarcely satisfactory or convincing. ALLEGED INTRINSIC JUSTIFICATIONS OF INTEREST l8l To answer that if the capitalist were not given interest industry and thrift would decrease and human welfare suffer, is to abandon the intrinsic argument entirely. It brings in the extrinsic consideration of social conse- quences. The Claims of Service The second intrinsic ground upon which interest is de- fended, is the service performed by the capitalist when he permits his capital to be used in production. Without capital, labourers and consumers would be unable to com- mand more than a fraction of their present means of live- lihood. From this point of view we see that the service in question is w^orth all that is paid in the form of interest. Nevertheless it does not follow that the capitalist has a claim in strict justice to any payment for this service. According to St. Thomas, a seller may not charge a buyer an extra amount merely because of the extra value at- tached to the commodity by the latter.^ In other words, a man cannot justly be required to pay an unusual price for a benefit or advantage or service, when the seller undergoes no unusual deprivation. Father Lehmkuhl car- ries the principle further, and declares that the seller has a right to compensation only when and to the extent that he undergoes a privation or undertakes a responsibility.^ According to this rule, the capitalist would have no right to interest; for as mere interest-receiver he undergoes no privation. His risk and labour are remunerated in profits, while the responsibility of not withdrawing from produc- tion something that can continue in existence only by con- tinuing in production, is scarcely deserving of a reward according to the canons of strict justice. Whatever we may think of this argument from author- ity, we find it impossible to prove objectively that a man 1 " Secunda Secondae," q. 'jy, a. i, in corp. 2 " Theologia Moralis," I, no. 1050. l82 DISTRIBUTIVE JUSTICE who renders a service to another has an intrinsic right to anything beyond compensation for the expenditure of money or labour involved in performing the service. The man who throws a Hfe preserver to a drowning person may justly demand a payment for his trouble. On any recog- nised basis of compensation, this payment will not exceed a few dollars. Yet the man whose life is in. danger would pay a million dollars for this service if he were extremely rich. He would regard the service as worth this much to him. Has the man with the life preserver a right to exact such a payment? Has he a right to demand the full value of the service? No reasonable person would answer this question otherwise than in the negative. H the performer of the service may not charge the full value thereof, as measured by the estimate put upon it by the recipient, it would seem that he ought not to demand any- thing in excess of a fair price for his trouble. In other words, he may not justly exact anything for the service as such. It would seem, then, that the capitalist has no moral claim to pure interest on the mere ground that the use of his capital in production constitutes a service to labourers and consumers. It would seem that he has no right to demand a payment for a costless service. The Claims of Abstinence The third and last of the intrinsic justifications of inter- est that we shall consider is abstinence. This argument is based upon the contention that the person who saves his money, and invests it in the instruments of production undergoes a sacrifice in deferring to the future satisfac- tions that he might enjoy to-day. One hundred dollars now is worth as much as one hundred and five dollars a year hence. That is, when both are estimated from the viewpoint of the present. This sacrifice of present to future enjoyment which contributes a service to the com- ALLEGED INTRINSIC JUSTIFICATIONS OF INTEREST 183 munity in the form of capital, creates a just claim upon the community to compensation in the form of interest. If the capitalist is not rewarded for this inconvenience he is, like the unpaid labourer, subordinated to the ag- grandisement of his fellows. , Against this argument we may place the extreme refu- tation attempted by the Socialist leader, Ferdinand Lassalle : " But the profit of capital is the reward of abstinence. Truly a happy phrase! European millionaires are ascet- ics, Indian penitents, modern St. Simons Stylites, who perched on their columns, with withered features and arms and bodies thrust forward, hold out a plate to the passers-by that they may receive the wages of their priva- tions ! In the midst of this sacro-saint group, high above his fellow-mortifiers of the flesh, stands the Holy House of Rothschild. That is the real truth about our present society! How could I have hitherto blundered on this point as I have?" ^ Obviously this is a malevolently one-sided implication concerning the sources of capital. But it is scarcely less adequate than the explanation in opposition to which it has been quoted. Both fail to distinguish between the different kinds of savers, the different kinds of capital- owners. For the purposes of our inquiry savings may be divided into three classes. First, those which are accumulated and invested auto- matically. Very rich persons save a great deal of money that they have no desire to spend, since they have already satisfied or safeguarded all the wants of which they are conscious. Evidently this kind of saving involves no real sacrifice. To it the words of Lassalle are substantially applicable, and the claim to interest for abstinence de- cidedly inapplicable. Second, savings to provide for old age and other future i"What is Capital?" p. 27. 184 DISTRIBUTIVE JUSTICE contingencies which are estimated as more important than any of the purposes for which the money might now be expended. Were interest abolished this kind of saving would be even greater than it is at present; for a larger total would be required to equal the fund that is now pro- vided through the addition of interest to the principal. In a no-interest regime one thousand dollars would have to be set aside every year in order to total twenty thou- sand dollars in twenty years ; when interest is accumulated on the savings, a smaller annual amount will suffice to produce the same fund. Inasmuch as this class of persons would save in an even greater degree without interest, it is clear that they regard the sacrifice involved as fully compensated in the resulting provision for the future. In their case sacrifice is amply rewarded by accumulation. Their claim to additional compensation in the form of interest does not seem to have any valid basis. In the words of the late Professor Devas, '* there is ample re- ward given without any need of any interest or dividend. For the workers with heads or hands keep the property intact, ready for the owner to consume whenever con- venient, when he gets infirm or sick, or when his chil- dren have grown up, and can enjoy the property with him." 1 The third kind of saving is that which is made by per- sons who could spend, and have some desire to spend, more on present satisfactions, and who have already pro- vided for all future wants in accordance with the standards of necessaries and comforts that they have adopted. Their fund for the future is already sufficient to meet all those needs which seem weightier than their present un- satisfied wants. If the surplus in question is saved it will go to supply future desires which are no more important than those for which it might be expended now. In other words, the alternatives before the prospective saver 1 " Political Economy," p. 507. ALLEGED INTRINSIC JUSTIFICATIONS OF INTEREST 185 are to procure a given amount of satisfaction to-day, or to defer the same degree of satisfaction to a distant day. In this case the inducement of interest will undoubtedly be necessary to bring about saving. As between equal amounts of satisfaction at different times, the average person will certainly prefer those of the present to those of the future. He will not decide in favour of the future unless the satisfactions then obtainable are to be greater in quantity. To this situation the rule that deferred en- joyments are worth less than present enjoyments, is strictly applicable. The increased quantity of future satisfaction which is necessary to turn the choice from the present to the future, and to determine that the surplus shall be saved rather than spent, can be provided only through interest. In this way the accumulations of inter- est and savings will make the future fund equivalent to a larger amount of enjoyment or utility than could be obtained if the surplus were exchanged for the goods of the present. " Interest magnifies the distant object." Whenever this magnifying power seems sufficiently great to outweigh the advantage of present over future satis- factions, the surplus will be saved instead of spent. Among the well-to-do there is probably a considerable number of persons who take this attitude toward a con- siderable part of their savings. Since they would not make these savings without the inducement of interest, they regard the latter as a necessary compensation for the sacrifice of postponed enjoyment. In a general way we may say that they have a strict right to this interest on the intrinsic ground of sacrifice. Inasmuch as the com- munity benefits by the savings, it may quite as fairly be required to pay for the antecedent sacrifices of the savers as for the inconvenience undergone by the performer of any useful labour or service. Summing up the matter regarding the intrinsic justi- fication of interest, we find that the titles of productivity l86 DISTRIBUTIVE JUSTICE and service do not conclusively establish the strict right of the capitalist to interest, and that the title of abstinence is morally valid for only a portion, probably a rather small portion, of the total amount of interest now received by the owners of capital. Consequently interest as a whole is not conclusively vindicated on individual grounds. If it is to be proved morally lawful its justification must be sought in extrinsic and social considerations. This in- quiry will form the subject of the next chapter. CHAPTER XIII SOCIAL AND PRESUMPTIVE JUSTIFICATIONS OF INTEREST As we saw in the last chapter, interest cannot be con- clusively justified on the ground of either productivity or service. It is impossible to demonstrate that the capitalist has a strict right to interest because his capital produces interest, or because it renders a service to the labourer or the consumer. A part, probably a small part, of the inter- est now received can be fairly justified by the title of sacrifice. Some present owners of capital would not have saved had they not expected to receive interest. In their case interest may be regarded as a just compensation for the sacrifice that they underwent when they decided to save instead of consuming. Limitations of the Sacrifice Principle Nevertheless these men would suffer no injustice if in- terest were now to be abolished. Up to the moment of the change, they would have been in receipt of adequate com- pensation; thereafter, they would be in exactly the same position as when they originally chose to save rather than consume. They would still be able to sell their capital, and convert the proceeds to their immediate uses and pleasures. In this case they would obviously have no further claim upon the community for interest. On the other hand, they could retain the ownership of their cap- ital, and postpone its consumption to some future time. In making this choice they would regard future as more important than present consumption, and the superiority of future enjoyment as sufficiently great to compensate 187 1 88 DISTRIBUTIVE JUSTICE them for the sacrifice of postponement. Hence they would have no moral claim to interest on the ground of abstinence. In general, then, the sacrifice-justification of interest continues only so long as the interest continues. It extends only to the interest received by certain cap- italists in certain circumstances, not to all interest in all circumstances. Therefore, it presents no moral obstacle to the complete abolition of interest. Since probably the greater part of the interest now received cannot be justified on intrinsic grounds, and since that part of it which is thus justified could be abolished consistently with the rights of the recipients, let us see whether it is capable of justification for reasons of social welfare. Would its suppression be socially beneficial or socially detrimental? The Value of Capital in a No-Interest Regime The interest that we have in mind is pure interest, not undertaker's profit, nor insurance against risk, nor gross interest. Even if all pure interest were abolished the capitalist who loaned his money would still receive some- thing from the borrower in addition to the repayment of the principal, while the active capitalist would get from the consumer more than the expenses of production. The former would require a premium of, say, one or two per cent, to protect him against the loss of his loan. The latter would demand the same kind of insurance, and an additional sum to repay him for his labour and enterprise. None of these payments could be avoided in any system of privately directed production. The return whose sup- pression is considered here is that which the capitalist receives over and above these payments, and which in this country seems to be about three or four per cent. Would capital still have value in a no-interest regime, and if so how would its value be determined? At present the lower limit of the value of productive capital, as of SOCIAL AND PRESUMPTIVE JUSTIFICATIONS 189 all Other artificial goods, is fixed in the long run by the cost of production. Capital instruments that do not bring this price will not continue to be made. In other words, cost of production is the governing factor of the value of capital from the side of supply. It would likewise fix the lower limit of value in a no-interest regime; only, the cost of producing capital instruments would then be some- what lower than to-day, owing to the absence of an interest charge for the working capital during the productive process. But the cost of production is not a constant and accurate measure of the value of artificial capital. The true measure is found in the revenue or interest that a given piece of capital yields to its owners. If the current rate of interest is five per cent., a factory that brings in ten thousand dollars net return will have a value of about two hundred thousand dollars. This is the governing factor of value from the side of demand. In a no-interest economy the demand factor would be quite different. Capital instruments would be in demand, not as revenue producers, but as the concrete embodiments, the indis- pensable requisites of saving and accumulation. For it is impossible that saving should in any considerable amount take the form of cash hoards. In the words of Sir Robert Gififen : " The accumulations of a single year, even taking it at one hundred and fifty millions only, . . . would absorb more than the entire metallic currency of the country [Great Britain]. They cannot, therefore, be made in cash." ^ The instruments of production would be sought and valued by savers for the same reason that safes and safety deposit boxes are in demand now. They would be the only means of carrying savings into the future, and they would necessarily bring a price sufficiently high to cover the cost of producing them. One man might deposit his savings in a bank, whence they would 1 " Growth of Capital," p. 152. ipO DISTRIBUTIVE JUSTICE be borrowed without interest by some director of indus- try. When the owner of the savings desired to recover them he could obtain from the bank the fund of some other depositor, or get the proceeds of the sale of the con- crete capital in which his own savings had been embodied. Another man might prefer to invest his savings directly in a building, a machine, or a mercantile business, whence he could recover them later from the sale of the property. Hence the absence of interest would not change essen- tially the processes of saving or investment. Capital would still have value, but its valuation from the demand side would rest on a different basis. It would be valued not in proportion to its power to yield interest, but be- cause of its capacity to become a receptacle for savings, and to carry into the future the consuming power of the present. The question whether the abolition of interest by the State would be socially helpful or socially harmful is mainly, though not entirely, a question of the supply of capital. If the community would not have sufficient cap- ital to provide for all its needs, actual and progressive, the suppression of interest would obviously be a bad policy. Most economists seem inclined to think that this condi- tion would be realised; that, without the inducement of interest, men would neither make new savings nor con- serve existing capital in sufficient quantity to supply the wants of society. Very few of them, however, pretend to be able to prove this proposition. So many complex factors with regard to the possibilities of saving and the motives of savers, enter into the situation that no opinion on the subject can have any stronger basis than prob- ability. As a preliminary to our consideration of the question of abolition, let us inquire whether there exists any definite relation between the present supply of capital and the current rate of interest. SOCIAL AND PRESUMPTIVE JUSTIFICATIONS I9I Whether the Present Rate of Interest Is Necessary It is sometimes contended that the interest rate must be kept up to the present level if the existing supply of capital is to be maintained. The underlying assumption is that some of the present savers would discontinue that function at any lower rate, with the consequence that the supply of capital would fall below the demand. Owing to this excess of demand over supply, the rate of interest would rise, or tend to rise, to the former level. There- fore, the rate existing at any given time is the socially necessary rate. The rate of interest is said to be anal- ogous to the rate of wages. For example; of ten thou- sand men receiving five dollars a day, nine thousand may be willing to work for four dollars rather than quit their present jobs. But the other thousand set their minimum price at five dollars. If the wage is reduced to four dol- lars these men will get employment elsewhere, thus caus- ing such an excess of demand over supply as to force the wage rate back to five dollars. The same thing, it is con- tended, will happen when the high-priced section of the savers, " the marginal savers," discontinue saving on account of the artificial lowering of the rate of interest. The analogy, however, is misleading. The " marginal " one thousand wage earners refuse to work for four dollars a day because they can get better compensation in some other occupation. This phenomenon has been proved over and over again by observation and experience. On the other hand, there is no experience, no positive evi- dence, which shows or tends to show that any necessary group of present savers would discontinue or materially reduce their accumulations if they were no longer able to secure the present rate of interest. If the rate were lowered simultaneously in all civiHsed countries the dis- satisfied savers, unlike the dissatisfied labourers, would not be able to get a better price for their capital elsewhere. 192 DISTRIBUTIVE JUSTICE Their only alternative would be to spend their actual or potential savings for present enjoyment. Now we have no empirical data to justify the assumption that any con- siderable number of savers would choose this alternative in preference to, say, three or two per cent, interest. The fact that any group of savers at present gets and insists on getting a higner rate, merely proves that they can get it, and that they are selfish enough to take advantage of the possibility. We know that some men who now obtain six per cent, interest would accept two rather than cease to save; yet they do not hesitate to demand six per cent. So far as we know, all present savers might take the same attitude. At any rate, we can not conclude that they would not take less from the fact that they now get more. Why then does not the rate of interest fall? If all present savers are getting a higher rate than is necessary to induce them to save, why do they not increase their savings to such an extent that the supply of capital will exceed the present volume of demand, and thus lead to a declme in the rate of interest? This is what happens when the price of consumption-goods rises appreciably above the mini- mum level that satisfies the most high-priced or " mar- ginal " producers. There is, however, an important difference between the two cases. The capacity to pro- duce more goods is practically unlimited, and the corre- sponding desire is also unlimited, so long as the price of the product exceeds the cost of production. The capacity to save is not unlimited, and the desire to save is neu- tralised and sharply restricted by other and more powerful desires. Hence it is quite possible that the price of capital, i.e., interest, is determined to only a slight degree by the " cost " of saving, being mainly dominated and regulated from the side of demand. Even though many of the present savers and owners of capital should diminish or discontinue their functions on account of a fall in the rate of interest, a reduction SOCIAL AND PRESUMPTIVE JUSTIFICATIONS 1 93 would not necessarily take place in the supply of capital. The function of these *' marginal savers " would in all probability be performed by other persons, who would be compelled to increase their accumulations in order to pro- vide as well for the future as they had previously been able to provide with a smaller capital at a higher rate of interest.^ Whether at Least Two Per Cent. Is Necessary While admitting that the present rate is unnecessarily high, Professor Cassel maintains that a certain important class of savers would diminish very considerably their accumulations if the interest rate should fall much below two per cent. This class comprises those persons whose main object in saving is a fund which will some day sup- port them from its interest. At six per cent, a person can accumulate in about twelve years a sum sufficient to provide him with an interest-income equal to the amount annually saved. For example; two thousand dollars put aside every year, and subjected to compound interest, will aggregate in twelve years a principal capable of yielding an annual income of two thousand dollars. At two per cent, the same amount of yearly saving will not lead to the same income in less than thirty-live years. If the rate be one and one-half per cent., forty-seven years will be required to produce the desired income. Hence, con- cludes Cassel, if the rate falls below two per cent, the average man will decide that life is too short to provide for the future by means of an interest-income, and will expect to draw upon his principal. This means that he will not need to save as much as when he sought to ac- cumulate a capital large enough to support him out of its interest alone. The argument is plausible but not conclusive. If the 1 Cf . Conner, " Interest and Saving," p. 7s ; Cassel, " The Nature and Necessity of Interest," ch. iv. 194 DISTRIBUTIVE JUSTICE rate of interest is so low that a man must save for forty- seven years in order to obtain a sufficient interest-income to support him in his declining years, he will rarely attain that end. In the great majority of instances men who are unable to save more annually than the amount that they will need each year in old age, will expect and be com- pelled to use up a part or all of their capital in the period following the cessation of their economic usefulness. Nevertheless, it does not follow that they will save less at one and one-half per cent, than at six per cent. The determining factpr in the situation is the attitude of the saver toward the capital sum accumulated. He either de- sires or does not desire to leave this behind him. In the latter case he will save only as much as is necessary to provide an annual income composed partly of interest and partly of the principal. If this contemplated income is two thousand dollars, and the rate of interest is six per cent., he will not need to save that* much annually for as long a period as ten years. He can diminish' either the yearly amount saved or the length of time devoted to sav- ing. On the other hand, if the rate is only one and one- half per cent, he will be compelled to save a larger total in order to secure an equal accumulation and an equal provision for the future. In all cases, therefore, in which the saving is carried on merely for the saver's own life- time it will be increased instead of decreased by a low rate of interest. If the saver does desire to bequeath his capital he will not always be deterred from this purpose merely because he is compelled to use some of the capital for the satis- faction of his own wants. Take the man who can save two thousand dollars a year, and with the rate of interest at six per cent, assure himself an interest-income of the same amount, and who intends to leave the principal (some thirty-three thousand dollars) to his children. Should the rate fall to one and one-half per cent, he would SOCIAL AND PRESUMPTIVE JUSTIFICATIONS I95 be unable to accumulate and bequeath nearly such a large sum. Surely this fact, discouraging as it is, will not de- termine him to save nothing. He will not, as Cassel's argument assumes, decide to leave nothing to his children, and content himself with that amount of saving which will suffice to provide for his own future. In all prob- ability he will try to accumulate a sum which, even when diminished by future deductions for his own wants, will approximate as closely as possible the amount that he could have bequeathed had the rate remained at six per cent. This means that he will save more at the low than at the high rate of interest. The relative insignificance of the sum which would be saved at a low rate might sometimes, indeed, deter a person from saving for testamentary purposes. With the rate at six per cent., a man might be willing to save six hundred dollars a year for a sufficiently long period to provide a legacy of twenty thousand dollars to an educa- tional institution. With the rate at one and one-half per cent., the amount that he could hope to accumulate would be so much smaller that it might seem to him not worth while, and he would decline to save the six hundred dol- lars annually. Cases of this kind, however, always in- volve the secondary objects of saving, the luxuries rather than the necessaries of testamentary transmission. They do not include such primary objects as provision for one's family. When the average man finds that he cannot leave to his family as much as he would desire, as much as he would have bequeathed to them at a higher rate of interest, he will strive to increase rather than decrease his efforts to save for this purpose. Speaking generally, then, we conclude that the assump- tion underlying Professor Cassel's theory is contradicted by our experience of human motives and practices. Men who save mainly for a future interest-income, at the same time wishing to keep the principal intact until death, and 196 DISTRIBUTIVE JUSTICE who could have fully realised this desire under a high interest regime, will not become entirely indifferent to it when they find that they cannot attain it completely. They will ordinarily try to leave behind them as large a capital or principal as they can. Hence they will save more rather than less. Whether Any Interest Is Necessary Perhaps the best known recent statement of the opinion that interest is inevitable, appears in Professor Irving Fisher's ** The Rate of Interest." ^ While he does not assert explicitly that sufficient capital would not be pro- vided without interest, and even admits that in certain circumstances interest might disappear, the general logic and implications of his argument are decidedly against the supposition that society could ever get along without interest. He lays such stress upon the factor of " impa- tience," i.e., man's unwillingness to wait for future goods, as to suggest strongly that other causes of interest, and the number of savers free from " impatience," are quite insignificant. Now, if " impatience " were the only cause of interest the latter must continue as long as " impa- tience " continues; and if practically all savers, actual and possible, are completely dominated by " impatience " the abolition of interest would be socially disastrous. How- ever, neither of these assumptions is demonstrable. We have just seen that the present rate of interest has other causes than " impatience " ; that a large proportion of savers insist upon getting the present rate, not because they require it to offset their " impatience," but simply because they can obtain it, and because they prefer it to the lower rate. Therefore, the mere existence of the present rate does not prove it to be necessary. By the same argument it is evident that the existence of any interest does not demonstrate the necessity of some inter- 1 New York, 1907. SOCIAL AND PRESUMPTIVE JUSTIFICATIONS I97 est. In the second place, the number of savers, present and prospective, v^hose " impatience '' is so weak as to permit them to save without interest, is probably greater than the average reader of Professor Fisher's pages is led to assume. The question whether interest is necessary cannot be answered by reference to the general fact of human " impatience " ; it demands a preliminary analysis of the extent to which " impatience " affects the different classes of savers. With interest abolished, those persons who were willing to subordinate present secondary satisfactions to the pri- mary future needs of themselves and their families, would save at least as much for these purposes as when they could have obtained interest. Most of them would prob- ably save more in order to render their future provision as nearly as possible equal to what it would have been had interest accrued on their annual savings. Whether a person intended to leave all his accumulations, or part of tiiem, or none of them to posterity, he would still desire them to be as large as they might have been in a regime of interest. In order to realise this desire, he would be compelled to increase his savings. And it is reasonable to expect that this is precisely the course that would be followed by men of average thrift and foresight. Such men regard future necessaries and comforts, whether for themselves or their children, as more important than pres- ent non-essentials and luxuries. Interest or no interest, prudent men will subordinate the latter goods to the former, and will save money accordingly. When, however, both future and present goods are of the same order and importance, the future is no longer preferred to the present. In that case the preference is reversed. The luxuries of to-day are more keenly prized than the luxuries of to-morrow. If the latter are to be preferred they must possess some advantage over the luxuries that might be obtained here and now. Such ad- 198 DISTRIBUTIVE JUSTICE vantage may arise in various ways; for example, when a man decides that he will have more leisure for a foreign journey two years hence than this year, or when he prefers a large amount of future enjoyment at one time to present satisfactions taken in small doses. But the most general method of conferring advantage upon the secondary satis- factions of the future as compared with those of the present, is to increase the quantity. The majority of fore- seeing persons are willing to pass by one hundred dollars' worth of enjoyment now for the sake of one hundred and five dollars' worth one year hence. This advantage of quantity is provided through the receipt of interest. It affects all those persons whose saving, as noted in the last chapter, involves a sacrifice for which the only adequate compensation is interest, and likewise all those persons who are in a position to choose between present and future luxuries. Were interest suppressed these classes of per- sons would cease to save for this kind of future goods. According to Professor Taussig, " most saving is done by the well-to-do and the rich." ^ On this hypothesis it seems probable that the abolition of interest would dimin- ish the savings and capital of the community very con- siderably; for the accumulations of the wealthy are derived mainly from interest rather than from salaries. On the other hand, the suppression of interest should bring about a much wider diffusion of wealth. The sums formerly paid out as interest, would be distributed among the masses of the population as increased wages and re- duced costs of living. Hence the masses would possess an immensely increased capacity for saving, which might offset or even exceed the loss of saving-power among those who now receive interest-incomes.^ To sum up the results of our inquiry concerning the necessity of interest: The fact that men now receive 1" Principles of Economics," II, 42. 2 Cf. Hobson, " The Economics of Distribution," pp. 259-265. SOCIAL AND PRESUMPTIVE JUSTIFICATIONS I99 interest does not prove that they would not save without interest. The fact that many men would certainly save without interest does not prove that a sufficient amount would be saved to provide the community with the neces- sary supply of capital. Whether the savings of those classes that increased their accumulations would counter- act the decreases in the saving of the richer classes, is a question that admits of no definite or confident answer. The State Is Justified in Permitting Interest If we assume that the suppression of interest would cause a considerable decline in saving and capital, we must conclude that the community would be worse off than under the present system. To diminish greatly the in- struments of production, and consequently the supply of goods for consumption, would create far more hardship than it would relieve. While " workless " incomes would be suppressed, and personal incomes more nearly equalised, the total amount available for distribution would probably be so much smaller as to cause a deterioration in the con- dition of every class. In this hypothesis the State would do wrong to abolish the system of interest. If, however, we assume that no considerable amount of evil would follow, or that the balance of results would be favourable, the question of the proper action of the State becomes somewhat complex. In the first place, in- terest could not rightfully be suppressed while the private taking of rent remained. To adopt such a course would be to treat the receivers of property incomes inequitably. Landowners would continue to receive an income from their property, while capital owners would not; yet the moral claims of the former to income are no better than those of the latter. In the second place, the State would be obliged to compensate the owners of existing capital instruments for the decline in value which, as we have already seen, would occur when the item of interest was 200 DISTRIBUTIVE JUSTICE eliminated from the cost of reproducing such capital in- struments. It would likewise be under moral obligation to compensate landowners for whatever decrease in value befell their property as a result of the abolition of rent. Nevertheless, the practical difficulties confronting the legal abolition of interest are apparently so great as to render the attempt socially unwise and futile. In order to be effective the prohibition would have to be interna- tional. Were it enforced in only one or in a few coun- tries, these would suffer far more through the flight of capital than they would gain through the abolition of interest. The technical obstacles in any case would be well nigh insuperable. If the attempt were made to sup- press interest on producing capital, as well as on loans, the civil authorities would be unable to determine with any degree of precision what part of the gross returns of a business was pure interest, and what part was a necessary compensation for risk and the labour of management. Should the State try to solve this problem by allowing the directors of industry varying salaries to correspond with their comparative degrees of efficiency, and different rates of insurance-payments to represent the different risks, it would inevitably make some allowances so low as to discourage labour and enterprise, and others so high as to give the recipients a considerable amount of pure in- terest in the guise of profits and salaries. Should it fix a flat rate of salaries and profits, the more efficient under- takers would refuse to put forth their best efforts, and the more perilous enterprises would not be undertaken. The supervision of expenses, receipts, and other details of business that would be required to prevent evasion of the law, would not improbably cost more than the total amount now paid in the form of interest. On the other hand, if the method of suppression were confined to loans it would probably prove only a little less futile than the effort to abolish interest on productive capital. The great SOCIAL AND PRESUMPTIVE JUSTIFICATIONS 201 majority of those who were prevented from lending at interest would invest their money in stocks, land, build- ings, and other forms of productive property. Moreover, it is probable that a large volume of loans would be made despite the prohibition. In the Middle Ages, when the amount of money available for lending was comparatively small, and when State and Church and public opinion were unanimous in favour of the policy, the legal prohibition of loans was only partially effective. Now that the sup- ply of and the demand for loans have enormously in- creased, and interest is not definitely disapproved by the Church or the public, a similar effort by the State would undoubtedly prove a failure. Even if it were entirely successful it would only decrease, not abolish, interest on productive capital.^ In view of the manifold and grave uncertainties of the situation, it is practically certain that modern States are justified in permitting interest. Civil Authorisation not Sufficient for Individual Justification This justification of the attitude of the State does not of itself demonstrate that the capitalist has a right to accept interest. The civil law tolerates many actions which are morally wrong in the individual; for example, the payment of starvation wages, the extortion of unjust prices, and the traffic in immorality. Obviously legal toleration does not per se nor always exonerate the indi- vidual offender. How, then, shall we justify the indi- vidual receiver of interest? As already pointed out more than once, those persons who would not save without interest are justified on the ground of sacrifice. So long as the community desires 1 Cf. Fisher, " Elementary Principles of Economics,"^ pp. 396, 397. However, he does not discuss in this passage the possibility of sup- pressing interest on productive capital by a direct method. 202 DISTRIBUTIVE JUSTICE their savings, and is willing to pay interest on them, the savers may take interest as the fair equivalent of the in- convenience that they undergo in performing this social service. The precise problem before us, then, is the justi- fication of those savers and capitalists v^ho do not need the inducement of interest, and whose functions of saving and conserving capital are sufficiently compensated with- out interest. It is a fact that the civil law can sometimes create moral rights and obligations. For example; the statute requir- ing a person to repair losses that he has unintentionally inflicted upon his neighbour is held by the moral theologians to be binding in conscience, as soon as the matter has been adjudicated by the court. In other words, this civil reg- ulation confers on the injured man property rights, and imposes on the morally inculpable injurer property obli- gations. The civil statutes also give moral validity to the title of prescription, or adverse possession. When the alien possessor has complied with the legal provisions that apply, he has a moral right to the property, even though the original owner should assert his claim at a later time. Some moral theologians maintain that a legal discharge in bankruptcy liberates the bankrupt from the moral obli- gation of satisfying his unpaid debts. Several other situ- ations might be cited in which the State admittedly creates moral rights of individual ownership which would have no definite existence in the absence of such legal action and authorisation.^ This principle would seem to have received a par- ticularly pertinent application for our inquiry in the doc- trine of prcBmium legale as a title of interest on loans. In the " Opus Morale " of Ballerini-Palmieri can be found a long list of moral theologians living in the seventeenth and eighteenth centuries who maintained that the mere legal sanction of a certain rate of interest was a sufficient iCf. Lehmkuhl, "Theologia Moralis," I, nos. 917, 965, 1035. SOCIAL AND PRESUMPTIVE JUSTIFICATIONS 203 moral justification for the lender.^ While holding to the traditional doctrine that interest was not capable of being justified on intrinsic grounds, these writers contended that by virtue of its power of eminent domain the State could transfer from the borrower to the lender the right to the interest paid on a loan. They did not mean that the State could arbitrarily take one man's property and hand it over to another, but only that, when it sanctioned interest for the public welfare, this extrinsic circumstance (Hke the other " extrinsic titles " approved by moralists) annulled the claim of the borrower in favour of the lender. In other words, they maintained that the money paid in loan- interest did not belong to either borrower or lender with certainty or definiteness until the matter was determined by economic conditions and extrinsic circumstances. Hence legal authorisation for the common good was morally sufficient to award it to the lender. More than one of them declared that the State had the same right to determine this indeterminate property, to assign the ownership to the lender, that it had to transfer property titles by the device of prescription. And their general position seems to have been confirmed by the response of the Congregation of the Poenitentiaria, Feb. ii, 1832, to the Bishop of Verona, the substance of which was that a confessor might adopt and act upon this position.^ And yet, neither this nor any of the other precedents cited above, are sufficient to give certain moral sanction to the practice of interest-taking by those persons who would continue to save if interest were aboHshed. All the acts of legal authorisation that we have been consider- ing relate to practices which are beneficial and necessary to society. Only in such cases has the State the moral authority to create or annul property rights. In the seventeenth and eighteenth centuries the legal authorisa- 1 Vol. 3, pp. 617-629 ; 2d ed. 2 Ballerini-Palmieri, loc. cit. ; cf . Van Roey, op. cit., pp. 73-75. 204 DISTRIBUTIVE JUSTICE tion of a certain rate of interest made that rate mor ally- lawful simply because this legal act gave formal and au- thoritative testimony to the social utility of interest- taking. The State merely declared the reasonableness, and fixed the proper limits of the practice. The beneficent effect of interest-taking upon society v^as its underlying justification, v^as the ultimate fact which made it reason- able, and which gave to the action of the State moral value. Had the taking of interest on loans not been allowed the bulk of possible savings would either not have been saved at all, or would have been hoarded instead of converted into capital. And that money was badly needed in the com- mercial and industrial operations of the time. Hence the owners of it were in the position of persons who regarded saving and investing as a sacrifice for which interest was a necessary and proper compensation. To-day, however, there are millions of persons who would continue to per- form both these functions without the inducement of interest. Therefore, the public good does not require that they should receive interest, nor that the State should have the power to clothe their interest-incomes with moral law- fulness. Inasmuch as the State is not certain that the abolition of interest would be socially expedient or prac- tically possible, it is justified in permitting the institution to continue ; but it has no power to affect the morality of interest-taking as an individual action. How the Interest-Taker Is Justified Although the interest received by the non-sacrifice savers is not clearly justifiable on either intrinsic or social grounds, it is not utterly lacking in moral sanctions. In the first place, we have not contended that the intrinsic factors of productivity and service are certainly invalid morally. We have merely insisted that the moral worth of these titles has never been satisfactorily demonstrated. Possibly they have a greater and more definite efficacy SOCIAL AND PRESUMPTIVE JUSTIFICATIONS 205 than has yet been shown by their advocates. In more concrete terms, we admit that the productivity of capital and the service of the capitahst to the community, are pos- sible and doubtful titles to interest. A doubtful title to property is, indeed, insufficient by itself. In the case of the interest receiver, however, the doubtful titles of pro- ductivity and service are reinforced by the fact of posses- sion. Thus supplemented, they are sufficient to justify the non-sacrifice saver in giving himself the benefit of the doubt as regards the validity of his right to take interest. To be sure, this indefinite and uncertain claim would be overthrown by a more definite and positive title. But no such antagonistic title exists. Neither the consumer nor the labourer can show any conclusive reason why interest should go to him rather than to the capitalist. Hence the latter has at least a presumptive title. In the circum- stances this is morally sufficient. To this justification by presumption must be added a justification by analogy. The non-sacrifice savers seem to be in about the same position as those other agents of production whose rewards are out of proportion to their sacrifices. For example; the labourer of superior native ability gets as much compensation for the same quality and quantity of work as his companion who has only ordi- nary ability ; and the exceptionally intelligent business man stands in the same relation to his less efficient competitor ; yet the sacrifices undergone by the former of each pair is less than that suffered by the latter. It would seem that if the more efficient men may properly take the same re- wards as those who make larger sacrifices, the non-sacri- fice capitalist might lawfully accept the same interest as the man whose saving involves some sacrifice. On this principle the lenders who would not have invested their money in a productive enterprise were nevertheless per- mitted by the moralists of the post-mediaeval period to take advantage of the title of lucrum cessans. Although 206 DISTRIBUTIVE JUSTICE they had relinquished no opportunity of gain, nor made any sacrifice, they were put on the same moral level as sacrificing lenders, and were allowed to take the same interest. As a determinant of ownership, possession is the fee- blest of all factors, and yet it is of considerable importance for a large proportion of incomes and property. In the distribution of the national product, as well as in the di- vision of the original heritage of the earth, a large part is played by the title of first occupancy. Much of the product of industry is assigned to the agents of production mainly on the basis of inculpable possession. That is; it goes to its receivers automatically, in exchange for bene- fits to those who hand it over, and without excessive exploitation of their needs. Just as the first arrival on a piece of land may regard it as a no-man's territory, and make it his own by the mere device of appropriation, so the capitalist may get morally valid possession of interest. Sometimes, indeed, this dei3atable share, this no-man's share of the product of industry, is secured in some part by the consumer of the labourer. In such cases their title to it is just as valid as the title of the capitalist, notwith- standing the doubtful titles of productivity and service which the latter has in his favour. First occupancy and possession are the more decisive factors. In the great ma- jority of instances, however, the capitalist is the first occupant, and therefore the lawful possessor of the interest-share. The general justification of interest set forth in the immediately preceding paragraphs is supplemented in the case of the great majority of capital owners by the fact that their income from this source is relatively insig- nificant. The average income of the farmers of the United States is only 724 dollars per year, and of this 322 dollars is interest on the capital invested in the farm.^ 'iCf. American Economic Review, March, 1916; p. 46. SOCIAL AND PRESUMPTIVE JUSTIFICATIONS 20J Even when we make due allowance for the high purchas- ing power of farm incomes, due to the lower cost of foodstuffs and house rent, the total amount of 724 dollars provides only a very moderate living. Consequently the great majority of farmers can regard the interest that they receive as a necessary part of the remuneration that is fairly due them on account of their labour, sacrifices, and risks. So far as they are concerned, the justification of interest, as interest, is not a practical question. The same observation applies to the majority of urban business men, such as small merchants and manufacturers. Their inter- est can be justified as not more than fair wages and profits. Again, there is a large number of interest receivers who are entirely dependent upon this kind of income, and who obtain therefrom only a moderate livelihood. They are mainly children, aged persons, and invalids. Unlike the classes just described, they cannot justify their interest as a fair supplement to wages ; however, they may reason- ably claim it as their equitable or charitable share of the common heritage of the earth. If they did not receive this interest-income they would have to be supported by their relatives or by the State. For many reasons this would be a much less desirable arrangement. Conse- quently their general claim to interest is supplemented by considerations of human welfare. The difference between the ethical character of the interest discussed in the last two paragraphs and of that received by persons who possess large incomes, is too often overlooked in technical treatises. Every man own- ing any productive goods is reckoned as a capitalist, and assumed to receive interest. If, however, a man's total interest-income is so small that when combined with all his other revenues it merely completes the equivalent of a decent living, it is surely of very little significance as interest. It stands in no such need of justification as the 208 DISTRIBUTIVE JUSTICE interest obtained by men whose incomes amount to, say, ten thousand dollars a year and upwards. Still another confirmatory title of interest is suggested by the following well known declaration of St. Thomas Aquinas : " The possession of riches is not in itself unlaw- ful if the order of reason be observed : that a man should possess justly what he owns, and use it in a proper manner for himself and others." ^ Neither just acquisition nor proper use is alone sufficient to render private posses- sions morally good. Both must be present. As we have seen above, the capitalist can appeal to certain presumptive and analogous titles which justify practically his acquisi- tion of interest; but there can be no doubt that his claim and his moral power of disposal are considerably strengthened when he puts his interest-income to a proper use. One way of so using it is for a reasonable livelihood, as exemplified in the case of the farmers, business men, and non-workers whom we considered above. Those persons who receive incomes in excess of their reasonable needs could devote the surplus to religion, charity, education, and a great variety of al- truistic purposes. We shall deal with this matter spe- cifically in the chapter on the " Duty of Distributing Superfluous Wealth." In the meantime it is sufficient to note that the rich man who makes a benevolent use of his interest-income has a special reason for believing that his receipt of interest is justified. The decisive value attributed to presumption, analogy, possession, and doubtful titles in our vindication of the capitalist's claim to interest, is no doubt disappointing to those persons who desire clear-cut mathematical rules and principles. Nevertheless, they are the only factors that seem to be available. While the title that they confer upon the interest receiver is not as definite nor as noble as that by which the labourer claims his wages or the business man 1 " Contra Gentiles," lib. 3, c. 123. SOCIAL AND PRESUMPTIVE JUSTIFICATIONS 20g his profits, it is morally sufficient. It will remain logically and ethically unshaken until more cogent arguments have been brought against it than have yet appeared in the denunciations of the income of the capitalist. And what is true of him is likewise true of the rent receiver, and of the person who profits by the " unearned increment " of land values. In all three cases the presumptive justi- fication of " workless " incomes will probably remain valid as long as the present industrial system endures. CHAPTER XIV CO-OPERATION AS A PARTIAL SOLVENT OF CAPITALISM Interest is not a return for labour. The majority of interest receivers are, indeed, regularly engaged at some active task, whether as day labourers, salaried employes, directors of industry, or members of the professions; but for these services they obtain specific and distinct com- pensation. The interest that they get comes to them solely in their capacity as owners of capital, independently of any personal activity. From the viewpoint of eco- nomic distribution, interest is a " workless '' income. As such, it seems to challenge that ethical intuition which connects reward with effort and which inclines to regard income from any other source as not quite normal. Moreover, interest absorbs a large part of the national income, and perpetuates grave economic inequalities.^ 1 Professor Scott Nearing estimates the annual Income derived from the ownership of property in the United States ; that is, land and all forms of capital, at from six to nine billion dollars. Professor W. I. King gives the combined shares of the national income received by the landowners and the capitalists at more than six and three-quarter billions in 1910. According to the Census Bulletin on the " Estimated Valuation of National Wealth," the capital goods of the country were in 1912 approximately $175,000,000,000.00. At four per cent, this would mean an annual income of seven billion dollars. The lowest of the three estimates, six billion dollars, is equivalent to more than sixty dollars a year for every man, woman, and child in the United States. If that sum were equally distributed among the whole population, it would mean an increase of between forty and sixty per cent, in the income of the majority of workingmen's families! Nor do present tendencies hold out any hope of an automatic reduction of the interest- burden in the future. In the opinion of Professor Scott Nearing, " the present economic tendencies will greatly increase the amount of property income paid with each passing decade." "Income," p. 199; 210 CO-OPERATION AS A PARTIAL SOLVENT 211 Nevertheless, interest cannot be wholly abolished. As long as capital remains in private hands, its owners will demand and obtain interest. The only way of escape is by the road of Socialism, and this would prove a blind alley. As we have seen in a preceding chapter, Socialism is ethically and economically impossible. May not the burdens and disadvantages of interest be mitigated or minimised? Such a result could conceivably be reached in two ways : the sum total of interest might be reduced, and the incomes derived from interest might be more widely distributed. Reducing the Rate of Interest No considerable diminution of the interest-volume can be expected through a decline in the interest rate. As far back as the middle of the eighteenth century, England and Holland were able to borrow money at three per cent. During the period that has since intervened, the rate has varied from three to six per cent, on this class of loans. Between 1870 and 1890, the general rate of interest de- clined about two per cent., but it has risen since the latter date about one per cent. The Great War now (19 16) in action is destroying an enormous amount of capital, and it will, as in the case of all previous military conflicts of importance, undoubtedly be followed by a marked rise in the rate of interest. On the other hand, the only definite grounds upon which a decline in the rate can be hoped for are either uncertain or unimportant. They are the rapid increase of capital, and the extension of government ownership and operation of natural monopolies. New York, 1915. See especially ch. vii. According to Professor Taussig, " the absolute amount of income going to this [the capitalist] class tends to increase, and its share of the total income tends also to increase ; whereas for the labourers, though their total income may in- crease, their share of income of society as a whole tends to decline." " Principles of Economics," II, 205. 212 DISTRIBUTIVE JUSTICE The first is uncertain in its effects upon the rate of in- terest because the increased supply of capital is often neutralised by the process of substitution. That is, a large part of the new capital does not compete with and bring down the price of the old capital. Instead, it is absorbed in new inventions, new types of machinery, and new processes of production, all of which take the place of labour, thus tending to increase rather than diminish the demand for capital and the rate of interest. To be sure, the demand for capital thus arising has not always been sufficient to offset the enlarged supply. Since the Indus- trial Revolution capital has at certain periods and in cer- tain regions increased so rapidly that it could not all find employment in new forms and in old forms at the old rate. In some instances a decline in the rate of interest can be clearly traced to the disproportionately quick growth of capital. But this phenomenon has been far from uniform, and there is no indication that it will be- come so in the future. The possibilities of the process of substitution have been by no means exhausted. The effects of government ownership are even more problematical. States and cities are, indeed, able to obtain capital more cheaply than private corporations for such public utilities as railways, telegraphs, tramways, and street lighting; and public ownership of all such concerns will probably become general in the not remote future. Nevertheless the social gain is not likely to be propor- tionate to the reduction of interest on this section of capital. A part, possibly a considerable part, of the sav- ing in interest will be neutralised by the lower efficiency and greater cost of operation; for in this respect publicly managed are inferior to privately managed enterprises. Consequently, the charges to the public for the services rendered by these utilities cannot be reduced to the same degree as the rate of interest on the capital. On the other hand, the exclusion of private operating capital from this CO-OPERATION AS A PARTIAL SOLVENT 213 very large field of public utilities should increase competi- tion among the various units of capital, and thus bring down its rewards. To what extent this would happen cannot be estimated even approximately. The only safe statement is that the decline in the general rate of interest would probably be slight. Need for a Wider Distribution of Capital The main hope of lightening the social burden of in- terest lies in the possible reduction in the necessary volume of capital, and especially in a wider distribution of interest- incomes. In many parts of the industrial field there is a considerable waste of capital through unnecessary duplica- tion. This means that a large amount of unnecessary interest is paid by the consumer in the form of unneces- sarily high prices. Again, the owners of capital and re- ceivers of interest constitute only a minority of the popu- lation of all countries, with the possible exception of the United States. The great majority of the wage earners in all lands possess no capital, and obtain no interest. Not only are their incomes small, often pitiably small, but their lack of capital deprives them of the security, confidence, and independence which are required for comfortable existence and efficient citizenship. They have no income from productive property to protect them against the ces- sation of wages. During periods of unemployment they are frequently compelled to have recourse to charity, and to forego many of the necessary comforts of life. So long as the bulk of the means of production remains in the hands of a distinct capitalist class, this demoralising insecurity of the workers must continue as an essential part of our industrial system. While it might conceivably be elim- inated through a comprehensive scheme of State insur- ance, this arrangement would substitute dependence upon the State for dependence upon the capitalist, and be much less desirable than ownership of income-bearing property. 214 DISTRIBUTIVE JUSTICE The workers who possess no capital do not enjoy a normal and reasonable degree of independence, self respect, or self confidence. They have not sufficient con- trol over the wage contract and the other conditions of employment, and they have nothing at all to say concerning the goods that they shall produce, or the persons to whom their product shall be sold. They lack the incentive to put forth their best efforts in production. They cannot satisfy adequately the instinct of property, the desire to control some of the determining forms of material pos- session. They are deprived of that consciousness of power which is generated exclusively by property, and which contributes so powerfully toward the making of a contended and efficient life. They do not possess a normal amount of freedom in politics, nor in those civic and social relations which lie outside the spheres of industry and politics. In a word, the worker without capital has not sufficient power over the ordering of his own life. The Essence of Co-operative Enterprise The most effective means of lessening the volume of interest, and bringing about a wider distribution of capital, is to be found in co-operative enterprise. Co-operation in general denotes the unified action of a group of persons for a common end. A church, a debating club, a joint stock company, exemplifies co-operation in this sense. In the strict and technical sense, it has received various definitions. Professor Taussig declares that it " consists essentially in getting rid of the managing employer " ; but this description is applicable only to co-operatives of pro- duction. " A combination of individuals to economise by buying in common, or increase their profits by selling in common" (Encyclopedia Britannica) is likewise too narrow, since it fits only distributive and agricultural co- operation. According to C. R. Fay, a co-operative society is " an association for the purpose of joint trading, orig- CO-OPERATION AS A PARTIAL SOLVENT 21$ inating among the weak, and conducted always in an un- selfish spirit." If the word, " trading " be stretched to comprehend manufacturing as well as commercial activi- ties, Fay's definition is fairly satisfactory. The distin- guishing circumstance, " originating among the weak," is also emphasised by Father Pesch in his statement that the essence, aim, and meaning of co-operation are to be found in " a combination of the economically weak in common efforts for the security and betterment of their condi- tion." ^ In order to give the proper connotation for our purpose, we shall define co-operation as, that joint eco- nomic action which seeks to obtain for a relatively weak group all or part of the profits and interest which in the ordinary capitalist enterprise are taken by a smaller and different group. This formula puts in the foreground the important fact that in every form of co-operative effort, some interest or profits, or both, are diverted from those who would have received them under purely capitalistic arrangements, and distributed among a larger number of persons. Thus it indicates the bearing of co-operation upon the problem of lightening the social burden of interest. From the viewpoint of economic function, co-operation may be divided into two general kinds, producers' and consumers'. The best example of the former is a wage earners' productive society; of the latter, a co-operative store. Credit co-operatives and agricultural co-operatives fall mainly under the former head, inasmuch as their prin- cipal object is to assist production, and to benefit men as producers rather than as consumers. Hence from the viewpoint of type, co-operation may be classified as credit, agricultural, distributive, and productive. 1 " Lehrbuch der Nationaloekonomie," III, 517. 2l6 DISTRIBUTIVE JUSTICE Co-operative Credit Societies A co-operative credit society is a bank controlled by the persons who patronise it, and lending on personal rather than material security. Such banks are intended almost exclusively for the relatively helpless borrower, as, the small farmer, artisan, shopkeeper, and the small man gen- erally. Fundamentally they are associations of neigh- bours who combine their resources and their credit in order to obtain loans on better terms than are accorded by the ordinary commercial banks. The capital is derived partly from the sale of shares of stock, partly from de- posits, and partly from borrowed money. In Germany, where credit associations have been more widely extended and more highly developed than in any other country, they are of two kinds, named after their respective founders, Schulze-Delitzsch and Raiffeisen. The former operates chiefly in the cities, serves the middle classes rather than the very poor, requires all its members to subscribe for capital stock, commits them to a long course of saving, and thus develops their interest as lenders. The Raiffeisen societies have, as a rule, very little share capital, exist chiefly in the country districts, especially among the poorest of the peasantry, are based mostly on personal credit, and do not profess to encourage greatly the saving and lending activities of their members. Both forms of association loan money to their members at lower rates of interest than these persons could obtain elsewhere. Hence credit co-operation directly reduces the burden of interest. The Schulze-Delitzsch societies have more than half a million members in the cities and towns of Germany, sixty per cent, of whom take advantage of the borrowing facili- ties. The Raiffeisen banks comprise about one-half of all the independent German agriculturists. Some form of co-operative banking is well established in every important country of Europe, except Denmark and Great Britain. CO-OPERATION AS A PARTIAL SOLVENT 217 In the former country its place seems to be satisfactorily filled by the ordinary commercial banks. Its absence from Great Britain is apparently due to the credit system pro- vided by the large landholders, to the scarcity of peasant proprietors, and to general lack of initiative. It is espe- cially strong in Italy, Belgium, and Austria, and it has made a promising beginning in Ireland. In every country in which it has obtained a foothold, it gives indication of steady and continuous progress. Nevertheless it is sub- ject to definite limits. It can never make much headway among that class of persons whose material resources are sufficiently large and palpable to command loans on the usual terms offered by the commercial banks. As a rule, these terms are quite as favourable as those available through the co-operative credit associations. It is only because the poorer men cannot obtain loans from the com- mercial banks on the prevailing conditions that they are impelled to have recourse to the co-operative associations. Co-operative Agricultural Societies The chief operations of agricultural co-operative socie- ties are manufacturing, marketing, and purchasing. In the first named field the most important example is the co-operative dairy. The owners of cows hold the stock or shares of the concern, and in addition to dividends re- ceive profits in proportion to the amount of milk that they supply. In Ireland and some other countries, a portion of the profits goes to the employes of the dairy as a dividend on wages. Other productive co-operatives of agriculture are found in cheese making, bacon curing, distilling, and wine making. All are conducted on the same general principles as the co-operative dairy. Through the marketing societies and purchasing societies, the farmers are enabled to sell their products to better advantage, and to obtain materials needed for carry- ing on agricultural operations more cheaply than would be 2l8 DISTRIBUTIVE JUSTICE possible by isolated individual action. Some of the prod- ucts marketed by the selling societies are eggs, milk, poultry, fruit, vegetables, live stock, and various kinds of grain. The purchasing societies supply for the most part manures, seeds, and machinery. Occasionally they buy the most costly machinery in such a way that the associa- tion becomes the corporate owner of the implements. In these cases the individual members have only the use of the machines, but they would be unable to enjoy even that advantage were it not for the intervention of the co-opera- tive society. Where such arrangements exist, the society exemplifies not only co-operative buying but co-operative ownership. Agricultural co-operation has become most widely ex- tended in Denmark, and has displayed its most striking possibilities in Ireland. Relatively to its population, the former country has more farmers in co-operative societies, and has derived more profit therefrom, than any other nation. The rapid growth and achievements of agricul- tural co-operation in the peculiarly unfavourable circum- stances of Ireland constitute the most convincing proof to be found anywhere of the essential soundness and efficacy of the movement. Various forms of rural co- operative societies are solidly established in Germany, France, Belgium, Italy, and Switzerland. In recent years the movement has made some progress in the United States, especially in relation to dairies, grain elevators, the marketing of live stock and fruit, and various forms of rural insurance. The co-operative insurance companies effect a saving to the Minnesota farmers of $700,000 annually, and the co-operative elevators handle about 30 per cent, of the grain marketed in that state. In 191 5 the business transacted by the co-operative marketing and purchasing organisations of the farmers of the United States amounted to $1,400,000,000. The transformation in the rural life of more than one CO-OPERATION AS A PARTIAL SOLVENT 2I9 European community through co-operation has amounted to httle less than a revolution. Higher standards of agri- cultural products and production have been set up and maintained, better methods of farming have been incul- cated and enforced, and the whole social, moral, and civic life of the people has been raised to a higher level. From the view^point of material gain, the chief benefits of agri- cultural co-operation have been the elimination of un- necessary middlemen, and the economies of buying in large quantities, selling in the best markets, and employing the most efficient implements. As compared v^ith farming conducted on a large scale, the small farm possesses cer- tain advantages, and is subject to certain disadvantages. It is less wasteful, permits greater attention to details, and makes a greater appeal to the self interest of the cultivator; but the small farmer cannot afford to buy the best machinery, nor is he in a position to carry on to the best advantage the commercial features of his occupation, such as borrowing, buying, and marketing. Co-operation frees him from all these handicaps. " The co-operative com- munity ... is one in which groups of humble men com- bine their efforts, and to some extent their resources, in order to secure for themselves those advantages in in- dustry which the masters of capital derive from the organisation of labour, from the use of costly machinery, and from the economies of business when done on a large scale. They apply in their industry the methods by which the fortunes of the magnates in commerce and manufac- ture are made." These words, uttered by a prominent member of the Irish co-operative movement, summarise the aims and achievements of agricultural co-operation in every country of Europe in which it has obtained a strong foothold. In every such community the small farm has gained at the expense of the large farm system. Finally, agricultural co-operation reduces the burden of interest by eliminating some unnecessary capital, stimulates saving 220 DISTRIBUTIVE JUSTICE among the tillers of the soil by providing a ready and safe means of investment, and in manifold ways contributes materially toward a better distribution of wealth. Co-operative Mercantile Societies Co-operative stores are organised by and for consumers. In every country they follow rather closely the Rochdale system, so called from the English town in which the fxrst store of this kind was established in 1844. The members of the co-operative society furnish the capital, and receive thereon interest at the prevailing rate, usually five per cent. The stores sell goods at about the same prices as their privately owned competitors, but return a dividend on the purchases of all those customers who are members of the society. The dividends are provided from the surplus which remains after wages, interest on the capital stock, and all other expenses have been paid. In some co-opera- tive stores non-members receive a dividend on their pur- chases at half the rate accorded to members of the society, but only on condition that these payments shall be invested in the capital stock of the enterprise. And the members themselves are strongly urged to make this disposition of their purchase-dividends. Since the latter are paid only quarterly, the co-operative store exercises a considerable influence toward inducing its patrons to save and to become small capitalists. In Great Britain the vast majority of the retail stores have been federated into two great wholesale societies, one in England and the other in Scotland. The retail stores provide the capital, and participate in the profits according to the amounts purchased, just as the individual consumers furnish the capital and share the profits of the retail estab- lishments. The Scottish Wholesale Society divides a part of the profits among its employes. Besides their opera- tions as jobbers, the wholesale societies are bankers for the retail stores, and own and operate factories, farms. CO-OPERATION AS A PARTIAL SOLVENT 221 warehouses, and steamships. Many of the retail co-opera- tives likewise carry on productive enterprises, such as milling, tailoring, bread making, and the manufacture of boots, shoes, and other commodities, and some of them build, sell, and rent cottages, and lend money to members who desire to obtain homes. The co-operative store movement has made greatest progress in its original home, Great Britain. In 19 13 about one person in every three was to some degree inter- ested in or a beneficiary of these institutions. The profits of the stores amounted to about $71,302,070, which was about 35 per cent, on the capital. The employes num- bered about 145,000, and the sales for the year aggregated $650,000,000. The English Wholesale Society was the largest flour miller and shoe manufacturer in Great Brit- ain, and its total business amounted to $150,000,000. Outside of Great Britain, co-operative distribution has been most successful in Germany, Belgium, and Switzer- land. It has had a fair measure of development .in Italy, but has failed to assume any importance in France. " There is every sign that within the near future — except in France — the stores will come to include the great majority of the wage earning class, which is a constantly growing percentage of the total population.'* ^ Within recent years a respectable number of stores have been established on a sound basis in Canada and the United States. Owing, however, to the marked individualism and the better economic conditions of these two countries, the co-operative movement will continue for some time to be relatively slow. As in the case of agricultural co-operation, the money benefits accruing to the members of the co-operative stores consist mainly of profits rather than interest. In the absence of the store societies, these profits would have gone for the most part to middlemen as payments for the 1 Fay, " Co-operation at Home and Abroad," p. 340. 222 DISTRIBUTIVE JUSTICE risks and labour of conducting privately owned establish- ments. Forty-seven of the sixty million dollars profits of the British co-operative stores in 1910 were divided among more than two and one-half million members of these in- stitutions, instead of going to a comparatively small num- ber of private merchants. The other thirteen million dollars were interest on the capital stock. Had the mem- bers invested an equal amount in other enterprises they could, indeed, have obtained about the same rate and amount of interest, but in the absence of the co-operative stores their inducements and opportunities to save would have been much smaller. For it must be kept in mind that a very large part of the capital stock in the co-operative stores is derived from the members' dividends on their purchases at such stores, and would not have come into existence at all without these establishments. The gains of the co-operative stores, whether classified as profits or as interest, are evidently a not inconsiderable indication of a better distribution of wealth. Co-operation in Production Co-operative production has occasionally been pro- nounced a failure. This judgment is too sweeping and too severe. " As a matter of fact," says a prominent London weekly, " the co-operators' success has been even more remarkable in production than in distribution. The co-operative movement runs five of the largest of our flour mills; it has, amongst others, the very largest of our boot factories ; it makes cotton cloth and woollens, and all sorts of clothing; it has even a corset factory of its own; it turns out huge quantities of soap; it makes every article of household furniture; it produces cocoa and confec- tionery; it grows its own fruit and makes its own jams; it has one of the largest tobacco factories, and so on." Obviously this passage refers to that kind of productive co-operation which is carried on by the stores, not to pro- CO-OPERATION AS A PARTIAL SOLVENT 223 ductive concerns owned and managed by the workers therein employed. Nevertheless the enterprises in ques- tion are co-operatively managed, and hence exemplify co- operation rather than private and competitive industry. They ought not to be left out of any statement of the field occupied by co-operative production. The limitations and possibilities of co-operation in production can best be set forth by considering its three different forms separately. The " perfect " form occurs when all the workers en- gaged in a concern own all the share capital, control the entire management, and receive the whole of the wages, profits, and interest. In this field the failures have been much more numerous and conspicuous than the successes. Godin's stove works at Guise, France, is the only important enterprise of this kind that is now in existence. Great Britain has several establishments in which the workers own a large part of the capital, but apparently none in which they are the sole proprietors and managers. The " labour societies " of Italy, consisting mostly of diggers, masons, and bricklayers, co-operatively enter into contracts for the performance of public works, and share in the profits of the undertaking in addition to their wages; but the only capital that they provide consists of comparatively simple and inexpensive tools. The raw material and other capital is furnished by the public authority which gives the contract. A second kind of productive co-operation is found in the arrangement known as co-partnership. This is " the system under which, in the first place, a substantial and known share of the profit of a business belongs to the workers in it, not by right of any shares they may hold, or any other title, but simply by right of the labour they have contributed to make the profit; and, in the second place, every worker is at liberty to invest his profit, or any other savings, in shares of the society or company, and so become a member entitled to vote on the affairs of the 224 DISTRIBUTIVE JUSTICE body which employs him/' ^ So far as its first, or profit sharing, feature is concerned* co-partnership is not genuine co-operation, for it includes neither ownership of capital nor management of the business. Co-operative action begins only with the adoption of the second element. In most of the existing co-partnership concerns, all the em- ployes are urged, and many of them required to invest at least a part of their profits in the capital stock. The most notable and successful of these experiments is that carried on by the South Metropolitan Gas Company of London. Practically all the company's 6,000 employes are now among its stockholders. Although their combined hold- ings are only about one-twenty-eighth of the total, they are empowered to select two of the ten members of the board of directors. Essentially the same copartnership arrangements have been adopted by about one-half the privately owned gas companies of Great Britain. In none of them, however, have the workers obtained as yet such a large percentage of either ownership or control as in the South Metropolitan. Co-partnership exists in several other enterprises in Great Britain, and is found in a con- siderable number of French concerns. There are a few instances in the United States, the most thoroughgoing being that of N. O. Nelson & Co. at Le Claire, 111. As already noted, the co-operative stores exemplify a third type of co-operative production. In some cases the productive concern is under the management of a local retail establishment, but the great majority of them are conducted by the English and Scottish Wholesale Societies. As regards the employes of these enterprises, the arrange- ment is not true co-operation, since they have no part in the ownership of the capital. The Scottish Wholesale Society, as we have seen, permits the employes of its pro- ductive works to share in the profits thereof; nevertheless it does not admit them as stockholders, nor give them any 1 Schloss, " Methods of Industrial Remuneration," pp. 353, 354. CO-OPERATION AS A PARTIAL SOLVENT 225 voice in the management. In all cases the workers may, indeed, become owners of stock in their local retail stores. Since the latter are stockholders in the wholesale societies, which in turn own the productive enterprises, the workers have a certain indirect and attenuated proprietorship in the productive concerns. But they derive therefrom no dividends. All the interest and most of the profits of the productive establishments are taken by the wholesale and retail stores. For it is the theory of the wholesale societies that the employes in the works of production should share in the gains thereof only as consumers. They are to profit only in the same way and to the same extent as other con- sumer-members of the local retail establishments. The most effective and beneficial form of co-operative production is evidently that which has been described as the " perfect " type. Were all production organised on this plan, the social burden of interest would be insig- nificant, industrial despotism would be ended, and indus- trial democracy realised. As things are, however, the establishments exemplifying this type are of small im- portance. Their increase and expansion are impeded by lack of directive ability and of capital, and the risk to the workers' savings. Yet none of these obstacles is neces- sarily insuperable. Directive ability can be developed in the course of time, just as it was in the co-operative stores. Capital can be obtained fast enough perhaps to keep pace with the supply of directive ability and the spirit of co- operation. The risk undertaken by workers who put their savings into productive concerns owned and managed by themselves need not be greater than that now borne by investors in private enterprises of the same kind. There is no essential reason why the former should not provide the same profits and insurance against business risks as the latter. While the employes assume none of the risks of capitalistic industry, neither do they receive any of the profits. If the co-operative factory exhibits the same de- 226 DISTRIBUTIVE JUSTICE gree of business efficiency as the private enterprise it will necessarily afford the workers adequate protection for their savings and capital. Indeed, if " perfect " co-opera- tive production is to be successful at all its profits will be larger than those of the capitalistic concern, owing to the greater interest taken by the workers in their tasks, and in the management of the business. For a long time to come, however, it is probable that " perfect " co-operative production will be confined to relatively small and local industries. The difficulty of finding sufficient workers' capital and ability to carry on, for example, a transcontinental railroad or a nationwide steel business, is not likely to be overcome for one or two generations.^ The labour co-partnership form of co-operation is sus- ceptible of much wider and more rapid extension. It can be adapted readily to the very large as well as to the small and medium sized concerns. Since it requires the workers to own but a part of the capital, it can be established in any enterprise in w^hich the capitalists show themselves will- ing and sympathetic. In every industrial corporation there are some employes who possess savings, and these can be considerably increased through the profit sharing feature of copartnership. A very long time must, indeed, elapse before the workers in any of the larger enterprises could get possession of all, or even of a controlling share of the capital, and a considerable time would be needed to educate and fit them for successful management. Production under the direction of the co-operative stores can be extended faster than either of the other two forms, and it has before it a very wide even though definitely limited field. The British wholesale societies have already shown themselves able to conduct with great success large manufacturing concerns, have trained and attracted an 1 Cf ,, however, Mr. A. R. Orage's work, " National Guilds," London, 1914. CO-OPERATION AS A PARTIAL SOLVENT 227 adequate number of competent leaders, and have accumu- lated so much capital that they have been obliged to invest several million pounds in other enterprises. The possible scope of the stores and their co-operative production has been well described by C. R. Fay : '' distribution of goods for personal consumption, first, among the working class population, secondly, among the salaried classes who feel a homogeneity of professional interest; production by working class organisations alone (with rare exceptions in Italy) of all the goods which they distribute to their mem- bers. But this is its limit. Distribution among the re- maining sections of the industrial population; production for distribution to these members; production of the in- struments of production, and production for international trade; the services of transport and exchange: all these industrial departments are, so far as can be seen, perma- nently outside the domain of a store movement," ^ The theory by which the stores attempt to justify the exclusion of the employes of their productive concerns from a share of the profits thereof is that all profits come ultimately from the pockets of the consumer, and should all return to that source. The defect in this theory is that it ignores the question whether the consumers ought not to be required to pay a sufficiently high price for their goods to provide the producers with profits in addition to wages. While the wholesale stores are the owners and managers of the capital in the productive enterprises, and on the capitalistic principle should obtain the profits, the question remains whether this is necessarily a sound prin- ciple, and whether it is in harmony with the theory and ideals of co-operation. In those concerns which have adopted the labour copartnership scheme, the workers, even when they own none of the capital, are accorded a part of the profits. It is assumed that this is a fairer and wiser method of distribution than that which gives the 1 Op. cit, p. 341. 228 DISTRIBUTIVE JUSTICE labourer only wages, leaving all the profits to the manager- capitalist. This feature of co-partnership rests on the ^theory that the workers can, if they will, increase their efficiency and reduce the friction between themselves and their employer to such an extent as to make the profit shar- ing arrangement a good thing for both parties. Conse- quently the profits obtained by the workers are a payment for this specific contribution to the prosperity of the busi- ness. Why should not this theory find recognition in productive enterprises conducted by the co-operative stores ? In the second place, the workers in these concerns ought to be permitted to participate in the capital ownership and management. They would thus be strongly encouraged to become better workers, to save more money, and to in- crease their capacity for initiative and self government. Moreover, this arrangement would go farther than any other system toward reconciling the interests of producer and consumer. As producer, the worker would obtain, besides his wages, interest and profits up to the limit set by the competition of private productive concerns. As consumer, he would share in the profits and interest which would otherwise have gone to the private distributive enter- prises. In this way the producer and consumer would each get the gains that were due specifically and respec- tively to his activity and efficiency. Advantages and Prospects of Co-operation At this point it will perhaps be well to sum up the ad- vantages and to estimate the prospects of the co-operative movement. In all its forms co-operation eliminates some waste of capital and energy, and therefore transfers some interest and profits from a special capitalist and under- taking class to a larger and economically weaker group of persons. For it must be borne in mind that all co-opera- tive enterprises are conducted mainly by and for labourers CO-OPERATION AS A PARTIAL SOLVENT 229 or small farmers. Hence the system always makes directly for a better distribution of wealth. To a con- siderable extent it transfers capital ownership from those who do not themselves work with or upon capital to those who are so engaged; namely, the labourers and the farmers; thus it diminishes the unhealthy separation now existing between the owners and the users of the instru- ments of production. Co-operation has, in the second place, a very great educational value. It enables and in- duces the weaker members of economic society to combine and utilise energies and resources that would otherwise remain unused and undeveloped ; and it greatly stimulates and fosters initiative, self confidence, self restraint, self government, and the capacity for democracy. In other words, it vastly increases the development and efficiency of the individual. It likewise induces him to practise thrift, and frequently provides better fields for investment than would be open to him outside the co-operative movement. It diminishes selfishness and inculcates altruism; for no co-operative enterprise can succeed in which the individual members are not willing to make greater sacrifices for the common good than are ordinarily evoked by private enter- prise. Precisely because co-operation makes such heavy demands upon the capacity for altruism, its progress always has been and must always continue to be relatively slow. Its fundamental and perhaps chief merit is that it does provide the mechanism and the atmosphere for a greater development of the altruistic spirit than is possible under any other economic system that has ever been tried or devised. By putting productive property into the hands of those who now possess little or nothing, co-operation promotes social stability and social progress. This statement is true in some degree of all forms of co-operation, but it applies with particular force to those forms which are carried on by the working classes. A steadily growing number of 230 DISTRIBUTIVE JUSTICE keen-sighted social students are coming to realise that an industrial system which permits a comparatively small sec- tion of society to own the means of production and the instrumentalities of distribution, leaving to the great majority of the workers nothing but their labour power, is fundamentally unstable, and contains within itself the germs of inevitable dissolution. No mere adequacy of wages and other working conditions, and no mere security of the workers' livelihood, can permanently avert this danger, nor compensate the individual for the lack of power to determine those activities of life which depend upon the possession of property. Through co-operation this unnatural divorce of the users from the owners of capital can be minimised. The worker is converted from a mere wage earner to a wage earner plus a property owner, thus becoming a safer and more useful member of society. In a word, co-operation produces all the well recognised individual and social benefits which have in all ages been evoked by the " magic of property." Finally, co-operation is a golden mean between individ- ualism and Socialism. It includes all the good features and excludes all the evil features of both. On the one hand, it demands and develops individual initiative and self reliance, makes the rewards of the individual depend upon his own efforts and efficiency, and gives him full ownership of specific pieces of property. On the other hand, it compels him to submerge much of the selfishness and indifference to the welfare of his fellows which char- acterise our individual economy. It embraces all the good that is claimed for Socialism because it induces men to con- sider and to work earnestly for the common good, elim- inates much of the waste of competitive industry, reduces and redistributes the burdens of profits and interest, and puts the workers in control of capital and industry. At the same time, it avoids the evils of an industrial des- potism, of bureaucratic inefficiency, of individual indiffer- CO-OPERATION AS A PARTIAL SOLVENT 2^1 ence, and of an all pervading collective ownership. The resemblances that Socialists sometimes profess to see be- tween their system and co-operation are superficial and far less important than the differences. Under both arrange- ments the workers would, we are told, own and control the means of production; but the members of a co-operative society directly own and immediately control a definite amount of specific capital, which is essentially private property. In a Socialist regime the workers' ownership of capital would be collective not private, general not specific, while their control of the productive instruments with which they worked would be shared with other citizens. The latter would vastly outnumber the workers in any par- ticular industry, and would be interested therein not as producers but as consumers. No less obvious and funda- mental are the differences in favour of co-operation as regards the vital matters of freedom, opportunity, and efficiency. In so far as the future of co-operation can be predicted from its past, the outlook is distinctly encouraging. The success attained in credit, agriculture, and distribution, is a sufficient guarantee for these departments. While pro- ductive co-operation has experienced more failures than successes, it has finally shown itself to be sound in prin- ciple, and feasible in practice. Its extension will neces- sarily be slow, but this is exactly what should be expected by any one who is acquainted with the limitations of human nature, and the history of human progress. If a move- ment that is capable of modifying so profoundly the con- dition of the workers as is co-operative production, gave indications of increasing rapidly, we should be inclined to question its soundness and permanence. Experience has given us abundant proof that no mere system or machinery can effect a revolutionary improvement in economic con- ditions. No social system can do more than provide a favourable environment for the development of those in- 232 DISTRIBUTIVE JUSTICE dividual capacities and energies which are the true and the only causal forces of betterment. Nor is it to be expected that any of the other three forms of co-operation will ever cover the entire field to which it might, absolutely speaking, be extended ; or that co-opera- tion as a whole will become the one industrial system of the future. Even if the latter contingency were possible it would not be desirable. The elements of our economic life, and the capacities of human nature, are too varied and too complex to be forced with advantage into any one system, whether capitalism, Socialism, or co-operation. Any single system or form of socio-economic organisation would prove an intolerable obstacle to individual oppor- tunity and social progress. Multiplicity and variety in social and industrial orders are required for an effective range of choices, and an adequate scope for human effort. In a general way the limits of co-operation in relation to the other forms of economic organisation have been satis- factorily stated by Mr. Aneurin Williams : " I suggest, therefore, that where there are great monopolies, either natural or created by the combination of businesses, there you have a presumption in favour of State and municipal ownership. In those forms of industry where individ- uality is everything; where there are new inventions to make, or to develop or put on the market, or merely to adopt in some rapidly transformed industry; where the eye of the master is everything; where reference to a com- mittee, or appeals from one official to another, would cause fatal delay: there is the natural sphere of individual enter- prise pure and simple. Between these two extremes there is surely a great sphere for voluntary association to carry on commerce, manufacture, and retail trade, in circum- stances where there is no natural monopoly, and where the routine of work is not rapidly changing, but on the whole fairly well established and constant." ^ 1 " Copartnership and Profit-Sharing," p. 235. CO-OPERATION AS A PARTIAL SOLVENT 233 The province open to co-operation is, indeed, very large. If it were fully occupied the danger of a social revolution would be non-existent, and what remained of the socio- industrial problem would be relatively undisturbing and unimportant. The " specialisation of function " in indus- trial organisation, as outlined by Mr. Williams, would give a balanced economy in which the three great socio- economic systems and principles would have full play, and each would be required to do its best in fair competition with the other two. Economic life would exhibit a diversity making strongly for social satisfaction and stability, inasmuch as no very large section of the indus- trial population would desire to overthrow the existing order. Finally, the choice of three great systems of in- dustry would offer the utmost opportunity and scope for the energies and the development of the individual. And this, when all is said, remains the supreme end of a just and efficient socio-industrial organisation. REFERENCES ON SECTION II Fisher: The Rate of Interest. New York; 1907. Cassel : Nature and Necessity of Interest. London ; 1903. Conner: Interest and Saving. London; 1906. Landry: L' Interet du Capital. Paris; 1904. Menger : The Right to the Whole Produce of Labour. London ; 1899. Cathrein-Gettelman : Socialism. St. Louis ; 1904. Skelton: Socialism: A Critical Analysis. New York; 191 1. Spargo : Socialism. Macmillan ; 1906. Walling : Socialism As It Is. New York ; 1912. Hillquit-Ryan : Socialism: Promise or Menace? Macmillan; 1914. Savatier : La Theorie Moderne du Capital et la Justice. Paris ; 1898. Garriguet : Regime du Travail. Paris ; 1908. Funk: Zins und Wucher. Tiibingen; 1868. Holyoake: The History of Co-operation. London; 1906. Fay : Co-operation at Home and Abroad. London ; 1908. Williams: Copartnership and Profit-Sharing. Henry Holt & Co.; 1913- 234 DISTRIBUTIVE JUSTICE Mann, Sievers, Cox : The Real Democracy. London ; 1913. ^xA}^° ft^ ^°f^?. of Taussig, Devas, Antoine, Hobson, Nearin?, Willonghby, and Hitze, which were given at the end of the introductonr chapter. ■" SECTION III THE MORAL ASPECT OF PROFITS / \ CHAPTER XV THE NATURE OF PROFITS We have seen that rent goes to the landlord as the price of land use, while interest is received by the capitalist as the return for the use of capital. The two shares of the product which remain to be considered include an element which is absent from both rent and interest. The use for which profits and wages are paid comprises not merely the utilisation of a productive factor, but the sustained exer- tion of the factor's owner. Like the landowner and the capitalist, the business man and the labourer put the pro- dutive factors which they control at the disposal of the industrial process; but they do so only when and so long as they exercise human activity. The shares that they receive are payments for the continuous output of human energy. No such significance attaches to rent or interest. The Functions and Rewards of the Business Man Who is the business man, and what is the nature of his share of the product of industry? Let us suppose that the salaried manager of a hat factory decides to set up a business of the same kind for himself. He wishes to be- come an entrepreneur, an undertaker, a director of indus- try, in more familiar language, a business man. Let us assume that he is without money, but that he commands extraordinary financial credit. He is able to borrow half a million dollars with which to organise, equip, and operate the new enterprise. Having selected a favourable site, he rents it on a long term lease, and erects thereon the neces- sary buildings. He installs all the necessary machinery and 237 238 DISTRIBUTIVE JUSTICE other equipment, hires capable labour, and determines the kinds and quantities of hats for which he thinks that he can find a market. At the end of a year, he realises that, after paying for labour of all sorts, returning interest to the capitalist and rent to the landowner, defraying the cost of repairs, and setting aside a fund to cover depreciation, he has left for himself the sum of ten thousand dollars. This is the return for his labour of organisation and direc- tion, and for the risk that he underwent. It constitutes the share called profits, sometimes specified as net profits. This case is artificial, since it assumes that the business man is neither capitalist nor landowner in addition to his function as director of industry. It has, however, the advantage of distinguishing quite sharply the action of the business man as such. For the latter merely organises, directs, and takes the risks of the industrial process, finds a market for the product, and receives in return neither rent nor interest but only profits. In point of fact, how- ever, no one ever functions solely as business man. Always the business man owns some of the capital, and very often some of the land involved in his enterprise, and is the receiver not only of profits but of interest and rent. Thus, the farmer is a business man, but he is also a capi- talist, and frequently a landowner. The grocer, the clothier, the manufacturer, and even the lawyer and the doctor own a part at least of the capital with which they operate, and sometimes they own the land. Nevertheless their rewards as business men can always be distinguished from their returns as capitalists and landowners by finding out what remains after making due allowance for rent and interest. It is a fact that many business men, especially those directing the smaller establishments, use the term profits to include rent and interest on their own property. In other words, they describe their entire income from the business as profits. In the present discussion, and THE NATURE OF PROFITS 239 throughout this book generally, profits are to be under- stood as comprising merely that part of the business man's returns which he takes as the reward of his labour, and as insurance against the risks affecting his enterprise. De- duct from the business man's total income a sum which will cover interest on his capital at the prevailing rate and rent on his land, and you have left his income as business man, his profits. The Amount of Profits In a preceding chapter we have seen that where the con- ditions of capital are the same, there exists a fairly uni- form rate of interest. No such uniformity obtains in the field of profits. Businesses subject to the same risks and requiring the same kind of management yield very dif- ferent amounts of return to their directors. In a sense the business man may be regarded as the residual claimant of industry. This does not mean that he takes no profits until all the other agents of production have been fully remunerated, but that his share remains indeterminate until the end of the productive period, say, six months or a year, while the shares of the other agents are determined beforehand. At the end of the productive period, the business man may find that his profits are large, moderate, or small, while the landowner, the capitalist, and the labourer ordinarily obtain the precise amounts of rent, in- terest, and wages that they had expected to obtain. That there exists no definite upper limit to profits is proved by the history of modern millionaires. That there exists no rigid lower limit is proved by the large proportion of enter- prises that meet with failure. Nevertheless it would be wrong to infer that the volume of profits is governed by no law whatever, or that they show no tendency toward uniformity in any part of the industrial field. There is a calculated or preconceived minimum. No man will embark in business for himself 240 DISTRIBUTIVE JUSTICE unless he has reason to expect that it will yield him, in addition to protection against risks, an income as large as he could obtain by hiring his services to some one else. In other words, contemplated profits must be at least equal to the income of the salaried business manager. No tend- ency toward uniformity of profits exists among very large enterprises nor among industries which are constantly adopting new methods and new inventions. In businesses of small and moderate size, and in those whose methods have become standardised, such as a retail grocery store, or a factory that turns out staple kinds of shoes, profits tend to be about the same in the great majority of estab- lishments. In such industries the profits of the business man do not often exceed the salary that he could com- mand as general manager for some one else in the same kind of business. Professor King estimates the total volume of profits in the United States in 19 lo as almost eight and one-half billion dollars. This was 27.5 per cent, of the national product, as against 24.6 per cent, in 1890 and 30 per cent, in 1900.^ He interprets the fall in the wage earners' share which has taken place since 1890 (53.5 to 46.9 per cent.) as indicating a considerable increase in the share of those business men who control the very large industries. " The promoters and manipulators of these concerns have re- ceived, as their share of the spoils, permanent income claims, in the shape of securities, large enough to make Croesus appear like a pauper." ^ Moreover, even outside this monopoly field, the more able and successful business men seem to have obtained in recent years what might be termed a relatively large share of the product of industry. The exceptionally efficient undertakers, those possessing the imagination, foresight, judgment, and courage to take i"The Wealth and Income of the People of the United States," 158, 160. 2 Idem, p. 21S. THE NATURE OF PROFITS 24I full advantage of the recent improvements in the indus- trial arts, and in the methods of production generally, seem to have advanced in wealth and income more rapidly than any other class that has been subject to the operation of competition. Profits in the Joint-Stock Company Up to this point v^e have been considering the inde- pendent business man, the undertaker who manages his enterprise either alone or as a member of a partnership. In all such concerns it is easy to identify the business man. Who or where is the business man in a joint stock com- pany ? Where are the profits, and who gets them ? Strictly speaking, there is no undertaker or business man in a corporation. His functions of ownership, responsibility, and direction are exercised by the whole body of stockholders through the board of directors and other officers. It is true that in very many, probably in most corporations, one or a very few of the largest stock- holders dominate the policies of the concern, and exercise almost as much power and authority as though they were the sole owners. Neither these, however, nor any other officer in a corporation receives profits in the same sense as the independent owner of a business. For their active services the officers of the corporation are given salaries; for the risks that they undergo as owners of the stock they are compensated in the same way as all the other stock- holders, that is, through a sufficiently high rate of divi- dend. For example, in railroads the bonds usually pay from four to five per cent., the stock from five to six per cent. The bonds represent borrowed money, and are se- cured by a mortgage on the physical property. The stock represents the money invested by the owners, and is sub- ject to all the risks of ownership ; hence its holders require the protection which is afforded by the extra one per cent, which they obtain over that paid to the bondholders. 242 DISTRIBUTIVE JUSTICE While a corporation has no profits in the sense of a reward for directive activity or a protection against risk, it frequently possesses profits in the sense of a surplus which remains after costs and expenses of every kind have been defrayed. These profits are ordinarily distributed pro rata among the stockholders, either outright in the form of an extra dividend, or indirectly through enlarge- ment of the property and business of the company. They are surplus gains or profits having the same intermittent and speculative character as the extra gains which the individual business man sometimes obtains in addition to those profits which are necessary to remunerate him for his labour, and protect him against risks. They are not profits in the ordinary economic sense of the term. CHAPTER XVI THE PRINCIPAL CANONS OF DISTRIBUTIVE JUSTICE Before taking up the question of the morality of profits, it will be helpful, if not necessary, to consider the chief rules of justice that have been or might be adopted in dis- tributing the product of industry among those who par- ticipate actively in the productive process. While the discussion is undertaken with particular reference to the rewards of the business man, it will also have an important bearing on the compensation of the wage earner. The morality of rent and interest depends upon other principles than those governing the remuneration of human activity; and it has been sufficiently treated in chapters xii and xiii. The canons of distribution applicable to our pres- ent study are mainly six in number: arithmetical equality; proportional needs; efforts and sacrifices; comparative productivity; relative scarcity; and human welfare. The Canon of Equality According to the rule of arithmetical equality, all per- sons who contribute to the product should receive the same amount of remuneration. With the exception of Bernard Shaw, no important writer defends this rule to-day. It is unjust because it would treat unequals equally. Although men are equal as moral entities, as human per- sons, they are unequal in desires, capacities, and powers. An income that would fully satisfy the needs of one man would meet only 75 per cent., or 50 per cent., of the capac- ities of another. To allot them equal amounts of income would be to treat them unequally with regard to the requi- 243 244 DISTRIBUTIVE JUSTICE sites of life and self development. To treat them un- equally in these matters would be to treat them unequally as regards the real and only purpose of property rights. That purpose is welfare. Hence the equal moral claims of men which admittedly arise out of their moral equality must be construed as claims to equal degrees of welfare, not to equal amounts of external goods. To put the mat- ter in another way, external goods are not welfare; they are only means to v/elfare; consequently their importance must be determined by their bearing upon the welfare of the individual. From every point of view, therefore, it is evident that justice in industrial distribution must be measured with reference to welfare rather than with refer- ence to incomes, and that any scheme of distribution which provided equal incomes for all persons would be radically unjust. Moreover, the rule of equal incomes is socially imprac- ticable. It would deter the great majority of the more efficient from putting forth their best efforts and turn- ing out their maximum product. As a consequence, the total volume of product would be so diminished as to ren- der the share of the great majority of persons smaller than it would have been under a rational plan of unequal distribution. The Canon of Needs The second conceivable rule is that of proportional needs. It would require each person to be rewarded in accordance with his capacity to use goods reasonably. If the task of distribution were entirely independent of the process of production, this rule would be ideal; for it would treat men as equal in those respects in which they are equal; namely, as beings endowed with the dignity and the potencies of personality; and it would treat them as unequal in those respects in which they are unequal; that is, in their desires and capacities. But the relation THE PRINCIPAL CANONS OF DISTRIBUTIVE JUSTICE 245 between distribution and production cannot be left out of account. The product is distributed primarily among the agents of production only, and it must be so distributed as to give due consideration to the moral claims of the pro- ducer as such. The latter has to be considered not merely as a person possessing needs, but as a person who has con- tributed something to the making of the product. Whence arise the questions of relative efforts and sacrifices, and relative productivity. Since only those who have contributed to the product participate in the distribution thereof, it would seem that they should be rewarded in proportion to the efforts and sacrifices that they exert and undergo. As an example of varying effort, let us take two men of equal needs who perform the same labour in such a way that the first expends 90 per cent, of his energy, while the second ex- pends 60 per cent. As an example of varying sacrifice, let us take the ditch digger, and the driver who sits all day on the dump wagon. In both these examples the first man expends more painful exertion than the second. This would seem to make a difference in their moral desert. Justice would seem to require that in each case compensa- tion should be proportionate to exertion rather than to needs. At any rate, the claims of needs should be modi- fied to some extent in favour of the claims of exertion. It is upon the principle of efforts and sacrifices that we ex- pect our eternal rewards to be based by the infinitely just Rewarder. The principle of needs is likewise in conflict with the principle of comparative productivity. Men gen- erally demand rewards in proportion to their products. The validity of this demand we shall examine in a subse- quent paragraph. Like the rule of arithmetical equality, the rule of pro- portional needs is not only incomplete ethically but impos- sible socially. Men's needs vary so widely and so imper- ceptibly that no human authority could use them as the 246 DISTRIBUTIVE JUSTICE basis of even an approximately accurate distribution. Moreover, any attempt to distribute rewards on this basis alone would be injurious to social welfare. It would lead to a great diminution in the productivity of the more honest, the more energetic, and the more efficient among the agents of production. The Canon of Efforts and Sacrifice The third canon of distribution, that of efforts and sacri- fices, would be ideally just if we could ignore the questions of needs and productivity. But we cannot think it just to reward equally two men who have expended the same quantity of painful exertion, but who differ in their needs and in their capacities of self -development. To do so would be to treat them unequally in the matter of welfare, which is the end and reason of all distribution. Conse- quently the principle of efforts and sacrifices must be modi- fied by the principle of needs. Apparently it must also give way in some degree to the principle of comparative productivity. When two men of unequal powers make equal efforts, they turn out unequal amounts of product. Almost invariably the more productive man believes that he should receive a greater share of the product than the other. He believes that the rewards should be deter- mined by productivity. It is evident that the rule of efforts and sacrifices, like those of equality and needs, could not be universally en- forced in practice. With the exception of cases in which the worker is called upon regularly to make greater sacri- fices owing to the disagreeable nature of the task, attempts to measure the amounts of effort and painful exertion put forth by the different agents of production would on the whole be little more than rough guesses. These would probably prove unsatisfactory to the majority. More- over, the possessors of superior productive power would in most instances reject the principle of efforts and sacrifices THE PRINCIPAL CANONS OF DISTRIBUTIVE JUSTICE 247 as unfair, and refuse to do their best work under its opera- tion. The three rules already considered are formally ethical, inasmuch as they are directly based upon the dignity and claims of personality. The two following are primarily physical and social ; for they measure economic value rather than ethical worth. Nevertheless, they must have a large place in any system which includes the factor of competi- tion. The Canon of Productivity According to this rule, men should be rewarded in pro- portion to their contributions to the product. It is open to the obvious objection that it ignores the moral claims of needs and efforts. The needs and use-capacities of men do, indeed, bear some relation to their productive capaci- ties, and the man who can produce more usually needs more; but the differences between the two elements are so great that distribution based solely upon productivity would fall far short of satisfying the demands of needs. Yet we have seen that needs constitute one of the funda- mentally valid principles of distribution. Between pro- ductivity on the one hand and efforts and sacrifices on the other, there are likewise important differences. When men of equal productive power are performing the same kind of labour, superior amounts of product do represent superior amounts of effort; when the tasks differ in irk- someness or disagreeableness, the larger product may be brought into being with a smaller expenditure of painful exertion. If men are unequal in productive power their products are obviously not in proportion to their efforts. Consider two men whose natural physical abilities are so unequal that they can handle with equal effort shovels dif- fering in capacity by fifty per cent. Instances of this kind are innumerable in industry. If these two men are rewarded according to productivity, one will get fifty per 248 DISTRIBUTIVE JUSTICE . cent, more compensation than the other. Yet the surplus received by the more fortunate man does not represent any action or quality for which he is personally responsible. It corresponds to no larger output of personal effort, no superior exercise of will, no greater personal desert. It is based solely upon a richer physical endowment by the Creator. It is clear, then, that the canon of productivity cannot be accepted to the exclusion of the principles of needs and efforts. It is not the only ethical rule of distribution. Is it a valid partial rule? Superior productivity is fre- quently due to larger effort and expense put forth in study and in other forms of industrial preparation. In such cases it demands superior rewards by the title of efforts and sacrifices. Where, however, the greater productivity is due merely to higher native qualities, physical or mental, the greater reward is not easily justified on purely ethical grounds. For it represents no personal responsibility, will-effort, or creativeness. Nevertheless, the great ma- jority of the more fortunately endowed think that they are unfairly treated unless they are recompensed in pro- portion to their products. Sometimes this conviction is due to the fact that such men wrongly attribute their larger product to greater efforts. In very many cases, however, the possessors of superior productive power be- lieve that they should be rewarded in proportion to their products, regardless of any other principle or factor. Probably the true explanation of this belief is to be found in man's innate laziness. While the prevalence of the con- viction that superior productivity constitutes a just title to superior compensation, does create some kind of a presump- tion in favour of its correctness, it must be remembered that presumption is not proof. Weighing this presumption against the objective considerations on the opposite side of the argument, we take refuge in the conclusion that the ethical validity of the canon of comparative product- THE PRINCIPAL CANONS OF DISTRIBUTIVE JUSTICE 249 ivity can neither be certainly proved nor certainly dis- proved. Like the rules of equality, needs, and efforts, that of pro- ductivity cannot be universally enforced in practice. It is susceptible of accurate application among producers who perform the same kind of work with the same kind of in- struments and equipment ; for example, between two shov- ellers, two machine operators, two bookkeepers, two law- yers, two physicians. As a rule, it cannot be adequately applied to a product which is brought into existence through a combination of different processes. The en- gine driver and the track repairer contribute to the com- mon product, railway transportation; the bookkeeper and the machine tender co-operate in the production of hats; but we cannot tell in either case whether the first con- tributes more or less than the second, for the simple rea- son that we have no common measure of their contribu- tions. Sometimes, however, w^e can compare the produc- tivity of individuals engaged in different processes ; that is, when both can be removed from the industry without caus- ing it to come to a stop. Thus, it can be shown that a single engine driver produces more railway transportation than a single track repairer, because the labour of the latter is not indispensable to the hauling of a given load of cars. But no such comparison can be made as between the w^hole body of engine drivers and the whole body of track re- pairers, since both groups are indispensable to the produc- tion of railway transportation. Again, a man can be shown to exert superior productivity because he affects the productive process at more points and in a more inti- mate way than another who contributes to the product in a wholly different manner. While the surgeon and the at- tendant nurse are both necessary to a surgical operation, the former is clearly more productive than the latter. When due allowance is made for all such cases, the fact remains that in a large part of the industrial field it is 250 DISTRIBUTIVE JUSTICE simply impossible to determine remuneration by the rule of comparative productivity. The Canon of Scarcity It frequently happens that men attribute their larger re- wards to larger productivity, when the true determining element is scarcity. The immediate reason why the engine driver receives more than the track repairer, the general manager more than the section foreman, the floorwalker more than the salesgirl, lies in the fact that the former kinds of labour are not so plentiful as the latter. Were general managers relatively as abundant as section foremen their remuneration would be quite as low; and the same principle holds good of every pair of men whose occupa- tions and products are different in kind. Yet the pro- ductivity of the general managers would remain as great as before. On the other hand, no matter how plentiful the more productive men may become, they can always command higher rewards than the less productive men in the same occupation, for the simple reason that their products are superior either in quantity or in quality. Men engaged upon the more skilled tasks are likewise mis- taken when they attribute their greater compensation to the intrinsic excellence of their occupation. The fact is that the community cares nothing about the relative nobil- ity, or ingenuity, or other inherent quality of industrial tasks or functions. It is concerned solely with products and results. As between two men performing the same task, superior efficiency receives a superior reward because it issues in a larger or better product. As between two men performing different tasks, superior skill receives su- perior compensation simply because it can command the greater compensation ; and it is able to do this because it is scarce. In most cases where scarcity is the immediate determi- nant of rewards, the ultimate determinant is, partly at THE PRINCIPAL CANONS OF DISTRIBUTIVE JUSTICE 25 1 least, some kind of sacrifice. One reason why chemists and civil engineers are rarer than common labourers is to be found in the greater cost of preparation. The scarcity of workers in occupations that require no special degree of skill is due to unusual hazards and unpleasantness. In so far as scarcity is caused by the uncommon sacrifices preceding or involved in an occupation, the resulting higher rewards obviously rest upon most solid ethical grounds. However, some part of the differences in scarcity is the result of unequal opportunities. If all young persons had equal facilities of obtaining college and technical training, the supply of the higher kinds of labour would be consid- erably larger than it now is, and the compensation would be considerably smaller. Scarcity would then be deter- mined by only three factors; namely, varying costs of training, varying degrees of danger and unattractiveness among occupations, and inequalities in the distribution of native ability. As a consequence, competition would tend to apportion rewards according to efforts, sacrifices, and efificiency. How can we justify the superior rewards of that scarcity which is not due to unusual costs of any sort, but merely to restricted opportunity? So far as society is concerned, the answer is simple: the practice pays. As to the pos- sessors of the rarer kinds of ability, they are in about the same ethical position as those persons whose superior pro- ductivity is derived entirely from superior native endow- ment. In both cases the unusual rewards are due to fac- tors outside the control of the recipients; to advantages which they themselves have not brought into existence. In the former case the decisive factor and advantage is opportunity; in the latter it is a gift of the Creator. Now we have seen that this sort of productivity cannot be proved to be immoral as a canon of distribution; conse- quently the same statement will hold good of this sort of scarcity. 252 DISTRIBUTIVE JUSTICE The Canon of Human Welfare We say " human " welfare rather than " social " wel- fare, in order to make clear the fact that this canon con- siders the well being of men not only as a social group, but also as individuals. It includes and summarises all that is ethically and socially feasible in the five canons already reviewed. It takes account of equality, inasmuch as it regards all men as persons, as subjects of rights; and of needs, inasmuch as it awards to all the necessary partici- pants in the industrial system at least that amount of re- muneration which will meet the elementary demands of decent living and self development. It is governed by efforts and sacrifices, at least in so far as they are reflected in productivity and scarcity ; and by productivity and scar- city to whatever extent is necessary in order to produce the maximum net results. It would give to every producer sufficient remuneration to evoke his greatest net contribu- tion to the productive process. Greatest " net " contribu- tion; for a man's absolute maximum product may not al- ways be worth the required price. For example: a man who for a salary of 2500 dollars turns out a product valued at 3000 dollars, should not be given 3000 dollars in order to induce him to bring forth a product worth 3300 dollars. In this case a salary of 2500 dollars evokes the maximum net product, and represents the reward which would be as- signed by the canon of human welfare. Once the vital needs of the individual have been safeguarded, the su- preme guide of the canon of human welfare is the prin- ciple of maximum net results, or the greatest product at the lowest cost. It is not contended here that this canon ought never to undergo modification or exception. Owing to the excep- tional hazards and sacrifices of their occupation, a com- bination of producers might be justified in exacting larger compensation than would be accorded them by the canon THE PRINCIPAL CANONS OF DISTRIBUTIVE JUSTICE 253 of human welfare on the basis of net results in the present conditions of supply and scarcity. Unusual needs and capacities might also justify a strong group in pursuing the same course. All that is asserted at present is that in conditions of average competition the canon of human welfare is not unjust. And this is all that is necessary as a preliminary to the discussion of just profits.^ lA very suggestive discussion of the psychology, the general prin- ciples, and the practical limitations of distributive justice, will be found in an article by Gustav Schmoller, entitled, " The Idea of Justice in Political Economy." It is No. 113 in the Publications of the Ameri- can Academy of Political and Social Science. CHAPTER XVII JUST PROFITS IN CONDITIONS OF COMPETITION We have seen that profits are that share of the product of industry which goes to the business man. They com- prise that residual portion which he finds in his hands after he has made all expenditures and allowances for wages, salaries, interest at the prevailing rate on both his own and the borrowed capital, and all other proper charges. They constitute his compensation for his labour of direc- tion, and for the risks of his enterprise and capital. In the opinion of most Socialists, profits are immoral because they are an essential element of an unjust indus- trial system, and because they are not entirely based upon labour. Under Socialism the organising and directing functions that are now performed by the business man, would be allotted to salaried superintendents and man- agers. Their compensation would include no payment for the risks of capital, and it would be fixed instead of inde- terminate. Hence it would differ considerably from pres- ent-day profits. To the assertion that profits are immoral a sufficient re- ply at this time is that Socialism has already been shown to be impracticable and inequitable. Consequently the system of private industry is essentially just, and profits, being a necessary element of the system, are essentially legitimate. The question of their morality is one of degree not of kind. It will be considered under two principal heads : the right of the business man to obtain indefinitely large profits ; and his right to a certain minimum of profits. 254 JUST PROFITS IN CONDITIONS OF COMPETITION 255 The Question of Indefinitely Large Promts As a general rule, business men who face conditions of active competition have a right to all the profits that they can get, so long as they use fair business methods. This means not merely fair and honest conduct toward competi- tors, and buyers and sellers, but also just and humane treatment of labour in all the conditions of employment, especially in the matter of wages. When these conditions are fulfilled, the freedom to take indefinitely large profits is justified by the canon of human welfare. The great majority of business men in competitive industries do not receive incomes in excess of their reasonable needs. Their profits do not notably exceed the salaries that they could command as hired managers, and generally are not more than sufficient to reimburse them for the cost of education and business training, and to enable them to live in reason- able conformity with the standard of living to which they have become accustomed. Efiforts and sacrifices are reflected to some extent in the different amounts of profits received by different business men. When all due allowance is made for chance, pro- ductivity, and scarcity, a considerable proportion of profits is attributable to harder labour, greater risk and worry, and larger sacrifices. Like the principle of needs, that of efforts and sacrifices is a partial justification of the busi- ness man's remuneration. Those profits which cannot be justified by either of the titles just mentioned, are ethically warranted by the prin- ciples of productivity and scarcity. This is particularly true of those exceptionally large profits which can be traced specifically to that unusual ability which is exempli- fied in the invention and adoption of new methods and processes in progressive industries. The receivers of these large rewards have produced them in competition with less efficient business men. While the title of produc- 256 DISTRIBUTIVE JUSTICE tivity does not entirely satisfy the seeker for decisive ethi- cal sanctions, it is stronger morally than any opposing considerations that can be invoked. It is probably as strong as some other principles that we have to accept as the best attainable in the very difficult field of industrial ethics. Nevertheless, it would seem that those business men who obtain exceptionally large profits could be reasonably re- quired to transfer part of their gains to their employes in the form of higher wages, or to the consumers in the form of lower prices. Both of these methods have been fol- lowed by Henry Ford, the automobile manufacturer. Neither of them is certainly demanded by the principles of strict justice; they rest upon the feebler and less decisive principle of general equity or fairness.^ This concept is less definite than those of charity and justice, and stands midway between them. It comes into operation when an action is obligatory on stricter grounds than those of char- ity, and yet cannot with certainty be required on grounds of justice. Notwithstanding its vagueness, it is suffi- ciently strong to make the average conscientious man feel uncomfortable if he neglects its prescriptions entirely. It has, therefore, sufficient practical value to deserve a place in the ethics of distribution. And it seems to have suffi- cient application to the problem before us to justify the statement that the receivers of exceptionally large profits are bound in equity to share them with those persons who have co-operated in producing and providing them, namely, wage earners and consumers. In the field of profits the canon of human welfare is not only sound ethically but expedient socially. It permits the great majority of business men to obtain, if they can, sufficient remuneration to meet their reasonable needs. Whether it requires society to guarantee at least this amount of profit-income is a question that we shall exam- 1 Cf. pp. 212, 213 of Castelein's " Philosophia Moralis et Socialis." JUST PROFITS IN CONDITIONS OF COMPETITION 257 ine presently. It encourages efforts, and makes for the maximum social product by permitting business men to retain all the profits that they can get in conditions of fair competition. Does it forbid any attempt by society to limit exceptionally large profit-incomes? If the limit were placed very high, say, at 50,000 dollars per year, it would not apparently check the productive efforts of the great majority of business men, since they never hope to pass that figure. Whether it would have a seriously discour- aging effect upon the activity and ambition of those who do hope to reach, and of those who have already reached that level, is uncertain. Among business men who are approaching or who have passed the 50,000 dollars annual profit-income mark, the desire to possess more money is frequently weaker as a motive to business activity than the longing for power and the driving force of habit. At any rate, the question is not very practical. Any sustained at- tempt to limit profits by law would require such extensive and minute supervision of business that the policy would prove to be socially intolerable and unprofitable. The es- pionage involved in the policy would provoke general re- sentment, and the amount of profits that could be diverted either to the State or to private persons would be relatively insignificant. Thus far we have been considering the independent busi- ness man and business firm, not the joint stock company or corporation. In the latter form of organisation, the labour of direction is remunerated by fixed salaries to the executive officers, while the risks of enterprise and capital are covered by the regular dividends received by the whole body of stockholders. Consequently the only revenues comparable to profits are the surplus gains that remain after wages, salaries, interest, dividends, rent, and all other expenses and charges have been met. These are ap- portioned through one process or another among the stock- holders. On what ethical principle can they be thus dis- 258 DISTRIBUTIVE JUSTICE tributed? The general principle of productivity, or supe- rior productivity, is the only one available. If a corpora- tion which uses fair methods of competition can obtain surplus gains, while the majority of its competitors fail to do so, the cause must be sought in its superior business management. This superiority must be credited to the whole body of stockholders, even though the great major- ity of them are responsible for it only in a very remote way, through their selection of the executive officers. The stockholders surely have a better claim to these surplus gains than any other group in the community. At the same time, they are, like the independent business man, bound by the principle of equity to share the surplus with the labourers and consumers. The Question of Minimum Profits Has the business man a strict right to a minimum living profit ? In other words, have all business men a right to a sufficient volume of sales at sufficiently high prices to pro- vide them with living profits or a decent livelihood? Such a right would imply a corresponding obligation upon the consumers, or upon society, to furnish the requisite amount of demand at the required prices. Is there such a right, and such an obligation? No industrial right is absolute. They are all condi- tioned by the possibilities of the industrial system, and by the desires, capacities, and actions of the persons who enter into industrial relations with one another. As we shall see later, this statement is true even of the right to a liv- ing wage. When the industrial resources are adequate, all persons of average ability who contribute a reasonable amount of labour to the productive process have a right to a decent livelihood on two conditions: first, that such labour is their only means of sustenance ; and, second, that their labour is economically indispensable to those who utilise it or its product. " Economically indispensable " JUST PROFITS IN CONDITIONS OF COMPETITION 259 means that the beneficiary of the labour would rather give the equivalent of a decent livelihood for it than go without it. While both these conditions are apparently fulfilled in the case of the great majority of wage earners, they are only rarely realised with regard to business men. In most instances the business man who is unable to make living profits could become an employe, and thus convert his right to a decent livelihood into a right to a living wage. Even when no such alternative is open to him, he cannot claim a strict right to living profits, for the second condition stated above remains unfulfilled. The consuming public does not regard the business function of such men as eco- nomically indispensable. Rather than pay the higher prices necessary to provide living profits for the inefficient business men, consumers will transfer their patronage to the efficient competitors. Should the retail grocer, for example, raise his prices in the effort to get living profits, his sales would fall off to such an extent as to reduce his profits still lower. While the consumers may be willing to fulfil their obligation of furnishing living profits for all necessary grocers, they are not willing, nor are they morally bound, to do so in the case of grocers whose in- ability to command sufficient patronage at remunerative prices shows that they are not necessary to the community. The consuming public does not want to employ such busi- ness men at such a cost. Nor is the State under obligation to ensure living profits for all business men. To carry out such a policy, either by enforcing a sufficiently high level of prices, or by sub- sidising those who fail to obtain living profits, would be to compel the public to support inefficiency. In the foregoing paragraphs we have assumed that the inability of the business men under consideration to get living profits is due to their own lack of capacity as com- pared with their more efficient competitors. When, how- ever, their competitors are not more efficient, but are 26o DISTRIBUTIVE JUSTICE enabled to undersell through the use of unfair methods, such as adulteration of goods and oppression of labour, a different moral situation is presented. Honest and hu- mane business men undoubtedly have a claim upon society to protection against such unfair competition. And the consumers are under obligation to make reasonable efforts to withhold their patronage from those business men who practise dishonesty and extortion. The Question of Superfluous Business Men Although we have rejected as impractical the proposal to set a legal limit to profit-incomes, we have to admit that many of the abler business men would continue to do their best work even if the profits that they could hope to obtain were considerably smaller in volume. These men hold a strategic position in industry, inasmuch as they are not subject to the same degree of constant competition as the other agents of production.^ Were the supply of superior business capacity more plentiful, their rewards would be automatically reduced, and the burden of profits resting upon society would be to that extent diminished. On the other hand, the number of mediocre business men, espe- cially in the distributive industries, is much larger than is necessary to supply the wants of the community. This constitutes a second unnecessary volume of payments un- der the head of profits. Is there no way by which these wastes can be reduced ? The volume of exceptionally large profits could be dimin- ished by an extension of the facilities of technical and in- dustrial education. Thus the number of persons qualify- ing as superior business men could be gradually increased, competition among this class of men would be intensified, and their rewards correspondingly diminished. The profits that go to superfluous business men, espe- cially in the class known as middlemen, can be largely 1 Cf . Hobson, " The Industrial System," chapter on " Ability." JUST PROFITS IN CONDITIONS OF COMPETITION 26 1 eliminated through combination and co-operation. The tendency to unite into a single concern a large number of small and inefficient enterprises should be encouraged up to the point at which the combination threatens to become a monopoly. That this process is capable of effecting a considerable saving in business profits as well as in capital, has been amply demonstrated in several different lines of enterprise. As we have seen in a preceding chapter, the co-operative movement, whether in banking, agriculture, or stores, has been distinctly successful in reducing profits. Millions of dollars are thus diverted every year from un- necessary profit-receivers to labourers, consumers, and to the man of small resources generally. Yet the co-opera- tive movement is only in its infancy. It contains the pos- sibility of eliminating entirely the superfluous business man, and even of diminishing considerably the excessive profits of the exceptionally able business man. CHAPTER XVIII THE MORAL ASPECT OF MONOPOLY The conclusion was drawn in the last chapter that the surplus gains of corporations operating in conditions of competition, can justly be retained by the stockholders as the remuneration of exceptional productive efficiency. It is, of course, to be understood that the proper allowance for interest on the capital is not necessarily the amount authorised by the stipulated rate of dividend on the stock, but the prevailing or competitive rate of interest plus an adequate rate of insurance against the risks of the enter- prise. If the prevailing rate of interest is five per cent., and the risk is sufficiently protected by an allowance of one per cent., the fair rate of return on the investment is six per cent. The fact that a concern may actually award its stockholders ten per cent, dividends, has no bearing on the determination of the genuine surplus. If the actual surplus that remains after paying all other charges and allowing ten per cent, on the stock, is only 50,000 dollars, whereas it would be 100,000 dollars with an allowance of only six per cent., then the true surplus gains, or profits, are the latter amount not the former. No part of the 100,000 dollars can be justified as interest on capital. It must all find its justification as profits proceeding from superior productivity. Bearing in mind this distinction between the actual rate of dividend and the proper allowance for interest on capi- tal, we take up the question of the morality of profits or surplus gains in conditions of monopoly. 262 THE MORAL ASPECT OF MONOPOLY 263 Surplus and Excessive Profits Several of the great industrial combinations of the United States have obtained profits v^hich are commonly stigmatised as "excessive." For example, the Standard Oil Company paid, from 1882 to 1906, an average annual dividend of 24.15 per cent, on the capital stock, and had profits in addition at the rate of about 8 per cent, annu- ally;^ from 1904 to 1908 the American Tobacco Com- pany averaged 19 per cent, on its actual investment; ^ and the United States Steel Corporation obtained an average annual return of 12 per cent, on its investment from 1901 to 1910.^ A complete list of the American monopolies that have reaped more than the competitive rate of return on their capital v^ould undoubtedly be a very long one. Is it possible to justify such returns? Has a monopoly a right to take surplus gains? Let us suppose a concern which is getting 15 per cent, on its investment. Inas- much as the risks are smaller than in competitive enter- prises, six per cent, is an ample allowance for interest. Of the remaining 9 per cent., 4 per cent., we shall assume, is derived from economies of production as compared with the great majority of competitive concerns. This portion of the surplus, being the reward of superior ef- ficiency, may be retained by the owners of the monopoly quite as justly as similar gains are taken by the exception- ally efficient corporation in conditions of competition. The objection that the monopoly ought to share these gains with the public, since it limits individual opportunity in a 1 Report of the Commissioner of Corporations on the Petroleum Industry, II, 40, 41. 2 Report of the Commissioner of Corporations on the Tobacco In- dustry, II, 26-34. 3 Report of the Commissioner of Corporations on the Steel Industry, I, 51. According to F. J. McRae, the expert accountant for the Stanley congressional investigating committee, this concern secured 40 per cent. on the cost of its property. 264 DISTRIBUTIVE JUSTICE socially undesirable way, has some merit, but it can scarcely be urged on grounds of strict justice. At most it points only to an obligation in equity. By what canon of distribution can the retention of the other 5 per cent, of surplus gain be justified? Not by the titles of needs and efforts, for these have already been sat- isfied through the salaries paid to those stockholders who perform labour in the management of the concern. These titles afford no basis for any other claim than that which proceeds from labour. They cannot be made to justify claims made on behalf of capital. Not by the title of productivity, for this has already been remunerated in the 4 per cent, just considered. Not as interest on capital, for ample allowance has already been made under this head in the original 6 per cent. As we have seen in an earlier chapter, the only reasons that give ethical support to interest on capital are the sacrifice that is involved in some kinds of saving, the possibility that interest is neces- sary in order to induce the provision of sufficient capital, the certainty that the State would be unable to enforce the abolition of interest, and some presumptive considerations. Since all of these reasons and ends are satisfied by the competitive rate of interest, none of them will justify the exaction of more than the competitive rate. It is not possible to justify a higher rate on either social or indi- vidual grounds. Therefore, the only basis that is left upon which to defend the retention of the five per cent, surplus that we are discussing, is the power of appropria- tion. The monopoly possesses the economic strength to take this five per cent, because it is able to impose higher than competitive prices upon the consumer. Obviously such power has no greater ethical sanction or validity than the pistol of the highwayman. In both cases the gains are the product of extortion. The conclusion that men have no right to more than the competitive rate of interest, as interest, on their capital, and THE MORAL ASPECT OF MONOPOLY 265 that a monopoly has consequently no right to those surplus gains that are not produced by superior efficiency, is con- firmed by public opinion and by the decisions of the courts. The monopolistic practice of taking more than the usual rate of returns on capital merely because there exists the power to take it, is universally condemned as inequitable. In fixing the charges of public service corporations, the courts with practical unanimity allow only the rate of re- turn that is obtainable in competitive conditions of invest- ment. The statement that the monopoly may retain those sur- plus gains which are derived from superior efficiency as- sumes, of course, that fair wages have been paid to em- ployes, and fair prices to the sellers of materials, and that fair methods have been used toward competitors. In so far as any of these conditions is not met, the monopolistic concern has no right to surplus gains of any sort. All three of the claims just mentioned are morally stronger than the claim to superior rewards because of superior efficiency. The Question of Monopolistic Efficiency So much for the moral principle. What proportion of the surplus gains of monopoly are due to extortionate prices rather than to economies in production, cannot be known even approximately. According to Justice Bran- deis, who is one of the most competent authorities in this field, only a very small part of these gains are derived from superior efficiency.^ Professor E. S. Meade writes : "During a decade [1902-1912] of unparalleled industrial development, the trusts, starting with every advantage of large capital, well-equipped plants, financial connections, and skilled superintendence, have not succeeded." ^ On 1 Hearings Before the Interstate Commerce Committee, U. S. Senate, Part XVI, pages 1146-1166. 2 The Journal of Political Economy, April, 1912, p. 366. 266 DISTRIBUTIVE JUSTICE the other hand, President Van Hise thinks that, " the weight of argument is strongly in favour of the increased efficiency of large combinations of industry on the aver- age." ^ The difference of opinion existing among stu- dents of this subject is due to lack of adequate data, par- ticularly to the absence of such uniform and comprehen- sive systems of accounting as w^ould be required to provide a basis for reliable general conclusions. Opposing par- ticular statements may be equally true, because based upon different instances; but general statements are little better than guesses. Let us approach the question from another side, that of prices. Whenever the charges imposed by monopolistic concerns upon their products are higher than those that w^ould have prevailed under competition, the surplus gains are obviously to that extent not due to superior efficiency. They have their source in the arbitrarily made prices. The Final Report of the United States Industrial Commission, v^hich v^as made at the beginning of the year 1902, de- clared that, " in most cases the combination has exerted an appreciable pov^er over prices, and in practically all cases it has increased the margin betw^een raw materials and finished products." ^ Since the cost of production had decreased during the preceding decade, this increase in the margin, and the ensuing increased profits, necessarily in- volved an increase in prices to the consumer. Taking the period of 1897-19 10, and comparing the movement of prices between eighteen important trust-controlled prod- ucts, and the same number of important commodities not produced by monopolistic concerns. Professor Meade con- cluded that the former were sold at a " much lower " rela- tive level than the latter.^ His computations were based upon figures compiled by the Bureau of Labour. Accord- 1 " Concentration and Control," p. 20. 2 Page 621. 3 The Journal of Political Economy, April, 1912, p. 363. THE MORAL ASPECT OF MONOPOLY 267 mg to the Commissioner of Corporations, the Standard Oil Company " has taken advantage of its monopoly power to extort prices much higher than would have existed under free competition." ^ The same authority shows that the American Tobacco Company used its power to obtain con- siderably more than competitive prices on some of its products.^ Excessive prices, as measured by the stand- ards of competition, were also established by the United States Steel Corporation, the American Sugar Refining Company, and the combinations in meat packing and in lumber.^ A safe statement w^ould probably be that the greater part of the surplus gains of the most conspicuous American monopolies have been due to excessive prices rather than to economies of production. Let us turn from the subject of unjust monopoly gains to that of unfair methods used by the great combinations toward their competitors. These methods are mainly three: discriminative underselling, exclusive-selling con- tracts, and advantages in transportation. Discriminative Underselling The first of these practices is exemplified when a monopoly sells its goods at unprofitably low rates in com- petitive territory, while maintaining higher prices else- where; and when it offers at very low prices those kinds of goods which are handled by competitors, while holding at excessively high prices the kinds of commodities over which it has exclusive control. Both forms of the practice seem to have been extensively used by most of the monopo- listic concerns of America.* The Standard Oil Company has been perhaps the most conspicuous offender in this 1 Report on the Petroleum Industry, II, 74. 2 Report on the Tobacco Industry, II, 27. 3Cf. Van Hise, op. cit., pp. 140, 149, I53, 159- * Final Report of the Industrial Commission, pp. 660-662. 268 DISTRIBUTIVE JUSTICE field.^ This practice is unjust because it violates the fun- damental moral principle that a man has a right to pursue a lawful good without hindrance through illicit means. Among the illicit means enumerated by the moral theo- logians are force, fraud, deception, lying, slander, intimida- tion, and extortion.^ The illicit means employed in discriminative under- selling are chiefly extortion and deception. If the very low prices at which the monopoly sells in the field which contains competitors were maintained outside of that field also, and if they were continued not merely until the inde- pendent concerns were driven out of business, but indefi- nitely afterward, no injustice would be done the latter. For no man has a natural right to any particular business. If a powerful concern can eliminate competitors through low prices made possible by superior efficiency, the com- petitors are not unjustly treated. They have no more just cause of complaint than the inefficient grocer whose custom is attracted from him by other and more efficient merchants. The offence is at the worst contrary to charity. But when the monopoly maintains the low and competition-eliminating prices only locally and temporarily, when it is enabled to establish and continue these prices only because it sells its goods at extortionate rates else- where, the latter prices are evidently the instrument or means by which the competitors are injured and eliminated. In that case the monopoly violates the right of the com- petitors to pursue a lawful good immune from unfair interference. The lawful good is a livelihood from this kind of business; and the illicit interference is the unjust prices maintained outside the competitive field. In the preceding paragraph we have assumed that the extortionate prices are operative at the same time as the excessively low prices, but in a different place. Suppose 1 Report on the Petroleum Industry, I, 328-332. 2Cf. Lehmkuhl, " Theologia Moralis," I, No. 974. THE MORAL ASPECT OF MONOPOLY 269 that the former are imposed only after the independent concerns are eHminated. The injustice to the competitors remains the same as in the preceding case. AUhough the extortionate prices are later in time, they are the instru- mental cause of the destructive low prices through which the competitors were driven out of business. If the owners of the monopoly were not certain of their ability to establish the subsequent extortionate prices, they would not have put into effect the unprofitably low prices. Hence there is a true causal connection between the former and the latter. Although the connection is mainly psychical, through the consciousness of the monopoly owners, it is none the less real and effective. Its practical effectiveness is seen in the fact that the subsequent possibility of impos- ing extortionate prices will induce men to lend the mo- nopoly money to carry on the process of exterminating competition. The process is maintained by means of the extortionate prices quite as effectively as though the two things were simultaneous. In so far as the patrons of the independent concerns are deceived into expecting that the very low prices will be permanent, and in so far as this impression causes them to withdraw their patronage from the independents, the latter are injured through another illicit means, namely, decep- tion. The competitors have a right not to be deprived of their customers through imposture. What is the measure of extortionate prices in this con- nection? How can we know that the high, competition- eliminating prices are really extortionate? There are only two possible tests of just price. The first is the proper cost of production, — fair wages to labour, fair prices for materials, and fair interest on capital. If the monopoly does not raise prices above this level, it obviously does not impose extortionate prices, nor inflict injustice upon the eliminated competitor. Moreover, if the monopoly has introduced economies of production it may, as we have 270 DISTRIBUTIVE JUSTICE seen, justly charge prices somewhat above the cost-of- production level. But it may not raise them above the level that would have prevailed under competition. This is the second test of just price. No possible justification can be found, except one to be mentioned presently, for charging the consumers higher prices than they could have obtained under competitive conditions. At such prices the monopoly will be able to secure the prevailing rate of in- terest on its capital, and all the surplus gains that proceed from superior efficiency. A higher scale of prices will be, therefore, extortionate, and the competitors who are elim- inated through its instrumentality will be the victims of injustice.-^ The exception alluded to above occurs when the monopoly uses the excess which it obtains over the com- petitive price to pay fair wages to those labourers who were insufficiently compensated in competitive conditions. In such a case the eliminated competitors would have no just claim against the monopoly; for their elimination took place in the just interest of the producers. The case, however, is purely academic, since the discriminative underselling practised by our monopolistic concerns has not been impelled by any such motive, nor has it achieved any such result. Exclusive-Sales Contracts The second unfair method employed by monopolies toward competitors is that of exclusive-selling contracts, 1 It may be of interest to recall the mediseval attitude toward monop- olistic exactions, as summarily stated by St. Antoninus, who was arch- bishop of Florence in the first half of the fifteenth century: "When monopolist merchants agree together to preserve a fixed price, so as to secure an unlimited profit, they are guilty of sinful trading." Ke maintained that they should not sell above the market price, and should be prevented from so doing by law. See his " Summa Theologica," III, 8, 3, iv, and II, i, t6, ii. Present day moral theologians lay down the' same doctrine, and in addition condemn the characteristic monopo- listic methods as unjust. See Tanquerey, " De Justitia," nos. 776, 777; Lehmkuhl, " Theologia Moralis," vol. I, no. 11 19. THE MORAL ASPECT OF MONOPOLY 27 1 sometimes called the " factor's agreement." It requires the dealer, merchant, or jobber to refrain from selling the goods produced by independent concerns, on penalty of being refused the goods produced by the monopoly. The merchant is compelled to choose between the less important line of wares to be had from the former, and the more important line obtainable from the latter. He will not be permitted to handle both. " Here is somebody who has been buying goods, let us say, by way of illustration, from the American Tobacco Company, and a rival producer comes in whom the merchant likes to patronise. He buys goods for a time from the rival, and an agent of the trust sends him a note to the effect that he must not buy any more from that rival corporation; that, if he does so, the trust will give all of its own goods, some of which the merchant is obliged to have, to another agent. That will probably bring him to terms." ^ By this method the inde- pendent manufacturer can be deprived of sufficient pat- ronage to injure him seriously, and perhaps to drive him out of business. This process is one of intimidation brought to bear upon the merchant. Through fear of loss he is compelled to discontinue selling the goods of the competing manufac- turer. It is a kind of secondary boycott. As such, it is an unreasonable interference with the liberty of the mer- chant unless its object is to compel him to do something that he may be reasonably required to do. In the case that we are considering, the object of the pressure is not of that character; for to drive the rival manufacturer out of business, or to assist in his expulsion, is not a reason- able thing. The exclusive-selling contract which is forced upon the merchant is quite as unreasonable as though its purpose were to prevent him from, say, patronising manu- facturers having red hair. Being thus unreasonable, thus injurious to individual liberty, it violates not only the law 1 Clark, " The Problem of Monopoly," p. 35. 2'J2 DISTRIBUTIVE JUSTICE of charity but that of justice. It transgresses the mer- chant's right to enter reasonable contracts with the rival manufacturer, and if it results in a pecuniary loss to the former it is an invasion of his rights of property. It like- wise violates the rights of the competitive manufacturer, since it is among the unfair means which may not be used to prevent a man from pursuing a legitimate good. It is an unfair means because it involves unreasonable intimida- tion, uncharity, and injustice toward the merchant. When the independent manufacturer is injured through such an instrumentality, he suffers injustice quite as certainly at the hands of the monopoly as though his property were destroyed through the strong-arm methods of hired thugs. Discriminative Transportation Arrangements Concerning the third unfair method, discriminative ad- vantages in transportation, the United States Industrial Commission declared : *' It is incontestable that many of the great industrial combinations had their origin in rail- road discrimination. This has been emphasised many times in the history of the Standard Oil Company, and of the great monopolies dealing in live stock, dressed beef, and other products." ^ The American Sugar Refining Company has been several times convicted of receiving illegal favours from railroads, and has paid in fines thou- sands upon thousands of dollars. Sometimes the monop- oly has openly been accorded lower freight rates than its competitors, and sometimes it has paid the regular charges, and then received back a part of them as a refund or rebate. At one time the Standard Oil Company obtained rebates not only on its own shipments, but on those of its rivals ! ^ Special advantages of this sort necessarily involve in- justice to the competitors of the monopoly. If the low 1 Final Report, p. 361. ? Report on the Petroleum Industry, pp. 22, 23. THE MORAL ASPECT OF MONOPOLY 273 rates given to the monopolistic concern are a sufficiently high price for the service of carrying freight, the higher charges imposed upon the competing concerns are extor- tionate; if the former rates are unprofitably low, the dif- ference between sufficient and insufficient freight charges is made up by the independent concerns. In the former case the independents pay the railroad too much; in the latter case they bear burdens that should properly rest upon the monopoly. The monopolistic concern is partly respon- sible for this injustice inasmuch as it urges and often in- timidates the railroad to establish the discriminating rates. All three of the practices that we have been considering are universally condemned by public sentiment. They are all likewise under the ban of statutory law. The first two have recently received detailed and explicit prohibition in the Clayton Anti-Trust Act. Natural Monopolies Up to this point we have been dealing with private and artificial monopolies. We turn now to consider briefly those natural and quasi-public monopolies which are either tacitly or explicitly recognised as monopolies by public authority, and whose charges are to a greater or less extent regulated by some department of the State. Such are, for example; steam railroads and municipal utilities. When the charges made for the services of these corporations are adequately regulated by public authority, the owners of such concerns will have a right to all the surplus gains that they can obtain. In that case a contract is made between the corporation and the public which is presumably fair to both parties, and which represents the social estimate of what is just. If the public authorities have not sufficiently safeguarded the interests of the people, if they have per- mitted the charges to be so high as to provide excessive returns for the corporation, the latter is under no moral obligation to refrain from reaping the full benefit of the 274 DISTRIBUTIVE JUSTICE State's negligence or incompetence. If, however, the un- duly high rates have been brought about through bribery, extortion, or deception practised by the corporation, the inequitable contract thus arranged will not justify the surplus gains thus produced. For example; if the cor- poration deliberately and effectively conceals the real value of its property through stockwatering, and thus misleads the public authority into permitting charges which return twelve instead of six per cent, on the actual investment, the corporation cannot forthwith justly claim the surplus gain represented by the extra six per cent. When the public authorities either fail entirely to regu- late charges, or do so only spasmodically and partially, the quasi-public monopoly will not necessarily have a right to all the obtainable surplus gains. For a long time the ex- press companies of the United States were permitted to exact what charges they pleased, and even yet the rates on some of our railroads are not adequately regulated by the State. In such cases the charges imposed on the public are not an adequate expression of the social estimate of justice, nor an adequate basis of legitimate surplus gains. In the absence of sufficient public regulation, a quasi-public monopoly is morally bound to fix its charges at such a level as will enable it to obtain only the prevailing rate of in- terest on the investment, and such surplus gains as it can produce through exceptional efficiency. In all such cases the public service corporation is in the same moral posi- tion as the artificial monopoly : it has no possible basis ex- cept superior efficiency for claiming or getting any returns above the competitive rate of interest on its capital. Its only possible reason for obtaining more is the fact that it has the power to take more. This fact has obviously no moral validity. THE MORAL ASPECT OF MONOPOLY 275 Methods of Preventing Monopolistic Injustice How shall the injustices of monopoly be prevented in the future? So far as quasi-public monopolies are con- cerned, all students of the subject are now agieed that these should be permitted to exist under adequate govern- mental regulation as to prices and service. The reason is that in this field successful and useful competition is im- possible. Public utility corporations are natural monopo- lies, and must be dealt with by the method of regulation until such time as they are brought under the ownership and operation of the State. With regard to the great in- dustrial combinations which have become or threaten to become artificial monopolies, there exists substantial agree- ment among competent authorities on one point, and dis- agreement on another point. All admit that the unfair competitive methods described in an earlier part of this chapter should be stringently prohibited. No possible reason can be found for legal toleration of these or any other discriminative, uncharitable, or unjust practices on the part of stronger toward weaker competitors. The disagreement among students of monopoly relates to the fundamental question of permitting or not permit- ting these combinations to exist. According to the first theory, of which Mr. Justice Brandeis is the most dis- tinguished exponent, no new industrial monopolies should be permitted, and those that we have should be dissolved. The basis of this theory is the assumption that all the economies and all the productive efficiency found in mo- nopolistic concerns can be developed and maintained in smaller business organisations, and that the method of prevention and dissolution is the simplest means of pro- tecting the public against the danger of extortionate monopoly prices. Attention has been called in a preceding paragraph to the impossibility of determining whether the great monopolistic combinations have on the average 276 DISTRIBUTIVE JUSTICE shown themselves to be more efficient than concerns sub- ject to active and adequate competition. It is significant, however, that in the discussion of this subject which took place at the twenty-sixth annual meeting of the American Economic Association, at Minneapolis in 1913, the econo- mists who participated were practically unanimous in hold- ing that the superior efficiency of the trusts had not been demonstrated, but was a matter of serious doubt, and that the burden of proof of their alleged superiority had been definitely shifted upon those who maintained the affirma- tive.^ Probably the great majority of the whole body of American economists would share these conclusions. On the other hand, the opponents of prevention and dissolution, of whom Mr. George W. Perkins is probably the most conspicuous, point to the obvious economies of large-scale over small-scale production, and contend that these are sufficient reason for permitting and even encour- aging the great combinations. The power to oppress com- petitors by unjust methods of business, and the public by extortionate prices, should be kept under rigid control by supervision, and government regulation of maximum prices. But the arguments advanced in favour of this position are never conclusive. Most of its advocates fail to realise, or at least to take adequately into account, the difference between large-scale production and production by a monopoly. While the large plant and the large busi- ness organisation have in many lines of manufacture and trade a considerable advantage over the small plant and the small organisation, there is not a scintilla of evidence to show that the efficiency of magnitude increases indefinitely with magnitude. There is no proof that the maximum efficiency is reached only with the maximum size of the business unit. On the contrary, all the evidence that we have points to the conclusion that in every field of indus- trial and commercial enterprise, all the economies of mag- 1 " Papers and Proceedings," pp. 158-194. THE MORAL ASPECT OF MONOPOLY 277 nitude and of combination are obtained long before the concern becomes a monopoly. There is not an industry of any importance in the United States in which all the advantages of bigness and concentration cannot be made operative in concerns that control as low as twenty-five per cent, of the total product. The highest economy and effi- ciency can be obtained without monopoly. Indeed, this is admitted by the more reasonable advo- cates of the regulation and price-fixing policy. While maintaining that " concentration must go far in order to give the maximum of efficiency," President Van Hise does not hold " that it should go to the extent that the element of monopoly enters " ; and he would have the law " declare restraint of trade unreasonable that gets to monopoly," and fix the definite per cent, of business control which constitutes a monopoly.^ We are justified, therefore, in concluding that the theory of prevention and dissolution (provided that the competing units are not made so small as to destroy the certain economies of magnitude) rather than the theory of permission and regulation, indicates the sound economic and social policy of dealing with monopolies. Legalised Price Agreements President Van Hise advocates the regulation policy in a modified form. In substance his view is that, while no corporation should be permitted to control the greater part of any product, monopolistic price-agreements should be sanctioned and regulated by law. No amount of restric- tive legislation, he maintains, can secure universal compe- tition in the matter of prices. Experience shows that the destructive results of cut-throat competition compel the more powerful competitors to make price agreements in some lines of business.^ For example; all the retail grocers in a city are often found selling certain staples at 1 Op. cit., pp. 20, 251. 2 op. cit., pp. 2S4'-26s. 278 DISTRIBUTIVE JUSTICE a uniform price for long periods of time. Agreements of this sort should, in the opinion of President Van Hise, be formally permitted by law, with the proviso that a govern- ment commission should fix the maximum and possibly the minimum limits. And he contends that the task of fixing fair maximum and minimum prices would be much less difficult than is commonly supposed, and that it would be much simpler and easier than the task of regulating rail- way freight rates. Whatever may be the merits of this plan, it is not likely to be embodied in legislation in the near future. So far as we can see now, the American people are committed to the policy of endeavouring to restore genuine competition by prohibiting those predatory practices to which the great monopolies mainly owe their existence. The attempt will be made to give competition a fair opportunity to prevent both monopolistic control of products and monopolistic fixing of prices. Competition has not enjoyed any such opportunity during the last quarter of a century. If this attempt should fail after a thorough trial, the time will be at hand for the regulation of prices by the government. Until that time has arrived (let us hope that it never will arrive) the State will not, and should not, embark upon such a large and difficult experiment. CHAPTER XIX THE MORAL ASPECT OF STOCK WATERING In the last chapter we saw that a monopoly has no right to gains in excess of the competitive rate of interest on its capital, except in so far as these have been derived from superior efficiency. Now superior efficiency is clearly present whenever the monopolistic concern obtains surplus gains by selling its product at competitive prices, or at the prices that would have prevailed under competition. Evi- dently the surplus in such a case is due to the greater pro- ductivity of the monopoly as compared with the average productivity of competitive concerns. When, however, the monopoly charges prices above the competitive level, its surplus gains cannot all be attributed to unusual effi- ciency. A part if not all of them are the result simply of the power to take ; consequently they are immoral. One of the means by which some monopolies have ob- tained unjust surplus gains is overcapitalisation, or stock- watering. This practice is rarely found in businesses that are subject to normal competition. So far as the con- sumer is concerned, a corporation that cannot fix prices arbitrarily has nothing to gain by inflating its capital. Unless it develops exceptional efficiency, it cannot hope to obtain more than the competitive rate of interest on its capital; if it does become exceptionally efficient, it can take the resulting surplus gains without arousing public resent- ment or criticism. In either case, it will have no sufficient reason to deceive the public by exaggerating the amount of its capital. When a competitive concern does water its stock, the object will be to defraud investors. If the 279 28o DISTRIBUTIVE JUSTICE scheme is successful the unjust surplus gains are taken by one set of stockholders from another set of stockholders. Whenever anything of this sort occurs, the deceptive de- vices employed are so crude and obvious that they present no special problem for the moralist. Even as practised by monopolies, stockwatering raises no principle that has not been already discussed. It does, however, create some special difficulties in the matter of applying the moral prin- ciples involved. Consequently, it may with advantage be considered in a separate chapter. The general definition of overcapitalisation is capitalisa- tion in excess of the proper valuation of a business. What is the measure of proper valuation? According to many corporation directors, it is earning power. If a concern is able to get the prevailing rate of interest on a capitalisa- tion of ten million dollars, that is the proper capitalisation for that concern, even though the money actually invested might not have exceeded five million dollars. In the opinion of most other persons, however, a company is over- capitalised when the face value of its securities is greater than the money put into the business plus the subsequent enhancement in the value of its land. " The money put into the business," means that which has been expended for labour, materials, land, equipment, and all other items and costs of organising the concern, together with the sum that is necessary to cover the interest not obtained by the investors during the preparatory period before the business became productively operative. The increase in the value of the land after its acquisition by the company also de- serves a place in the legitimate valuation, and may reason- ably be represented by an appropriate amount of securities. Monopolistic corporations have as good a right, generally speaking, to profit by the " unearned increment " of land as competitive concerns. In brief, the proper measure of capitalisation is cost: either the original cost, as just ex- THE MORAL ASPECT OF STOCKWATERING 281 plained and supplemented; or the present cost of reproduc- ing the business. Injurious Effects of Stockwatering Stockwatering can become an instrument of unjust gains in two ways : first, through fraud inflicted upon some of the investors; second, through the imposition of exorbi- tant prices upon the consumers. The former cannot occur so long as the process of inflation does not go beyond earn- ing power; for in that case all stockholders, barring dis- honest manipulation of the company's receipts, will obtain the normal rate of interest on their investment. If, how- ever, stock is sold in excess of the earning power of the concern, those stockholders who fail to obtain the ordinary rate of interest on their money are unjustly treated in so far as they have been deceived. And those officers or other members of the corporation who have profited by the deception of and injury to these stockholders, are the recipients of unjust gains. Daniel Drew inflated the capi- talisation of the Erie Railroad from seventeen millions to seventy-eight millions within four years for the purpose of manipulating the stock market; owing to excessive issues of stock, the American Shipbuilding Company was thrown into bankruptcy to the great injury of all but one of its stockholders ; ^ because they issued securities to buy subsidiary railway lines at exorbitant prices, and to provide extravagant commissions and discounts for bankers, the directors of the 'Frisco System forced it into a receiver- ship, after having inflicted a net loss of four million dol- lars per year upon the stockholders.^ Many other notable performances might be cited where stockwatering, both in railroads and in industrial concerns, has defrauded in- 1 Cf. Ripley, " Trusts, Pools, and Corporations," pp. 207-210. 2 See Report of the Interstate Commerce Commission on these trans- actions. 282 DISTRIBUTIVE JUSTICE vestors of millions of dollars, and enabled a few powerful directors to reap corresponding enormous profits. At first sight it would seem that stock watering is of little or no importance to the consumer. Since a monopolistic concern endeavours to fix its prices at the point that will yield the maximum net profit in any case, the amount of stock in existence would seem to be irrelevant to the prob- lem. Nevertheless, the presence of a large quantity of fictitious capital whose owners are calling for dividends, sometimes constitutes a special force impelling the imposi- tion of higher prices and charges. " It will happen at times that overcapitalisation does at least cause a clinging to high prices. The managers of an overcapitalised mo- nopoly may have to face the fact that great blocks of securities are outstanding, very likely issued by their prede- cessors, and now held by all sorts of investors. They are then loath to let go any slice of its profits. We have seen that often the monopoly principle of maximum net profit is not applied in its full sweep, especially in industries which are potentially subject to public control. Where abnormal returns on the original investment have been made, con- cessions to public opinion in the way of low rates and better facilities are more likely to come when capitalisation has not been inflated." ^ The United States Industrial Commission found that as regards railroads : " In the long run excessive capitalisation tends to keep rates high; con- servative capitalisation tends to make rates low." ^ This indirect influence of stockwatering toward exces- sive rates and prices becomes effective in two ways. The existence of fictitious capital conceals from the public the high rate of return that is obtained on the true valuation, thus preventing effective action for a reduction in prices and charges; and it sometimes causes the rate-making authorities to allow rates to be sufficiently high to yield 1 Taussig, " Principles of Economics," II, 385, 386. 2 Final Report, p. 414. THE MORAL ASPECT OF STOCKWATERING 283 something to the investors in the inflated capital. If a trust or a railroad has issued stock having a par value of tv^ice the capital invested, its rate of dividend on the entire capitalisation will be only one-half the rate of interest that it is receiving on the investment. If it pays, for example, seven per cent, on all its stock, it will be getting fourteen per cent, on its genuine capital. While the consumers of tobacco, or the patrons of a railroad, would raise no out- cry against seven per cent, dividends, they would probably begin to agitate for an enforcement of the anti-trust laws, and for a reduction in freight and passenger charges, if they realised that they were providing for dividends of fourteen per cent. Nor is the public adequately protected by government investigations of trusts and regulation of railway rates. Despite the anti-trust laws, many Amer- ican monopolies have for many years received exorbitant profits through excessive prices imposed upon the con- sumer; and in many of these instances overcapitalisation and its resulting concealment of real profits have been of considerable assistance to the extortionate monopoly. In fixing railway rates, the Interstate Commerce Commission, and the various state railroad commissions, have been seriously hampered by their inability to determine the real investment of the roads, and to separate the genuine from the fictitious capitalisation. N'ot until the year 19 13 did the national government begin the task of making a valua- tion' of interstate railroad property, and the work will re- quire several years. Very few of the states have made valuations of the railroads within their borders. In the meantime it is certain that many of the rates fixed by both the national and the state bodies will continue, as in the past, to be higher than they would have been if the true value of the railroads were known and accepted as the basis of freight and passenger charges. The second bad effect of stockwatering on the consumer is seen when rate-fixing bodies deliberately permit the 284 DISTRIBUTIVE JUSTICE charges of public service corporations to be high enough to include some returns on that portion of the capitalisa- tion which is fictitious. It is very difficult for such author- ities to resist entirely the plea of the " innocent investor." Consequently, railroad commissions and other rate making authorities, and even the courts, have occasionally made some provision for dividends on the " water." Chairman Knapp of the Interstate Commerce Commission admitted a few years ago that, in considering the reasonableness of a given rate, this body took into account the financial condi- tion, and therefore the capitalisation of the railroad.^ In 1 91 4 and 191 5 practically all the great railway systems of the United States made powerful, and in a measure suc- cessful, appeals to the Interstate Commerce Commission for a rise in rates on the ground that they were unable to pay the normal rate of interest on their securities, and hence could not obtain on advantageous terms new capital needed for improvements. Had the capitalisation of the roads been kept down to the actual investment, most of them would have been able to pay the competitive rate of interest on all their stock, and still have a sufficient surplus to command excellent credit. The Moral Wrong When prices or charges are made high enough to pro- vide returns on fictitious capital, the consumer is treated unjustly. As we have shown more than once, the con- sumer cannot rightfully be required to pay for the products of a monopoly at a greater rate than is necessary to pro- vide the competitive rate of interest on capital in the aver- age conditions of efficiency. If some concerns are able to sell at this price, and still obtain surplus gains, they have a right thereto on account of their exceptional pro- ductivity. But the capital upon which a monopolistic con- cern has a claim to the prevailing rate of interest, is genuine 1 Final Report of the Industrial Commission, p. 413. THE MORAL ASPECT OF STOCKWATERING 285 capital : that is, the actual investment as interpreted above, not an inflated capitalisation. The consumers may justly be required to pay for the use and benefit of actual pro- ductive goods; but it is not just that they should be com- pelled to pay for the supposed use of a capital that has no concrete reality. The stockholders of the monopolistic corporation which imposes upon the consumers exorbitant prices or charges through the instrumentality of inflated capitalisation, can become guilty of this injustice in two ways: by promoting the improper capitalisation; and by getting dividends on stock for which they have not given a fair equivalent. As a rule, the greater part of such guilt and responsibility rests upon certain special and powerful groups among the stockholders. For example; the J. P. Morgan syndicate which organised the United States Steel Corporation received for that service securities to the value of $63,500,000. " There can be no question," says the Commissioner of Corporations, " that this huge compensa- tion to the syndicate was greatly in excess of a reasonable payment." ^ The syndicate was able to exact this stupen- dous sum mainly because some of its members were also in control of some of the companies that were brought into the combination. *' In other words, as managers of the Steel Corporation these various interests virtually de- termined their compensation as underwriters." ^ In the opinion of the minority members Of the Stanley congres- sional investigating committee, " such a sum bore no rela- tion whatever to the service rendered, the risk run, and the capital advanced." ^ The majority of the committee characterised the transaction in even stronger language. It is clear, therefore, that the syndicate committed injustice toward the consumers both by organising a monopoly 1 Report on the Steel Industry, p. 38. 2 Idem, p. 39. 3 Chicago Record-Herald, July 29, 1912. 286 DISTRIBUTIVE JUSTICE which afterward imposed unjust prices, and by .taking millions of dollars in securities which its members did not earn, and on which they received interest through the exorbitant prices. While this transaction is exceptionally conspicuous, it is substantially typical of the methods by which many powerful monopolies have watered their stock to the detriment of the public, and the advantage of a small group of directors and financiers. The " Innocent " Investor Is the State obliged to protect, or is even justified in protecting, the innocent victims of stockwatering ? That is to say, should rate-making authorities fix the charges of public service corporations high enough to return some interest to the purchasers of fictitious securities? All the facts and presumptions of the case seem to demand an answer in the negative. In the first place, it is impossible to distinguish the " innocent " holders from those who were fully acquainted with the questionable and speculative nature of the stock at the time it came into their posses- sion. In the second place, the civil law has never formally recognised any such claim on the part of even innocent investors, nor any such obligation on the part of itself. It has never laid down the principle that any class of in- vestors in fictitious stock has a legal or moral right to obtain the normal rate of interest on such stock through the imposition of sufficiently high charges upon the con- sumers. Nor have the courts, except in isolated instances, sanctioned any such principle. On the contrary, the Supreme Court of the United States, in the case of Smyth vs. Ames, declared that a railroad '' may not impose upon the public the burden of such increased rates as may be required for the purpose of realising profits upon such ex- cessive valuation or fictitious capitalisation." In the third place, when we consider the matter from the side of morals, we see that the innocent investors are not the only THE MORAL ASPECT OF STOCKWATERING 287 persons whose rights are involved. If charges are placed high enough to cover interest on fictitious capital, the cost and the injury fall upon the consumers. The latter have a right to the services of utility corporations, such as rail- ways and gas companies, at a fair price; that is, a price which will return to the capital put into the concern the prevailing rate of interest, plus whatever gains are ob- tained by exceptional efficiency. To require them to pay more than this, is to compel them to give something for nothing; namely, to provide interest on capital which does not exist, and from which they receive no benefit. When, therefore, the State intervenes to secure fair charges for the consumers, it should base them upon the capital actually invested and used in the business of public service. Frequently, however, the State has permitted over- capitalisation, and charges sufficient to pay normal divi- dends thereon, for long periods of years. Has it not thereby encouraged investors to cherish the expectation that these high charges would be permitted to continue, and that the fictitious stock would remain indefinitely as valuable as when it came into their possession? Is it not breaking faith with these investors when it reduces charges to the basis of the actual investment ? A sufficient answer to these questions is found in the fact that the State has never officially sanctioned the practice of stockwatering, nor in any way intimated that it would recognise the exist- ence of the fictitious stock when it should take up the neglected task of fixing fair rates and charges. At the most, the civil law has merely tolerated the practice, and the resulting extortion upon the public. And there has never been a time when the greater and saner part of public opinion did not look upon overcapitalisation as at the least abnormal and irregular. Neither from the civil law nor from public sentiment have the devices of inflating capi- talisation received that measure of approval which would confer upon investments therein the legal or the moral 288 DISTRIBUTIVE JUSTICE Status of vested rights. To the " innocent investor " in watered stocks the maxim, caveat emptor, is as fairly appHcable as to the man who has been deceived into lend- ing his money on insufficient security, or the man who has been induced by the asseverations of a highly imaginative prospectus to put his money into a salted gold mine, or the man who buys stolen goods from a pawn shop, or the man who because of insufficient police protection loses his purse to a highwayman. In all these cases perfect legal safe- guards would have prevented the loss ; yet in none of them does the State undertake to make the loss good to the innocent victim. Such seems to be the strict justice of the situation as between the consumer and the innocent investor. It may sometimes happen that a particularly grave hardship can be averted from the latter at a comparatively slight cost to the former. In such a case equity would seem to require that some concession be made to the investors through the imposition of somewhat higher charges upon the consumer. Magnitude of Overcapitalisation Probably the majority of the great steam railroads, street railways, and gas companies that were organised during the last quarter of the nineteenth century inflated their capitalisation to a greater or less extent. Since the year 1900 the trusts have been the chief exponents and illustrations of the practice. According to President Van Hise, " the majority of the great concentrations of in- dustry have gone through two or three stages of reorgani- sation, the promoters and financiers each time profiting greatly, sometimes enormously." ^ For example; in 1908 the " water " in the American Tobacco Company was esti- mated by the Commissioner of Corporations at $66,- 000,000; the United States Shipbuilding Company diluted its twelve and one-half million dollars of capital 1 Op. cit., p. 28. THE MORAL ASPECT OF STOCKWATERING 289 with more than fifty-five miUions of " water " ; the United States Steel Corporation contained at the time of its organ- isation fictitious capital to the amount of $5oo,ocmd,ooo; and at least fifty per cent, of the common stock of the American Sugar Refining Company represented no actual investment.-^ Owing to the penetrating and widespread criticism, and the government investigations and prosecu- tions of the last few years, the practice of stockwatering has very greatly diminished. Perhaps the most flagrant recent example is that of the Pullman Company, which according to the testimony of R. T. Lincoln before the Federal Commission on Industrial Relations, distributed among its stockholders $100,000,000 in stock dividends between 1898 and 1910. Nevertheless the temptation to inflate capital will exist until the device is stringently prohibited by law. Both the nation and the states ought to adopt the policy of forbid- ding the sale of stock at less than par value, and restricting issues of stock to the amount required for the establish- ment, equipment, and permanent betterment of a concern, including a sum to cover the loss of interest to the investors during the early period of the business. Any extraor- dinary risks to which an enterprise is liable can be pro- tected by the simple device of allowing a correspondingly high rate of interest on the securities. With such legisla- tion enacted and enforced, neither the investor nor the consumer could be deceived or defrauded ; and the financing and management of corporations would become less specu- lative, and more beneficial to the community. The present chapter may be fittingly closed Vx^ith a moderate and sig- nificant statement from the pen of Professor Taussig: " It is doubtful whether the whole mechanism of irregular and swollen capitalisation was at any time necessary or wise. Why not provide once for all that securities shall be issued only to represent what has been invested? . . • 1 Cf . Van Hise, op. cit., pp. 29, 142, 149. 290 DISTRIBUTIVE JUSTICE It IS sometimes said that freedom, even recklessness, in the issue of securities was a useful device, in that it enabled the projectors to look forward to returns really tempting, and at the same time concealed these returns from a grudging public. ... A more simple and straightforward way of dealing with the issue of securities might thus have dampened in some degree the feverish speculation and restless progress of railway development. But a slower pace would have had its advantages also, and, not least, restriction of securities would have saved great com- plications in the later stages of established monopoly and needed regulation." ^ 1 Op. cit, II, 387, 388. CHAPTER XX THE LEGAL LIMITATION OF FORTUNES If the taxation and other measures of reform suggested in Section I were fully applied to our land system; if co- operative enterprise were extended to its utmost practicable limits for the correction of capitalism; and if the wide extension of educational opportunities, and the elimina- tion of the surplus gains of monopolies restricted the profits of the business man to an amount strictly com- mensurate with his ability and risks, — if all these results were accomplished the number of men who could become millionaires through their own efforts would be so small that their success would arouse popular applause rather than popular envy. Their claim to whatever wealth they might accumulate would be generally looked upon as en- tirely valid and reasonable. Their pecuniary eminence would be pronounced quite as deserved as the literary emi- nence of a Lowell, the scientific eminence of a Pasteur, or the political eminence of a Lincoln. In such conditions there could be no disconcerting discussion of the menace of great fortunes. In the meantime, these reforms are not realised, nor are they likely to be even approximately established within the present generation. For some time to come it will be possible for the exceptionally able, the exceptionally cun- ning, and the exceptionally lucky to accumulate great riches through clever and fortuitous utilisation of special advan- tages, natural and otherwise. Moreover, a great propor- tion of the large fortunes already in existence will persist, and will be transmitted to heirs who will in many cases 291 292 DISTRIBUTIVE JUSTICE cause them to increase. Can nothing be done to reduce the size and lessen the number of these great accumula- tions? If so, is such a proceeding socially and morally desirable ? The Method of Direct Limitation The law might directly limit the amount of property to be held by any individual. If the limit were placed fairly high, say, at one hundred thousand dollars, it could scarcely be regarded as an infringement on the right of property. In the case of a family numbering ten members, this would mean one million dollars. All the essential objects of private ownership could be abundantly met out of a sum of one hundred thousand dollars for each person. More- over, a restriction of this sort need not prevent a man from bestowing unlimited amounts upon charitable, religious, educational, or other benevolent causes. It would, indeed, hinder some persons from satisfying certain unessential wants, such as, the desire to enjoy gross or refined lux- uries, great financial power, and the control of immense industrial enterprises; but none of these objects is neces- sary for any individual's genuine welfare. In the interest of the social good such private and unimportant ends may properly be rendered impossible of realisation. Such a restriction would no more constitute a direct attack upon private ownership than limitations upon the use and kinds of property. At present a man may not do what he pleases with his gun, his horse, or his automobile, nor may he invest his money in the business of carrying the mails. The limitation of fortunes is just what the word expresses, a limitation of the right of property. It is not a denial nor destruction of that right. As a limita- tion of the amount to be held by an individual, it does not differ in principle from a limitation of the kinds of goods that may become the subject of private ownership. There is nothing in the nature of things nor in the reason of THE LEGAL LIMITATION OF FORTUNES 293 property to indicate that the right of ownership is un- limited in quantity any more than it is in quaHty. The final end and justification of individual rights of property is human welfare; that is, the welfare of all individuals severally and collectively. Now it is quite within the bounds of physical possibility that the limitation under discussion might be conducive to the welfare of human beings both as individuals and as constituting society. Nevertheless the dangers and obstacles confronting any legal restriction of fortunes are so real as to render the proposal socially inexpedient. It would easily lend itself to grave abuse. Once the community had habituated itself to a direct limitation of any sort, the temptation to lower it in the interest of better distribution and simpler living would become exceedingly powerful. Eventually the right of property might take such an attenuated and uncertain form in the public mind as to discourage labour and initiative, and thus seriously to endanger human welfare. In the second place, the manifold evasions to which the measure would lend itself would make it of very doubtful efficacy. To be sure, neither of these objections is abso- lutely conclusive, but taken together they are sufficiently weighty to dictate that such a proposal should not be enter- tained so long as other and less dangerous methods are available to meet the problem of excessive fortunes. Four of the nine members of the Federal Commission on Industrial Relations have suggested that the amount of property capable of being received by the heirs of any person be limited to one million dollars.-^ If we assume that by heirs the Commission meant the natural persons to whom property might come by bequest or succession, this limitation would permit a family of ten persons to inherit one hundred thousand dollars each, and a family of five persons to obtain two hundred thousand dollars apiece, ^ould such a restriction be a violation of the right of 1 " Final Report," p. 32. 294 DISTRIBUTIVE JUSTICE private ownership? The answer depends upon the effects of the measure on human welfare. The rights of bequest and succession are integral elements of the right of owner- ship ; hence they are based upon human needs, and designed for the promotion of human life and development. A per- son needs private property not only to provide for his personal wants and those of his family during his life- time, but also to safeguard the welfare of his dependents and to assist other worthy purposes, after he has passed away. Owing to the uncertainty of death, the latter ob- jects cannot be adequately realised without the institutions of bequest and succession. All the necessary and rational ends of bequest and suc- cession could be attained in a society in which no man's heirs could inherit more than one million dollars. Under such an arrangement very few of the children of million- aires would be prevented from getting at least one hun- dred thousand dollars. That much would be amply suffi- cient for the essential and reasonable needs of any human being. Indeed, we may go further, and lay down the proposition that the overwhelming majority of persons can lead a more virtuous and reasonable life on the basis of a fortune of one hundred thousand dollars than when bur- dened with any larger amount. The persons who have the desire and the ability to use a greater sum than this in a rational way are so few that a limitation law need not take them into account. Corporate persons, such as hos- pitals, churches, schools, and other helpful institutions, should not, as a rule, be restricted as to the amount that they might inherit; for many of them could make a good use of more than the amount that suffices for a natural person. So much for the welfare and rights of the beneficiaries of inheritance. The owners of estates would not be in- jured in their rights of property by the limitation that we are here considering. In the first place, the number of THE LEGAL LIMITATION OF FORTUNES 295 persons practically affected by the limitation would be ex- tremely small. Only an insignificant fraction of property owners ever transmit or expect to be wealthy enough to transmit to their families more than one million dollars. Of these few a considerable proportion would not be de- terred by the million dollar limitation from putting forth their best and greatest efforts in a productive way. They would continue to work either from force of habit and love of their accustomed tasks, or from a desire to make large gifts to their heirs during life, or because they wished to assist some benevolent enterprise. The infinitesimally small number whose energies would be diminished by the limitation could very safely be treated as a socially neg- ligible element. The commimity would be better off with- out them. The limitation of inheritance would, indeed, be liable to abuse. Circumstances would undoubtedly arise in which the community would be strongly tempted to make the maximum inheritable amount so low as to discourage the desire of acquisition, and to deprive heirs of reasonable protection. While the bad effects of such a limitation would not be as great as those following a similar abuse with regard to possessions, they are sufficiently grave and sufficiently probable to suggest that the legal restriction of bequest and succession should not be considered except as a last resort, and when the transmission of great fortunes had become a great and certain public evil. It seems reasonable to conclude, then, that neither the limitation of possessions nor the limitation of inheritance is necessarily a direct violation of the right of property, but that the possible and even probable evil consequences of both are so grave as to make these measures of very doubtful benefit. Whether the dangers in question are sufficiently great to render the adoption of either proposal morally wrong, is a question that cannot be answered with any degree of confidence. What seems to be fairly certain 296 DISTRIBUTIVE JUSTICE is that in our present conditions legislation of this sort would be an unnecessary and unwise experiment. Limitation Through Progressive Taxation Is it legitimate and feasible to reduce great fortunes indirectly, through taxation? There is certainly no ob- jection to the method on moral or social principles. As we have seen in chapter viii, taxes are not levied exclu- sively for the purpose of raising revenue. Some kinds of them are designed to promote social rather than fiscal ends. Now, to prevent and diminish dangerous accumulations of wealth is a social end which is at least as important as most of the objects sought in license taxes. The pro- priety of attempting to attain this end by taxation is, there- fore, to be determined entirely by reference to its probable effectiveness. The precise method of taxation available here is a pro- gressive tax on incomes and inheritances. By a progres- sive tax is meant one whose rate advances in some definite proportion to the increases in the amount taxed. For ex- ample, a bequest of 100,000 dollars might pay one per cent. ; 200,000 dollars, two per cent. ; 300,000 dollars, three per cent., and so forth. The reasonableness of the prin- ciple of progression in taxation has been well stated by Professor Seligman : " All individual wants vary in in- tensity, from the absolutely necessary wants of mere sub- sistence to the less pressing wants which can be satisfied by pure luxuries. Taxes, in so far as they rob us of the means of satisfying our wants, impose a sacrifice upon us. But the sacrifice involved in giving up a portion of what enables us to satisfy our necessary wants is very different from the sacrifice involved in giving up what is necessary to satisfy our less urgent wants. If two men have in- comes of one thousand dollars and one hundred thousand dollars respectively, we impose upon them not equal but very unequal sacrifices if we take away from each the same THE LEGAL LIMITATION OF FORTUNES 297 proportion, say ten per cent. For the one thousand dollar individual now has only nine hundred dollars, and must deprive himself and his family of necessaries of life; the one hundred thousand dollar individual has ninety thou- sand dollars, and if he retrenches at all, which is very doubtful, he will give up only great luxuries, which do not satisfy any pressing wants. The sacrifice imposed on the two individuals is not equal. We are laying on the one thousand dollar man a far heavier sacrifice than on the one hundred thousand dollar man. In order to impose equal sacrifices we must tax the richer man not only absolutely, but relatively, more than the poor man. The taxes must be not proportional, but progressive; the rate must be lower in the one case than in the other." ^ The principle of equality of sacrifices which underlies the progressive theory does not justify the levelling and communistic inferences that have sometimes been brought against it. Equality of sacrifice does not mean equality of satisfied, or unsatisfied, wants after the tax has been col- lected. If Brown pays a tax of one per cent, on his in- come of two thousand dollars, it does not follow that Jones with an income of ten thousand dollars should pay a suf- ficiently high rate to leave him with only the net amount remaining to Brown; namely, 1980 dollars. Equality of sacrifice means proportional equality of burden, not equal- ity of net resources after the tax has been deducted. The object of the progressive rate is to make relatively equal the sacrifices caused by the tax itself, not to equalise the sum total of burdens or unsatisfied wants that exist among men. Another objection to progressive taxation is that it readily lends itself to confiscation of the largest incomes. All that is necessary to produce this result is to increase the rate with sufficient rapidity. This could be accom- 1 " Progressive Taxation," pp. 210, 211 ; cf. Vermeersch, " Quaestiones de Justitia," pp. 94-126. 298 DISTRIBUTIVE JUSTICE plished either by large steps in the rate itself or by small steps in the income increases which formed the basis of the advances in the rate. For example, if the Federal in- come tax, which at present levies two per cent, on incomes of more than three thousand dollars, and three per cent, on incomes of over twenty thousand dollars, should thereafter progress geometrically with every geometrically progressive increment of income, the rate on incomes above $640,000 would be 96 per cent. ! Or if the rate should progress arithmetically with every ten thousand dollars of increase above twenty thousand dollars, it would be 100 per cent, on incomes of over $990,000! To this objection there are two valid answers. Even if the rate should ultimately reach one hundred per cent, it need not, and on progressive principles it should not, effect confiscation of an entire income. The progressive theory is satisfied when the successive rates of the tax apply to successive increments of income, instead of to the entire income. For example, the rate might begin at one per cent, on incomes of one thousand dollars, and increase by one per cent, with every additional thousand, and yet leave a very large part of the income in the hands of the re- ceiver. Each one thousand dollars would be taxed at a different rate, the first at one per cent., the fiftieth at fifty per cent, and the last at one hundred per cent. If the hundred per cent, rate were applied to the whole of the higher incomes, it would be a direct violation of the prin- ciple of equality of sacrifice. In the second place, the progressive theory forbids rather than requires the rate to go as high as one hundred per cent. While the sacrifices imposed by a given rate are greater in the case of small than of large properties, they become approximately equal as between all properties above a certain high level. After this level is reached, additional increments of wealth will all be expended either for extreme luxuries, or converted into new investments. Consequently they will supply THE LEGAL LIMITATION OF FORTUNES 299 wants of approximately equal intensity. For example, the wants dependent upon a surplus of 25,000 dollars in excess of an income of 100,000 dollars, and the wants dependent upon a surplus of 75,000 dollars above the same level do not differ materially in strength. To diminish these sur- pluses by the same per cent., say, ten, would impose pro- portionally equal burdens. Hence the rate of progression should be degressive; that is, it should increase at a constant pace until a certain high level of income is reached, then increase at a steadily di- minishing pace, and finally become uniform on the very highest incomes. For example; if the rate increased one per cent, with every additional five thousand dollars, reaching fifteen per cent, on incomes of seventy-five thou- sand dollars, it should be on eighty thousand dollars, not sixteen but fifteen and one-half per cent. On 85,000 dol- lars the rate should be 15% per cent.; on 90,000, 15% per cent.; on 95,000, i5^%g per cent.; and on all sums of 100,000 and over, 16 per cent. The point at which the in- crements in the rate began to decline would be that at which differences in wants began to diminish, and the point at which the rate became stationary would be that at which wants fell to the same level of intensity. The Proper Rate of Income and Inheritance Taxes While the principle of equality of sacrifices forbids a rate of tax that would reach or approximate confiscation, it gives no definite indication of the proper scale of pro- gression, or of the maximum limit that justice would set to the rate. Under our Federal law the highest rate on incomes is now 13 per cent.; under the Wisconsin law it is 6 per cent. ; under the law of Prussia it is 4 per cent. ; and under the British act of 1909 it is about 8% per cent. Evidently a much higher rate than any of these would be required to make any impression upon swollen fortunes. The British government recently (September, 191 5) made 300 DISTRIBUTIVE JUSTICE the maximum rate about 33% per cent. To be sure, this is a war measure which probably will not continue after the restoration of peace. However, if it were made per- manent it could not be proved to be unjust, provided that it were applied to the increments of income above a certain high limit, but not to these incomes in their entirety. Our present inheritance taxes are very low, averaging less than 3 per cent, throughout the United States. Prob- ably the highest rate is to be found in Wisconsin, where bequests to non relatives in excess of half a million dollars are subject to a tax of fifteen per cent. It is clear that all the existing rates could be raised very considerably with- out causing a violation of justice. Some years ago An- drew Carnegie recommended a tax of fifty per cent, on estates amounting to more than one million dollars.^ No country has yet reached this high level of inheritance taxes. Nevertheless we cannot certainly stigmatise it as unjust either to the testator or his heirs, nor can we prove that it is in any other manner injurious to human welfare. All that can be said with confidence concerning the just rates of inheritance taxation must take the form of generalisa- tions. The increments of the tax should correspond as closely as possible to the diminishing intensity of the wants which the tax deprives of satisfaction; in the case of each heir a certain fairly high minimum of property should be entirely exempt; on all the highest estates the rate should be uniform, and it should fall a long way short of con- fiscation; and the tax should at no point be such as to dis- courage socially useful activity and enterprise. Effectiveness of Such Taxation : The essential justice of the measures is not the only con- sideration affecting high income and inheritance taxes. There remain the questions of expediency and feasibility. Under the first head the objection is sometimes raised that 1 " The Gospel of Wealth," pp. 11, 12. THE LEGAL LIMITATION OF FORTUNES 3OI taxes which appropriated a considerable portion of the larger incomes and inheritances would diminish very ma- terially the social supply of capital. Immense sums of money would go into the public treasury which otherwise would have been invested in commerce and industry. Two questions are raised by this situation : first, whether it might not be better for society to have these sums devoted, through public works of various kinds, to consumptive uses instead of to an increase in the supply of capital; sec- ond, whether the reduction in the savings and capital pro- vided by the persons paying the taxes could be offset by increases in saving among other classes. Even if it be assumed that the first question should receive a negative answer, it is not improbable that the second should be an- swered in the affirmative. In other words, the increased saving which the poorer and middle classes would be enabled to make as a result of the shifting of some of their burden of taxation to the large incomes and inheritances, might very well counterbalance the curtailment in the in- vestments of the wealthy classes. Even if this possibility were not fully realised, even if the net volume of capital in the community were somewhat diminished, this disad- vantage might be more than neutralised by the wider social benefits of the taxation policy. With regard to the feasibility of very heavy income and inheritance taxes, it is sometimes contended that neither of these measures can be made effective toward the reduc- tion of abnormal fortunes.^ It is held that the successful collection of these taxes requires the co-operation of the persons affected by them; that if the rate should go above ten or twelve per cent., the income receiver would evade the tax in a great variety of ways, while the owner of a large estate would transfer his property outright to a trust company, which would after his death make the desired 1 Cf. Dr. T. S. Adams in " Papers and Proceedings of the 27th Annual Meeting of the American Economic Association," pp. 234, sq. 302 DISTRIBUTIVE JUSTICE distribution. The man who urges these objections is a very high authority on taxation, especially on its adminis- trative side; nevertheless his contentions are not absolutely conclusive. In particular, it does not seem probable that high inheritance taxes could be evaded by the simple de- vices that he mentions. It ought not to be beyond the power of administrative ingenuity to find methods of de- feating such subterfuges. However, it is altogether likely that the possibilities of evasion would be sufficient to pre- vent the imposition of tax rates that approached within measurable distance of the borderland of confiscation. The sum of the matter seems to be that the reduction and prevention of great fortunes cannot prudently be ac- complished by the method of direct limitation; that these ends may wisely and justly be attained indirectly, through the imposition of progressive income and inheritance taxes; but that the extent to which these measures would be genuinely effective cannot be estimated until they have been given a thorough trial. CHAPTER XXI THE DUTY OF DISTRIBUTING SUPERFLUOUS WEALTH The correctivies of the present distribution that were proposed before the beginning of the last chapter related mainly to the apportionment of the product among the agents of production. They would affect that distribution which takes place as an integral element of the productive process, not any disposition which the productive agents might desire or be required to make of the shares that they had acquired from the productive process. Such were many of the proposals regarding land tenure, and all of those concerning co-operative enterprises and monopoly. In the last chapter we considered the possibility of neu- tralising to some extent the abuses of the primary distri- bution by the action of government through the taxation of large fortunes. These were proposals directly affect- ing the secondary distribution. And they involved the method of compulsion. In the present chapter we shall in- quire whether desirable changes in the secondary distribu- tion may not be effected by voluntary action. The specific questions confronting us here are, whether and how far proprietors are morally bound to distribute their super- fluous wealth among their less fortunate fellows. The Question of Distributing Some The authority of revealed religion returns to the first of these questions a clear and emphatic answer in the affirma- tive. The Old and the New Testaments abound in declara- tions that possessors are under very strict obligation to give of their surplus to the indigent. Perhaps the most 303 304 DISTRIBUTIVE JUSTICE striking expression of this teaching is that found in the Gospel according to St. Matthew, ch. 25, verses 32-46, where eternal happiness is awarded to those who have fed the hungry, given drink to the thirsty, received the stranger, covered the naked, visited the sick, and called upon the imprisoned; and eternal damnation is meted out to those who have failed in these respects. The principle that ownership is stewardship, that the man who possesses superfluous goods must regard himself as a trustee for the needy, is fundamental and all-pervasive in the teaching of Christianity. No more clear or concise statement of it has ever been given than that of St. Thomas Aquinas: " As regards the power of acquiring and dispensing mate- rial goods, man may lawfully possess them as his own; as regards their use, however, a man ought not to look upon them as his own, but as common, so that he may readily minister to the needs of others." ^ Reason likewise enjoins the benevolent distribution of surplus wealth. It reminds the proprietor that his needy neighbours have the same nature, the same faculties, capacities, wants, and destiny as himself. They are his equals and his brothers. Reason, therefore, requires that he should esteem them as such, love them as such, and treat them as such; that he should love them not merely by well wishing, but by well doing. Since the goods of the earth were intended by the Creator for the common benefit of all mankind, the possessor of a surplus is rea- sonably required to use it in such a way that this original purpose of all created goods will be fulfilled. To refuse is to treat one's less fortunate neighbour as something dif- ferent from and less than oneself, as a creature whose claim upon the common bounty of nature is something less than one's own. Multiplying words will not make these truths plainer. The man who does not admit that the welfare of his neighbour is of equal moral worth and im- 1 " Summa Theologica," 2'a. 2ae., q. 66, a. 3. DUTY OF DISTRIBUTING SUPERFLUOUS WEALTH 305 portance with his own welfare, will logically refuse to admit that he is under any obligation of distributing his superfluous goods. The man who does acknowledge this essential equality will be unable to find any logical basis for such refusal. Is this obligation one of charity or one of justice? At the outset a distinction must be made between wealth that has been honestly acquired and wealth that has come into one's possession through some violation of rights. The latter kind must, of course, be restored to those persons who have been wronged. If they cannot be found or identified the ill-gotten gains must be turned over to charitable or other worthy objects. Since the goods do not belong to the present holder by any valid moral title, they should be given to those persons who are qualified by at least the claim and title of needs. Some of the Fathers of the Church maintained that all superfluous wealth, whether well or ill gotten, ought to be distributed to those in want. St. Basil of Csesarea: " Will not the man who robs another of his clothing be called a thief? Is the man who is able and refuses to clothe the naked deserving of any other appellation? The bread that you withhold belongs to the hungry; the cloak that you retain in your chest belongs to the naked ; the shoes that are decaying in your possession belong to the shoe- less ; the gold that you have hidden in the ground belongs to the indigent. Wherefore, as often as you were able to help men and refused, so often you did them wrong." ^ St. Augustine of Hippo : " The superfluities of the rich are the necessities of the poor. They who possess super- fluities possess the goods of others." ^ St. Ambrose of Milan: ''The earth belongs to all; not to the rich; but those who possess their shares are fewer than those who do not. Therefore, you are paying a debt, not bestowing 1 " Patrologia Graeca," vol. 31, cols. 275, 278. 2 " Patrologia Latina," vol. 37, col. 1922. 306 DISTRIBUTIVE JUSTICE a gift." ^ Pope Gregory the Great: "When we give necessaries to the needy, we do not bestow upon them our goods ; we return to them their own; we pay a debt of jus- tice rather than of mercy." ^ The great systematiser of theology in the thirteenth century, St. Thomas Aquinas, who is universally recog- nised as the most authoritative private teacher in the Church, stated the obligation of distribution in less ex- treme and more scientific terms : " According to the order of nature instituted by Divine Providence, the goods of the earth are designed to supply the needs of men. The division of goods and their appropriation through human law do not thwart this purpose. Therefore, the goods which a man has in superfluity are due by the natural law to the sustenance of the poor." ^ That this is the official teaching of the Church to-day is evident from the words of Pope Leo XIII : " When one has provided sufficiently for one's necessities and the de- mands of one's state of life, there is a duty to give to the indigent out of what remains. It is a duty not of strict justice, save in case of extreme necessity, but of Chris- tian charity." ^ Nearly thirteen years earlier, the same Pope had written : " The Church lays the rich under strict command to give their superfluity to the poor." ^ The only difference between the Fathers and Pope Leo XIII and St. Thomas on this question has reference to the precise nature of the obligation. According to the Fathers, the duty of distribution would seem to be a duty of justice. In the passage quoted above from St. Thomas, superfluities are said to '* belong," or to be " due " (" de- 1 " Patrologia Latina," vol. 14, col. 747. 2 " Patrologia Latina," vol. Tj, col. 87. These and several other ex- tracts of like tenor may be found in Ryan's " Alleged Socialism of the Church Fathers," ch. i ; St. Louis, 1913. 3 Op. cit., 2a. 2ae., q. 66, a. 7. * Encyclical, " On the Condition of Labour," May 15, 1891. 5 Encyclical, " On Socialism, Communism, Nihilism," Dec. 28, 1878. DUTY OF DISTRIBUTING SUPERFLUOUS WEALTH 307 betur ") to the needy; but the particular moral precept that applies is not specified. In another place, however, the Angelic Doctor declares that almsgiving is an act of char- ity.^ Pope Leo XIII explicitly says that the obligation of giving is one of charity, " except in extreme cases." The latter phrase refers to the traditional doctrine that a person who is in extreme need ; that is, in immediate dan- ger of losing life, limb, or some equivalent personal good, is justified in the absence of any other means of succour in taking from his neighbour what is absolutely necessary. Such appropriation, says St. Thomas, is not properly speaking theft; for the goods seized belong to the needy person, " inasmuch as he must sustain life." ^ In a word, the mediaeval and the modern Catholic teaching would make distribution of superfluous goods a duty of justice only in extreme situations, while the Fathers laid down no such specific limitation. Nevertheless, the difference is less im- portant than it appears to be on the surface. When the Fathers lived, theology had not been systematised nor given a precise terminology; consequently, they did not always make exact distinctions between the different classes of virtues and obligations. In the second place, the Patris- tic passages that we have quoted, and others of like import, were mostly contained in sermons addressed to the rich, and consequently were expressed in hortatory rather than scientific terms. Moreover, the needs of the time which the rich were exhorted to relieve were probably so urgent that they could correctly be classed as extreme, and there- fore would give rise to an obligation of justice on the part of those who possessed superfluous wealth. The truly important fact of the whole situation is that both the Fathers and the later authorities of the Church regard the task of distributing superfluous goods as one of strict moral obligation, which in serious cases is binding 1 Op. cit., 2a. 2ae., q. 32, a. I. 2 Idem, q. 66, a. 7, 308 DISTRIBUTIVE JUSTICE under pain of grievous sin. Whether it falls under the head of justice or under that of charity, is of no great practical consequence. The Question of Distributing All Is a man obliged to distribute all his superfluous wealth? As regards the support of human life, Catholic moral the- ologians distinguish three classes of goods : first, the neces- saries of life, those utilities which are essential to a healthy and humane existence for a man and his family, regard- less of the social position that he may occupy, or the standard of life to which he may have been accustomed; second, the conventional necessities and comforts, which correspond to the social plane upon which the individual or family moves; third, those goods which are not re- quired to support either existence or social position. Goods of the second class are said to be necessary as re- gards conventional purposes, but superfluous as regards the maintenance of life, while those of the third class are superfluous without qualification. No obligation exists to distribute the first class of goods; for the possessor is justified in preferring his own primary and fundamental needs to the equal or less important needs of his neighbours. The owner of goods of the second class is under obligation to dispense them to persons who are in extreme need, since the preservation of the neigh- bour's life is more important morally than the mainte- nance of the owner's conventional standard of living. On the other hand, there is no obligation of giving any of these goods to meet those needs of the neighbour which are social or conventional. Here, again, it is reasonable that the possessor should prefer his own interests to the equal interests of his fellows. Still less is he obliged to expend any of the second class of goods for the relief of ordinary or common distress. As regards the third class of goods, those which are absolutely superfluous, the pro- DUTY OF DISTRIBUTING SUPERFLUOUS WEALTH 309 portion to be distributed is indefinite, depending upon the volume of need. The doctrine of the moral theologians on the subject is summed up in the following paragraph. When the needs to be supplied are " ordinary," or " com- mon " ; that is, when they merely expose a person to con- siderable and constant inconvenience, without inflicting serious physical, mental, or moral injury, they do not im- pose upon any man the obligation of giving up all his superfluous goods. According to some moral theologians, the possessor fulfils his duty in such cases if he contributes that proportion of his surplus which would suffice for the removal of all such distress, provided that all other pos- sessors were equally generous; according to others, if he gives two per cent, of his superfluity ; according to others, if he contributes two per cent, of his annual income. These estimates are intended not so much to define the exact measure of obligation as to emphasise the fact that there exists some degree of obligation; for all the moral theologians agree that some portion of a man's superfluous goods ought to be given for the relief of ordinary or com- mon needs. When, however, the distress is grave ; that is, when it is seriously detrimental to welfare; for example, when a man or a family is in danger of falling to a lower social plane; when health, morality, or the intellectual or religious life is menaced, — possessors are required to con- tribute as much of their superfluous goods as is necessary to meet all such cases of distress. If all is needed all must be given. In other words, the entire mass of super- fluous wealth is morally subject to the call of grave need. This seems to be the unanimous teaching of the moral theologians.^ It is also in harmony with the general prin- lA comprehensive, though brief, discussion of this question and numerous references are contained in Bouquillon, " De Virtutibus Theologicis," pp. 332-348. When Pope Leo XIII declared that the rich are obliged to distribute " out of " their superfluity, he did not mean that they are free to give only a portion thereof. The particle " de " in his statement, " officium est de eo quod superat gratificari in- 3IO DISTRIBUTIVE JUSTICE ciple of the moral law that the goods of the earth should be enjoyed by the inhabitants of the earth in proportion to their essential needs. In any rational distribution of a common heritage, the claims of health, mind, and morals are surely superior to the demands of luxurious living, or investment, or mere accumulation. What per cent, of the superfluous incomes in the United States would suffice to alleviate all the existing grave and ordinary distress? Nothing like an exact answer is pos- sible, but we can get an approximation that will have con- siderable practical value. From the estimates of family incomes given by Professor W. I. King, it appears that in 1910 the number of families with annual incomes of less than one thousand dollars was a little more than ten and three quarter millions, and that the total incomes of those families receiving more than ten thousand dollars a year amounted to a little more than three and three quarter billions.^ If each of the latter class of families should expend ten thousand dollars per year for the needs of life and social position, they would have left nearly two and three quarter billions for distribution among the ten and three quarter million families who are below the one thou- sand dollar level. So far as the figures of Professor King's table enable us to judge, the greater part if not all of this sum would be required to bring this group of fam- ilies up to that standard. Possibly an income of one thousand dollars per family is not required to remove all ordinary and grave distress; and possibly ten thousand dollars is not enough for the reasonable requirements of some families. If both these suppositions are true they digentibiis," is not correctly translated by "some." It means rather " out of," " from," or " with " ; so that the affluent are commanded to d'evote their superfluous goods indefinitely to the relief of the needy. In the Encyclical, " Quot Ap«ostolici Muneris," he used the expression, "gravissimo divites urget praecepto ut quod superest pauperibus tribuant," which clearly declares the duty of distributing all. 1 " The Wealth and Income of the People of the United States," pp. 224-226. DUTY OF DISTRIBUTING SUPERFLUOUS WEALTH 3 II will tend to cancel each other : the needs to be met will be less, but the superfluous income to be distributed will be less also. Whatever be the minimum and maximum limits of family income that approve themselves to competent students, the conclusion will probably be inevitable that the greater part of the superfluous income of the well-to-do and the rich would be required to abolish all grave and ordinary need. Some Objections The desirability of such a thoroughgoing distribution of superfluous incomes appears to be refuted by the fact that a considerable part of the capital and organising abil- ity that function in industry is dependent upon the pos- session of superfluous goods by the richer classes. That surplus of the larger incomes which is not consumed or given away by its receivers at present, constitutes no small portion of the whole supply of savings annually converted into capital. Were all of it to be withdrawn from indus- try and distributed among the needy, the process might involve more harm than good. Moreover, the very large industrial enterprises are initiated and carried on by men who have themselves provided a considerable share of the necessary funds. Without these large masses of personal capital, they would have much more difficulty in organis- ing these great enterprises, and would be unable to exercise their present dominating control. To the first part of this objection we may reply that the distribution of superfluous goods need not involve any considerable withdrawal of existing capital from industry. The giving of large amounts to institutions and organisa- tions, as distinguished from needy individuals, might mean merely a transfer of capital from one holder to another; for example, the stocks and bonds of corporations. The capital would be left intact, the only change being in the persons that would thenceforth receive the interest. Small 312 DISTRIBUTIVE JUSTICE donations could come out of the possessor's income. Moreover, there is no reason why the whole of the distri- bution could not be made out of income rather than out of capital. While the givers would still remain possessed of superfluous wealth, they would have handed over to needy objects, persons, and causes the thing that in modern times constitutes the soul and essence of wealth; namely, its annual revenues. Nevertheless, the distribution from income would ap- parently check the necessary increase of capital, lessen unduly the supply of capital for the future. Were all, or the greater part of superfluous incomes devoted to benevo- lent objects it would be used up for consumption goods; such as, food, clothing, housing, hospitals, churches, schools. Would not this check to the increase of capital cause serious injury to society? New investment would not be diminished by an amount equal to the whole amount of income transferred to ob- jects of benevolence. For the improved position of the poorer classes that had shared in the distribution would enable them to increase their productive power and their resources, and therefore to save money and convert it into capital. Again, their increased consuming power would augment the demand for goods, bring about a larger use of existing capital instruments, and therefore lead to an en- largement of the community's capacity for saving. Thus, the new saving and capital would, partially at least, take the place of that which was formerly provided by the pos- sessors of surplus income. In so far as a net diminution occurred in the community's supply of capital, it would probably be more than offset, from the viewpoint of social welfare, by the better diffusion of goods and opportunities among the masses of the population. The second difficulty noted above, that such a thorough distribution of superfluous goods would lessen consider- DUTY OF DISTRIBUTING SUPERFLUOUS WEALTH 313 ably the power of the captains of Industry to organise and operate great enterprises, can be disposed of very briefly. Those who made the distribution from income rather than from invested wealth, would still retain control of large masses of capital. All, however, would have deprived themselves of the power to enlarge their business ven- tures by turning great quantities of their own income back into industry. But if their ability and character were such as to command the confidence of investors, they would be able to find sufficient capital elsewhere to equip and carry on any sound and necessary enterprise. In this case the process of accumulating the required funds would, indeed, be slower than when they used their own, but that would not be an unmixed disadvantage. When the busi- ness was finally established, it would probably be more stable, would respond to a more definite and considerable need, and would be more beneficial socially, inasmuch as it would include a larger proportion of the population among its proprietors. And the diminished authority and control exercised by the great capitalist, on account of his diminished ownership of the stock, would in the long run be a good thing for society. It would mean the curtail- ment of a species of power that is easily liable to abuse, wider opportunities of industrial leadership, and a more democratic and stable industrial system. Only a comparatively small portion of the superfluous goods of the country could with advantage be immediately and directly distributed among needy individuals. The greater part would do more good if it were given to re- ligious and benevolent institutions and enterprises. Churches, schools, scholarships, hospitals, asylums, housing projects, insurance against unemployment, sickness, and old age, and benevolent and scientific purposes generally, — constitute the best objects and agencies of effective distri- bution. By these means social and individual efficiency 314 DISTRIBUTIVE JUSTICE would be so improved within a few years that the distress due to economic causes would for the most part have dis- appeared. The proposition that men are under moral obligation to give away the greater portion of their superfluous goods or income is, indeed, a " hard saying." Not improbably it will strike the majority of persons who read these pages as extreme and fantastic. No Catholic, however, who knows the traditional teaching of the Church on the right use of wealth, and who considers patiently and seriously the magnitude and the meaning of human distress, will be able to refute the proposition by reasoned arguments. In- deed, no man can logically deny it who admits that men are intrinsically sacred, and essentially equal by nature and in their claims to a reasonable livelihood from the common heritage of the earth. The wants that a man supplies out of his superfluous goods are not necessary for rational existence. For the most part they bring him merely irrational enjoyment, greater social prestige, or in- creased domination over his fellows. Judged by any rea- sonable standard, these are surely less important than those needs of the neighbour which are connected with humane living. If any considerable part of the comm.unity re- jects these propositions the explanation will be found not in a reasoned theory, but in the conventional assumption that a man may do what he likes with his own. This as- sumption is adopted without examination, without criti- cism, without any serious advertence to the great moral facts that ownership is stewardship, and that the Creator intended the earth for the reasonable support of all the children of men. A False Conception of Welfare and Superfluous Goods If all the present owners of superfluous goods were to carry out their own conception of the obligation, the amount distributed would be only a fraction of the real DUTY OF DISTRIBUTING SUPERFLUOUS WEALTH 315 superabundance. Let us recall the definition of absolute superfluity as, that portion of individual or family income which is not required for the reasonable maintenance of life and social position. It allows, of course, a reasonable provision for the future. But the great majority of pos- sessors, as well as perhaps the majority of others, do not interpret their needs, whether of life or social position, in any such strict fashion. Those who acquire a surplus over their present absolute and conventional needs, gen- erally devote it to an expansion of social position. They move into larger and more expensive houses, thereby in- creasing their assumed requirements, not merely in the matter of housing, but as regards food, clothing, amuse- ments, and the conventions of the social group with which they are affiliated. In this way the surplus which ought to have been distributed is all absorbed in the acquisition and maintenance of more expensive standards. All classes of possessors adopt and act upon an exaggerated conception of both the strict and the conventional neces- sities. In taking this course, they are merely subscribing to the current theory of life and welfare. It is commonly assumed that to be worth while life must include the con- tinuous and indefinite increase of the number and variety of wants, and a corresponding growth and variation in the means of satisfying them. Very little endeavour is made to distinguish between kinds of wants, or to ar- range them in any definite scale of moral importance. Desires for purely physical goods, such as, food, drink, adornment, and sense gratifications generally, are put on the same level with the demands of the spiritual, moral, and intellectual faculties. The value and importance of any and all wants is determined mainly by the criterion of enjoyment. In the great majority of cases this means a preference for the goods and experiences that minister to the senses. Since these satisfactions are susceptible of in- definite increase, variety, and cost, the believer in this 3l6 DISTRIBUTIVE JUSTICE theory of life- values readily assumes that no practical limit can be set to the amount of goods or income that will be required to make life continuously and progressively worth living. Hence the question whether he has super- fluous goods, how much of a surplus he has, or how much he is obliged to distribute, scarcely occurs to him at all. Everything that he possesses or is likely to possess, is in- cluded among the necessaries of life and social position. He adopts as his working theory of life those propositions which were condemned as " scandalous and pernicious " by Pope Innocent XI in 1679: "It is scarcely possible to find among people engaged in worldly pursuits, even among kings, goods that are superfluous to social position. Therefore, hardly any one is bound to give alms from this source." The practical consequences of this false conception of welfare are naturally most conspicuous among the rich, especially the very rich, but they are also manifest among the comfortable and middle classes. In every social group above the limit of very moderate circumstances, too much money is spent for material goods and enjoyments, and too little for the intellectual, religious, and altruistic things of life. The True Conception of Welfare Tnis working creed of materialism is condemned by right reason, as well as by Christianity. The teaching of Christ on the worth of material goods is expressed sub- stantially in the following texts : ** Woe to you rich." "Blessed are you poor." " Lay not up for yourselves treasures on earth." " For a man's life consisteth not in the abundance of things that he possesseth." " Be not solicitous as to what you shall eat, or what you shall drink, or what you shall put on." " Seek ye first the kingdom of God and his justice, and all these things shall be added unto you." " You cannot serve God and Mammon." DUTY OF DISTRIBUTING SUPERFLUOUS WEALTH 317 "If thou wouldst be perfect, go, sell what thou hast and give to the poor, and come follow me." Reason informs us that neither our faculties nor the goods that satisfy them are of equal moral worth or importance. The in- tellectual and spiritual faculties are essentially and intrin- sically higher than the sense faculties. Only in so far as they promote, either negatively or positively, the develop- ment of the mind and soul have the senses any reasonable claim to satisfaction. They have no value in themselves; they are merely instruments to the welfare of the spirit, the intellect, and the disinterested will. Right life con- sists, not in the indefinite satisfaction of material wants, but in the progressive endeavour to know the best that is to be known, and to love the best that is to be loved ; that is, God and His creatures in the order of their importance. The man who denies the intrinsic superiority of the soul to the senses, who puts sense gratifications on the same level of importance as the activities of mind, and spirit, and disinterested will, logically holds that the most degrad- ing actions are equally good and commendable with those which mankind approves as the noblest. His moral stand- ard does not differ from that of the pig, and he himself is on no higher moral level than the pig. Those who accept the view of life and welfare taught by Christianity and reason cannot, if they take the trouble to consider the matter, avoid the conclusion that the amount of material goods which can be expended in the rational and justifiable satisfaction of the senses, is very much smaller than is to-day assumed by the great majority of persons. Somewhere between five and ten thousand dol- lars a year lies the maximum expenditure that any family can reasonably devote to its material wants. This is inde- pendent of the outlay for education, religion, and charity, and the things of the mind generally. In the overwhelm- ing majority of cases in which more than five to ten thou- sand dollars are expended for the satisfaction of material 3l8 DISTRIBUTIVE JUSTICE needs, some injury is done to the higher life. The inter- ests of health, intellect, spirit, or morals would be better promoted if the outlay for material things were kept below the specified limit. The distribution advocated in this chapter is obviously no substitute for justice or the deeds of justice. Inas- much, however, as complete justice is a long way from realisation, a serious attempt by the possessors of true superfluous goods to fulfil their obligations of distribu- tion would greatly counteract and soften existing injustice, inequality, and suffering. Hence, benevolent giving de- serves a place in any complete statement of proposals for a better distribution of wealth. Moreover, we are not likely to make great advances on the road of strict justice until we acquire saner conceptions of welfare, and a more effective notion of brotherly love. So long as men put the senses above the soul, they will be unable to see clearly what is justice, and unwilling to practise the little that they are able to see. Those who exaggerate the value of sense gratifications cannot be truly charitable, and those who are not truly charitable cannot perform adequate justice. The achievement of social justice requires not merely changes in the social mechanism, but a change in the social spirit, a reformation in men's hearts. To this end nothing could be more immediately helpful than a comprehensive recog- nition of the stewardship of wealth, and the duty of distributing superfluous goods. REFERENCES ON SECTION III Ely: Monopolies and Trusts. Macmillan; 1900. Van Hise: Concentration and Control. Macmillan; 1912. Stevens : Industrial Combinations and Trusts. Macmillan ; 1913. Russell: Business, the Heart of the Nation. John Lane; 191 1. Garriguet : Regime du Travail. Paris ; 1909. The Social Value of the Gospel. St. Louis ; 191 1. HoBSON : Work and Wealth, a Human Valuation. Macmillan ; 1914. West : The Inheritance Tax. New York ; 1908. DUTY OF DISTRIBUTING SUPERFLUOUS WEALTH 319 Seligman : Progressive Taxation. Princeton ; 1908. The Income Tax. New York; 1913. BouQUiLLON : De Virtutibus Theologicis. Brugis ; 1890. Also, the works of Taussig, Devas, Hobson, Antoine, Pesch, Carver, Vermeersch, Nearing, and King which are cited in connection with the introductory chapter. SECTION IV THE MORAL ASPECT OF WAGES CHAPTER XXII SOME UNACCEPTABLE THEORIES OF WAGE-JUSTICE " It may be that we are not merely chasing a will-o'-the- wisp when we are hunting for a reasonable wage, but we are at any rate seeking the unattainable." Thus wrote Professor Frank Haight Dixon in a paper read at the twenty-seventh annual meeting of the Amer- ican Economic Association, December, 1914. Whether he reflected the opinion of the majority of the economists, he at least gave expression to a thought that has frequently suggested itself to every one who has gone into the wage question free from prejudices and preconceived theories. One of the most palpable indications of the difficulty to which Professor Dixon refers is the number of doctrines concerning wage justice that have been laboriously built up during the Christian era, and that have failed to approve themselves to the majority of students and thinkers. In the present chapter the attempt is made to set forth some of the most important of these doctrines, and to show wherein they are defective. They can all be grouped under the following heads: The Prevailing-Rate Theory; Exchange-Equivalence Theories; and the Productivity Theories. I. The Prevailing-Rate Theory This is not so much a systematic doctrine as a rule of expediency deyised to meet concrete situations in the ab- 323 324 DISTRIBUTIVE JUSTICE sence of any better guiding principle. Both its basis and its nature are well exemplified in the following extract from the " Report of the Board of Arbitration in the Matter of the Controversy Between the Eastern Railroads and the Brotherhood of Locomotive Engineers :"^ *' Pos- sibly there should be some theoretical relation for a given branch of industry between the amount of the income that should go to labour and the amount that should go to capital; and if this question were decided, a scale of wages might be devised for the different classes of employes which would determine the amount rightly absorbed by labour. . . . Thus far, however, political economy is un- able to furnish such a principle as that suggested. There is no generally accepted theory of the division between capital and labour. ... " What, then, is the basis upon which a judgment may be passed as to whether the existing wage scale of the engineers in the Eastern District is fair and reasonable? It seems to the Board that the only practicable basis is to compare the rates and earnings of engineers in the East- ern District with those of engineers in the Western and Southern Districts, and with those of other classes of rail- way employes." Six of the seven men composing this board of arbitra- tion subscribed to this statement. Of the six one is the president of a great state university, another is a successful and large-minded merchant, the third is a great building contractor, the fourth is a distinguished lawyer, the fifth is a prominent magazine editor, and the sixth is a railway president. The dissenting member represented the em- ployes. Since the majority could not find in any generally accepted theory a principle to determine the proper division of the product between capital and labour, they were per- haps justified in falling back upon the practical rule that they adopted. 1 Page 47. SOME UNACCEPTABLE THEORIES OF WAGE- JUSTICE 325 Not in Harmony with Justice From the viewpoint of justice, however, this rule or standard is utterly inadequate. It is susceptible of two interpretations. " Wages prevailing elsewhere," may mean either the highest rates or those most frequently oc- curring. According to the latter understanding, only those wages which were below the majority rates should be raised, while all those above that level ought to be lowered. In almost all cases this would mean a reduction of the highest wages, as these are usually paid only to a minority of the workers of any grade. The adoption of the highest existing rates as a standard would involve no positive losses, but it would set a rigid limit to all possible gains in the future. According to either interpretation of the prevailing rate, the increases in wages which a powerful labour union seeks to obtain are unjust until they have been established as the prevailing rates. Thus, the attor- ney for the street railways of Chicago dissented from the increases in wages awarded to the employes by the majority of the board of arbitration in the summer of 191 5 because, " these men are already paid not only a fair wage but a liberal wage, when the wages in the same employment and the living conditions in other large cities are taken into consideration, or when comparison is made of these men's annual earnings with the earnings in any comparable line of work in the city of Chicago." ^ In other words, the dominant thing is always the right thing. Justice is determined by the preponderance of economic force. Now, a rule such as this, which condemns improvement until improvement has somehow become general, which puts a premium upon physical and intellectual strength, and which disregards entirely the moral claims of human needs, efforts, and sacrifices, is obviously not an adequate measure of either reason or justice. And we may well 1 The Chicago Daily Tribune, July 17, 1915. 326 DISTRIBUTIVE JUSTICE doubt that it would be formally accepted as such by any competent and disinterested student of industrial relations. 11. Exchange-Equivalence Theories According to these theories, the determining factor of wage justice is to be found in the wage contract. The basic idea is the idea of equality, inasmuch as equality is the fundamental element in the concept of justice. The prin- ciple of justice requires that equality should be maintained between what is owed to a person and what is returned to him, between the kinds of treatment accorded to different persons in the same circumstances. Similarly it requires that equality should obtain between the things that are exchanged in onerous contracts. An onerous contract is one in which both parties undergo some privation, and neither intends to confer a gratuity upon the other. Each exchanger desires to obtain the full equivalent of the thing that he transfers. Since each is equal in personal dignity an intrinsic worth to the other, each has a strict right to this full equivalent. Owing to the essential moral equality of all men, no man has a right to make of another a mere instrument to his own interests through physical force or through an onerous contract. Men have equal rights not only to subsist upon the earth, but to receive benefits from the exchange of goods. The Rule of Equal Gains The agreement between employer and employe is an onerous contract ; hence it ought to be made in such terms that the things exchanged will be equal, that the remunera- tion will be equal to the labour. How can this equiva- lence be determined and ascertained? Not by a direct comparison of the two objects, work and pay, for their differences render them obviously incommensurable. Some third term, or standard, of comparison is required SOME UNACCEPTABLE THEORIES OF WAGE-JUSTICE 327 in which both objects can find expression. One such standard is individual net advantage. Inasmuch as the aim of the labour contract is reciprocal gain, it is natural to infer that the gains ought to be equal for the two parties. Net gain is ascertained by deducting in each case the utility transferred from the utility received; in other words, by- deducting the privation from the gross return. The good received by the employer when diminished by or weighed against the amount that he pays in wages should be equal to the good received by the labourer when diminished by or weighed against the inconvenience that he undergoes through the expenditure of his time and energy. Hence the contract should bring to employer and employe equal amounts of net advantage or satisfaction. Plausible as this rule may appear, it is impracticable, inequitable, and unjust. In the vast majority of labour contracts it is impossible to know whether both parties obtain the same quantity of net advantage. The gains of the employer can, indeed, be frequently measured in terms of money, being the difference between the wages paid to and the specific product turned out by the labourer. In the case of the labourer no such process of deduction is possible ; for advantage and expenditure are incommensur- able. We cannot subtract the labourer's privation, that is, his expenditure of time and energy, from his gross ad- vantage, that is, his wages. How can we know or measure the net benefit obtained by a man who shovels sand ten hours for a wage of two dollars? How can we deduct his pain-cost from or weigh it against his compensation? So far as the two sets of advantages are comparable at all, those of the employe would seem to be always greater than those of the employer. A wage of seventy-five cents a day enables the labourer to satisfy the most important wants of life. Weighed against this gross advantage, his pain-cost of toil is relatively insignificant. His net advan- tage is the greatest that a man can enjoy, the continuation 328 DISTRIBUTIVE JUSTICE of his existence. The net advantage received by the em- ployer from such a wage contract is but a few cents, the equivalent of a cigar or two. Even if the wage be raised to the highest level yet reached by any wage earner, the net advantage to the labourer, namely, his livelihood, will be greater than the net advantage to the employer from that single contract. Moreover, the sum total of an em- ployer's gains from all his labour contracts is less quan- titatively than the sum total of the gains obtained by all his employes. The latter gains provide for many liveli- hoods, the former for only one. Again, no general rate of wages could be devised which would enable all the members of a labour group to gain equally. Differences in health, strength, and intelligence would cause differ- ences in the pain-cost involved in a given amount of labour; while differences in desires, standards of living, and skill in spending would bring about differences in the satisfactions derived from the same compensation. Fi- nally, various employers would obtain various money gains from the same wage outlay, and various advantages from the same money gains. Hence if the rule of equality of net advantages were practicable it would be inequitable. It is also fundamentally unjust because it ignores the moral claims of needs, efforts, and sacrifices as regards the labourer. As we have seen in the chapter on profits in competitive conditions, and as we shall have occasion to recognise again in a later chapter, no canon or scheme of distributive justice is acceptable that does not give ade- quate consideration to these fundamental attributes of human personality. The Rule of Free Contract Another form of the exchange equivalence theory would disregard the problem of equality of gains, and assume that justice is realised whenever the contract is free from force or fraud. In such circumstances both parties gain SOME UNACCEPTABLE THEORIES OF WAGE- JUSTICE 329 something, and presumably are satisfied; otherwise, they would not enter the contract. Probably the majority of employers regard this rule as the only available measure of practicable justice. The majority of economists likewise subscribed to it during the first half of the nineteenth century. In the words of Henry Sidgwick, " the teaching of the political economists pointed to the conclusion that a free exchange, without fraud or coercion, is also a fair exchange." -^ Apparently the economists based this teach- ing on the assumption that competition was free and gen- eral among both labourers and employers. In other words, the rule as understood by them was probably iden- tical with the rule of the market rate, which we shall examine presently. It is not at all likely that the econo- mists here referred to would have given their moral ap- proval to those *' free " contracts in which the employer pays starvation wages because he takes advantage of the ignorance of the labourer, or because he exercises the power of monopoly. No matter by whom it is or has been held, the rule of free contract is unjust. In the first place, many labour contracts are not free in any genuine sense. When a labourer is compelled by dire necessity to accept a wage that is insufficient for a decent livelihood, his consent to the contract is free only in a limited and relative way. It is what the moralists call '' voluntarium imperfectiimf It is vitiated to a substantial extent by the element of fear, by the apprehension of a cruelly evil alternative. The labourer does not agree to this wage because he prefers it to any other, but merely because he prefers it to unem- ployment, hunger, and starvation. The agreement to which he submits in these circumstances is no more free than the contract by which the helpless wayfarer ^ives up his purse to escape the pistol of the robber. While the 1 Article on " Political Economy and Ethics," in Palgrave's Dictionary of Political Economy. 330 DISTRIBUTIVE JUSTICE latter action is free in the sense that it is chosen in prefer- ence to a violent death, it does not mean that the wayfarer gives, or intends to give, the robber the right of ownership in the purse. Neither should the labourer who from fear of a worse evil enters a contract to work for starvation wages, be regarded as transferring to the employer the full moral right to the services which he agrees to render. Like the wayfarer, he merely submits to superior force. The fact that the force imposed upon him is economic instead of physical does not affect the morality of the transaction. To put the matter in another way, the equality which justice requires is wanting in an oppressive labour con- tract because of the inequality existing between the con- tracting parties. In the words of Professor Ely : " Free contract supposes equals behind the contract in order that it may produce equality." ^ Again, the rule of free contract is unjust because it takes no account of the moral claims of needs. A man whose only source of livelihood is his labour does wrong if he accepts a starvation wage willingly. Such a con- tract, however free, is not according to justice because it disregards the requirements of reasonable life. No man has a right to do this, any more than he has a right to perpetrate self mutilation or suicide. The Rule of Market Value A third method of interpreting exchange equivalence is based upon the concept of value. Labour and compensa- tion are thought to be equal when the value of one is equal to the value of the other. Then the contract is just and the compensation is just. The only objection to these propositions is that they are mere truisms. What does value mean, and how is it to be determined? If it is to receive an ethical signification; if the value of labour is 1 " Property and Contract," II, 603. SOME UNACCEPTABLE THEORIES OF WAGE-JUSTICE 33 1 to be understood as denoting not merely the value that labour will command in a market, but the value that labour ought to have, — the statement that wages should equal the value of labour becomes merely an identical proposition. All that it tells us is that wages ought to be what they ought to be. In its simplest economic sense value denotes purchasing power, or importance in exchange. As such, it may be either individual or social; that is, it may mean the ex- change importance attributed to a commodity by an in- dividual, or that attributed by a social group. In a competitive society social value is formed through the higgling of the market, and is expressed in market price. Now individual value is utterly impracticable as a meas- ure of exchange equivalence in the wage contract. Since the value attributed to labour by the employer differs in the great majority of instances from that estimated by the labourer himself, it is impossible to determine which is the true value, and the proper measure of just wages. The doctrine that the social value or market price of labour is also the ethical value or just price, is sometimes called the classical theory, inasmuch as it was held, at least implicitly, by the majority of the early economists of both France and England.^ Under competitive condi- tions, said the Physiocrats, the price of labour as of all other things corresponds to the cost of production ; that is, to the cost of subsistence for the labourer and his family. This is the natural law of wages, and being natural it is also just. Adam Smith likewise declared that competitive wages were natural wages, but he refrained from the ex- plicit assertion that they were just wages. Nevertheless his abiding and oft-expressed faith in the theory that men's powers were substantially equal, and in the social be- neficence of free competition, implied that conclusion. Although the great majority of his followers denied that 1 Cf . " L' Idee du Juste Salaire," by Leon Poller, ch. iil. Paris ; 1903. 332 DISTRIBUTIVE JUSTICE economics had moral aspects, and sometimes asserted that there was no such thing as just or unjust wages, their teaching tended to convey the thought that competitively fixed wages were more or less in accordance with justice. As noted above, their belief in the efficacy of competition led them to the inference that a free contract is also a fair contract. By a free contract they meant for the most part one that is made in the open market, that is governed by the forces of supply and demand, and that, conse- quently, expresses the social economic value of the things exchanged. All the objections that have been brought against the rule of the prevailing rate apply even more strongly to the doctrine of the market rate. The former takes as a stand- ard the scale of wages most frequently paid in the market, while the latter approves any scale that obtains in any group of labourers or section of the market. Both accept as the ultimate determinant of wage justice the prepon- derance of economic force. Neither gives any considera- tion to the moral claims of needs, efforts, or sacrifices. Unless we are to identify justice with power, might with right, we must regard these objections as irrefutable, and the market value doctrine as untenable. The Mediaeval Theory Another exchange-equivalence theory which turns upon the concept of value is that found in the pages of the mediaeval canonists and theologians. But it interprets value in a different sense from that which we have just considered. As the measure of exchange equivalence the mediaeval theory takes objective value, or true value. However, the proponents of this view did not formally apply it to wage contracts, nor did they discuss system- atically the question of just wages. They were not called upon to do this; for they were not confronted by any con- siderable class of wage earners. In the country the num- SOME UNACCEPTABLE THEORIES OF WAGE-JUSTICE 333 ber of persons who got their living exclusively as employes was extremely small, while in the towns the working class was composed of independent producers who sold their wares instead of their labour.^ The question of fair com- pensation for the town workers was, therefore, the ques- tion of a fair price for their products. The latter question was discussed by the mediaeval writers formally, and in great detail. Things exchanged should have equal values, and commodities should always sell for the equivalent of their values. By what rule was equality to be measured and value determined? Not by the subjective apprecia- tions of the exchangers, for these would sometimes sanc- tion the most flagrant extortion. Were no other help available, the starving man would give all he possessed for a loaf of bread. The unscrupulous speculator could monopolise the supply of foodstuffs, and give them an exorbitantly high value which purchasers would accept and pay for rather than go hungry. Hence we find the mediaeval writers seeking a standard of objective value which should attach to the commodity itself, not to the varying opinions of buyers and sellers. In the thirteenth century Albertus Magnus ^ and Thomas Aquinas ^ declared that the proper standard was to be found in labour. A house is worth as many shoes as the labour embodied in the latter is contained in the labour embodied in the former. It is worthy of note that the diagram which Albertus Magnus presents to illustrate this formula of value and exchange had been used centuries before by Aristotle. It is likewise noteworthy that this conception of ethical value bears a striking resemblance to the theory of economic value upheld by Marxian Socialists. However, neither Aristotle nor the Schoolmen asserted that all kinds of labour had equal value. 1 Poller, op. cit., pp. 2,3, sq. ; Ryan, " A Living Wage," pp. 26, sq. 2 " Ethica," lib. 5, tr. 2, cap. 5. 3 "Comment, ad Eth.," XXI, 172. 334 DISTRIBUTIVE JUSTICE Now this mediaeval labour-measure of value could be readily applied only to cases of barter, and even then only when the value of different kinds of labour had already been determined by some other standard. Accordingly we find the mediaeval writers expounding and defending a more general interpretation of objective or true value. This was the concept of normal value; that is, the aver- age or medium amount of utility attributed to goods in the average conditions of life and exchange. On the one hand, it avoided the excesses and the arbitrariness of in- dividual estimates ; on the other hand, it did not attribute to value the characters of immutability and rigidity. Con- trary to the assumptions of some modern writers, the Schoolmen never said that value was something as fixedly inherent in goods as physical and chemical qualities. When they spoke of " intrinsic " value, they had in mind merely the constant capacity of certain commodities to satisfy human wants. Even to-day bread has always the intrinsic potency of alleviating hunger, regardless of all the fluctuations of human appraisement. The objectivity that the mediaeval writers ascribed to value was relative. It assumed normal conditions as against exceptional con- ditions. To say that value was objective merely meant that it was not wholly determined by the interplay of supply and demand, but was based upon the stable and universally recognised use-qualities of commodities in a society where desires, needs, and tastes were simple and fairly constant from one generation to another. How or where was this relatively objective value of goods to find concrete expression ? In the " communis aestimatio," or social estimate, declared the canonists. Objective value and just price would be ascertained prac- tically through the judgment of upright and competent men, or preferably through legally fixed prices. But neither the social estimate nor the ordinances of lawmakers SOME UNACCEPTABLE THEORIES OF WAGE-JUSTICE 335 were authorised to determine values and prices arbitrarily. They were obliged to take into account certain objective factors. In the thirteenth and fourteenth centuries, the factors universally recognised as determinative were the utility or use-qualities of goods, but especially their cost of production. Later on, in the sixteenth and seventeenth centuries, risk and scarcity were given considerable promi- nence as value determinants. Now cost of production in the Middle Ages was mainly labour cost; hence the stand- ard of value was chiefly a labour standard. Moreover, this labour doctrine of true value and equality in exchanges was strongly reinforced by another mediaeval principle, according to which labour was the supreme if not the only just title to rewards. How was labour cost to be measured, and the differ- ent kinds of labour evaluated? By the necessary and customary expenditures of the class to which the labourer belonged. Mediaeval society was composed of a few defi- nite, easily recognised, and relatively fixed orders or grades, each of which had its own function in the social hierarchy, its own standard of living, and its moral right to a livelihood in accordance with that standard. Like the members of the other orders, the labourers were conceived as entitled to live in conformity with their customary class- requirements. From this it followed that the needs of the labourer became the main determinant of the cost of pro- duction, and of the value and just price of goods. Inas- much as the standards of living of the various divisions of the workers were fixed by custom, and limited by the restricted possibilities of the time, they afforded a fairly definite measure of value and price, — much more definite than the standard of general utility. To Langenstein, vice chancellor of the University of Paris in the latter half of the fourteenth century, the matter seemed quite simple; for he declared that every one could determine for himself 336 DISTRIBUTIVE JUSTICE the just price of his wares by referring to the customary needs of his rank of Hfe.^ Nevertheless, class needs are not and cannot be a stand- ard of exchange-equivalence. They cannot become a cri- terion of equality, a common denominator, a third term of comparison, between labour and wages. When we say that a given amount of wages is equal to a given content of livelihood, we express a purely economic, positive, and mathematical relation : when we say that a given amount of labour is equal to a given content of livelihood, we are either talking nonsense or expressing a purely ethical rela- tion; that is, declaring that this labour ought to equal this livelihood. In other words, we are introducing a fourth term of comparison ; namely, the moral worth or personal dignity of the labourer. Thus, we have not a single and common standard to measure both labour and wages, and to indicate a relation of equality between them. While class needs directly measure wages, they do not measure labour, either quantitatively, or qualitatively, or under any other aspect or category. Aside from this purely theoretical defect, the canonist doctrine of wage justice was fairly satisfactory as applied to the conditions of the Middle Ages. It assured to the labourer of that day a certain rude comfort, and probably as large a proportion of the product of industry as was practically attainable. Nevertheless it is not a universally valid criterion of justice in the matter of wages; for it makes no provision for those labourers who deserve a wage in excess of the cost of living of their class; nor does it furnish a principle by which a whole class of workers can justify their advance to a higher standard of living. It is not sufficiently elastic and dynamic. 1 Cf . Poller, op. cit., pp. 66-75 ; Ryan, op. cit., pp. 93, 94. SOME UNACCEPTABLE THEORIES OF WAGE-JUSTICE 337 A Modern Variation of the Mediceval Theory In spite of its fundamental impossibility, the concept of exchange-equivalence still haunts the minds of certain Catholic writers.^ They still strive to get a formula to express equality between labour and remuneration. Per- haps the best known and least vulnerable of the attempts made along this line is that defended by Charles An- toine, S. J.^ Justice, he declares, demands an objective equivalence between wages and labour; and objective equivalence is determined and measured by two factors. The remote factor is the cost of decent living for the labourer; the proximate factor is the economic value of his labour. The former describes the minimum to which the worker is entitled; the latter comprises perfect and adequate justice. In case of conflict between the two factors, the first is determinative of and morally superior to the second; that is to say, no matter how small the economic value of labour may seem to be, it never can descend below the requisites of a decent livelihood. Now, neither of these standards is in harmony with the principle of exchange-equivalence, nor capable of serving as a satisfactory criterion of wage justice. Father Antoine argues that labour is always the moral equivalent of a decent livelihood because the worker expends his energies, and gives out a part of his life in the service of his employer. Unless his wage enables the labourer to replace these energies and conserve his life, it is not the equivalent of the service. If the wage falls short of this standard the labourer gives more than he receives, and the contract is essentially unjust. In this conception of equivalence, energy expended, instead of cost of living, be- comes the term of comparison and the common measure of labour and remuneration. Energy expended is, how- 1 Cf . Polier, op. cit., pp. 92-95. 2 " Cours d' ficonomie Sociale," pp. 598, sq. ^^S DISTRIBUTIVE JUSTICE ever, technically incapable of providing such a common standard; for it does not measure both related terms in the same way. The service rendered to the employer is the effect rather than the equivalent of the energy ex- pended; and the compensation is a means to the replace- ment of this energy rather than its formal equivalent. Moreover, the formula does not even furnish an adequate rational basis for the claim to a decent minimum wage. A wage which is merely adequate to the replacement of expended energy and the maintenance of life, is really inadequate to a decent livelihood. Such compensation would cover only physical health and strength, leaving nothing for intellectual, spiritual, and moral needs. As Father Antoine himself admits and contends, the latter needs are among the elements of a decent livelihood, and a wage which does not make reasonable provision for them fails to comply with the minimum requirements of justice. The second factor of " objective equivalence " is even more questionable than the first. To be completely just, says Father Antoine, wages must be not merely adequate to a decent livelihood, but equivalent to the " economic value of the labour" ("la valeur economique du trav- ail"). This "economic value" is determined objectively by the cost of production, the utility of the product, and the movement of supply and demand; subjectively, by the judgment of employers and employes. In case of conflict between these two measures of value, and in case of un- certainty concerning the objective measure, the decision of the subjective determinant must always prevail. These statements are hopelessly ambiguous and confus- ing. If the objective measure of " economic value " is to be understood in a purely positive way, it merely means the wages that actually obtain in a competitive market. In the purely positive or economic sense, the utility of labour is measured by what it will command in the market, the movement of supply and demand is likewise reflected SOME UNACCEPTABLE THEORIES OF WAGE- JUSTICE 339 in market wages, and the determining effect of cost of production is also seen in the share that the market awards to labour after the other factors of production have taken their portions of the product. In other words, the " economic value " of labour is simply its market value. This, however, is not Father Antoine's meaning; for he has already declared that the " economic value "of labour is never less than the equivalent of a decent livelihood, whereas we know that the market value often falls below that level. In his mind, therefore, *' economic value " has an ethical signification. It indicates at least the requisites of decent living, and it embraces more than this in some cases. When? and how much more? Let us suppose a business so prosperous that it returns liberal profits to the employer and the prevailing rate of interest on the capital, and yet shows a surplus sufficient to give all the labourers ten dollars a day. Is '^ cost of production " to be inter- preted here as allowing only the normal rate of profits and interest to the business man and the capitalist, leaving the residue to labour ? Or is it to be understood as requiring that the surplus be divided among the three agents of pro- duction? In other words, is the ''economic value" of labour in such cases to be determined by some ethical prin- ciple which tells beforehand how much the other agents than labour ought to receive? If so, what is this principle or formula? None of these questions is satisfactorily answered in Father Antoine's pages. They are all to be solved by having recourse to the subjective determinant of " eco- nomic value"; namely, the judgment of employers and employes. Thus his proximate factor of justice in wages, his formula of complete as against minimum just wages, turns out to be something entirely subjective, and more or less arbitrary. It is in no sense a measure of the equiva- lence between work and pay. Moreover, it is inadequate as a measure of justice. 340 DISTRIBUTIVE JUSTICE Should the majority of both employers and employes fix the " economic value " of the labour of carpenters at five dollars a day, there v^ould be no certainty that this decision v^as correct, and that this figure represented just v^ages. Should they determine upon a rate of fifty dollars a day, v^e could not be sure that their decision v^as unjust. Un- doubtedly the combined judgment of employers and em- ployes w^ill set a fairer wage than one fixed by either party alone, since it vi^ill be less one-sided; but there is no suffi- cient reason for concluding that it will be in all cases com- pletely just. Undoubtedly employers and employes know what wages an industry can afford at prevailing prices, on the assumption that business ability and capital are to have a certain rate of return; but there is no certainty that the prevailing prices are fair, or that the assumed rates of profits and interest are fair. In a word, the device is too arbitrary. To sum up the entire discussion of exchange-equivalence theories: Their underlying concept is fundamentally un- sound and impracticable. All of them involve an attempt to compare two entities which are utterly incommensurate. There exists no third term, or standard, or objective fact, which will inform men whether any rate of wages is the equivalent of any quantity of labour. III. Productivity Theories The productivity concept of wage justice appears in a great variety of forms. The first of them that we shall consider is advocated mainly by the Socialists, and is usually referred to as the theory of the " right to the whole product of labour." ^ 1 Poller, op. cit., pp. 219^359 ; Menger, " The Right to the Whole Produce of Labour " ; English Translation. London ; 1899. SOME UNACCEPTABLE THEORIES OF WAGE- JUSTICE 34I Labour's Right to the Whole Product We have seen that Adam Smith's belief in the nor- mality and beneficence of free competition would have logically led him to the conclusion that competitive wages were just; and we know that this doctrine is implicit in his writings. On the other hand, his theory that all value is determined by labour would seem to involve the infer- ence that all the value of the product belongs to the labourer. As a matter of fact, Smith restricted this con- clusion to primitive and pre-capitalist societies. Appar- ently he, and his disciples in an even larger degree, was more interested in describing the supposed beneficence of competition than in justifying the distribution that re- sulted from the competitive process. The early English Socialists were more consistent. In 1793 William Godwin, whom Anton Menger calls "the first scientific Socialist of modern times," laid down in substance the doctrine that the labourer has a right to the whole product.^ In 1805 Charles Hall formulated and defended the doctrine with greater precision and con- sistency.^ In 1824 the doctrine was stated more funda- mentally, systematically, and completely by William Thompson.^ He accepted the labour theory of value laid down by Adam Smith, and formally derived therefrom the ethical conclusion that the labourer has a right to the whole product. " Thompson and his followers are only original in so far as they consider rent and interest to be unjust deductions, which violate the right of the labourer to the whole product of his labour." '^ He denounced the laws which empowered the land owner and the capitalist to appropriate value not created by them, and gave to the 1 " Enquiry Concerning Political Justice." 2 " On the Effects of Civilisation on the People of European States." 3 " An Inquiry Into the Principles of the Distribution of Wealth Most Conducive to Human Happiness." * Menger, op. cit., p. 56. 342 DISTRIBUTIVE JUSTICE value thus appropriated the name, '' surplus value." In the use of this term he anticipated Karl Marx by several years. His doctrines were adopted and defended by many other English Socialist writers, and were introduced into France by the followers of Saint-Simon. " From his works," says Menger, " the later Socialists, the Saint- Simonians, Proudhon, and above all, Marx and Rodbertus, have directly or indirectly drawn their opinions." ^ Although Saint-Simon never accepted the doctrine of the labourer's right to the whole product, his disciples, particularly Enfantin and Bazard, taught it implicitly. In a just social state, they maintained, every one would be expected to labour according to his capacity, and would be rewarded according to his product.^ Perhaps the most theoretical and extreme statement of the theory that we are considering is found in the writings of P. J. Proudhon.^ He maintained that the real value of products was determined by labour time, and that all kinds of labour should be regarded as equally effective in the value-creating process, and he advocated therefore equality of wages and salaries. For the realisation of this ideal he drew the outlines of a semi-anarchic social order, of which the main feature was gratuitous public credit. Neither his theories nor his proposals ever obtained any considerable number of adherents. A milder and better reasoned form of the theory was set forth by Karl J. Rodbertus.^ Professor Wagner calls him, '' the first, the most original, and the boldest repre- sentative of scientific Socialism in Germany." Yet, as Menger points out, Rodbertus derived many of his doc- trines from Proudhon and the Saint-Simonians. He ad- mitted that in a capitalist society the value of commodities 1 Op. cit, p. 51. 2 Cf. Menger, op. cit., pp. 62-73. 3 " Qu' est-ce que la propriete ou recherches sur la principe du droit et du gouvernment." 1840. *"Zur Erkentniss unserer staatswirthschaftlichen Zustande," 1842. SOME UNACCEPTABLE THEORIES OF WAGE-JUSTICE 343 does not always correspond to the labour embodied in them, and that different kinds of labour are productive in different degrees. Therefore, he had recourse to the con- cept of a normal, or average, day's labour in any group, and would have the various members of the group re- munerated with reference to this standard. This was to be brought about by a centralised organisation of industry in which the whole product would ultimately go to labour, and the share of the individual worker would be deter- mined by his contribution of socially necessary labour. Although Karl Marx adopted and formulated in his own terms the theory that value is determined by labour, he did not thence deduce the conclusion that labour has a right to the whole product.^ Being a materialist, he con- sistently rejected conceptions of abstract justice or injus- tice, rights or wrongs. In opposition to the methods of his predecessors, he endeavoured to discover the historical and positive forces which determined the actual distribu- tion, and to derive therefrom the laws that were neces- sarily preparing the way for a new social order. While he contended that rent receivers and interest receivers ap- propriated the surplus value created by labour, he refrained from stigmatising this process as morally wrong. It was merely a necessary element of the capitalist system. To call it unjust was in Marx' view to use language without meaning. As well might one speak of the injustice of a hurricane or an avalanche. Not the preaching of abstract justice, but the inevitable transformation of the capitalist into the collectivist organisation of industry, would enable labour to obtain its full product. Nevertheless, it is probably true that a majority of the followers of Marx have drawn from his labour theory of value the inference that all the value of the product be- longs by a moral right to the labourer. So deeply fixed in the human conscience is the conception of justice, and 1 " Das Kapital," 1867. 344 DISTRIBUTIVE JUSTICE SO general is the conviction of the labourer's right to his product, that most Socialists have not been able to main- tain a position of consistent economic materialism. Indeed, Marx himself did not always succeed in evading the influence and the terminology of idealistic conceptions. He frequently thought and spoke of the Socialist regime as not only inevitable but as morally right, and of the capitalist system as morally wrong. Despite his rigid, materialistic theorising, his writings abound in passionate denunciation of existing industrial evils, and in many sorts of " unscientific " ethical judgments.^ In so far as the right to the whole product of labour has been based upon the labour theory of value, it may be summarily dismissed from consideration. The value of products is neither created nor adequately measured by labour; it is determined by utility and scarcity. Labour does, indeed, affect value, inasmuch as it increases utility and diminishes scarcity, but it is not the only factor that influences these categories. Natural resources, the desires and the purchasing power of consumers determine value quite as fundamentally as does labour, and cause it to vary out of proportion to the labour expended upon a com- modity. To-day there are probably not many adherents of the right-to-the-whole-product doctrine who attempt to base it upon any theory of value. The majority appeal to the simple and obvious fact that the labourers, together with the active directors of industry, are the only human beings who expend energy in the productive process. The only labour that the capitalist and the landowner perform in return for the interest and rent that they respectively re- ceive, consists in choosing the particular goods in which their money is to be invested. As capitalist and land- owner, they do not participate in the turning out of prod- ucts. They are owners but not operators of the factors 1 Cf . Polier, op. cit., pp. 352, sq. SOME UNACCEPTABLE THEORIES OF WAGE-JUSTICE 345 of production. In the sense, therefore, of active agents the labourers and the business men are the only producers. Whether land and capital should be called productive^ whether the product should be regarded as produced by land and capital as well as by labour and undertaking activity, is mostly a matter of terminology. Inasmuch as they are instrumental in bringing forth the product, land and capital may properly be designated as productive, but not in the same sense as labour and business energy. The former are passive factors and instrumental causes of the product, while the latter are active factors and original causes. Moreover, the former are non-rational entities, while the latter are attributes of human beings. As we have seen in former chapters, it is impossible to prove that mere ownership of a productive thing, such as a cow, a piece of land, or a machine, necessarily creates a right to either the concrete or the conventional product. The formula, ''res fnictificat domino," is not a self evi- dent proposition. Nor are there any premises available from which the formula can be logically and necessarily deduced. On the other hand, we cannot prove conclu- sively that ownership of productive property does not give a right to the product. Whence it follows that the owners of land and capital have at least a presumptive claim to take rent and interest from their possessions. Moreover, those owners of capital who would not have saved money without the hope of interest have a just claim thereto on account of their sacrifices in saving. Would the State be justified in abolishing rent and in- terest, and thus enabling labour to obtain the whole prod- uct? Conceivably this result might be brought about under the present system of private ownership, or through the substitution of collectivism. Were the change made by the former method land and capital would no longer be sought or have value on account of their annual rev- enues, but only as receptacles of saving. They would be 346 DISTRIBUTIVE JUSTICE desired solely as means of accumulating stores of goods which might be exchanged for articles of consumption some time in the future. While we cannot estimate even approximately the decline that would thus occur in the value of land and capital, we may safely assert that it would be considerable. Unless the proprietors received adequate compensation for this loss, they would be com- pelled to suffer obvious and grave injustice. Any attempt, however, to carry out such a scheme, either with or with- out compensation, would inevitably fail. Rent might be terminated through the Single Tax, but interest could not be abolished by any mere legal prohibition. Nor does Socialism afford a way out; for, as we have seen in a former chapter, it is an impracticable system. Conse- quently the theory of the right to the whole product of labour is confronted by the final objection that its realisa- tion would involve greater evils and injustices than those which it seeks to abolish. Finally, the theory is radically incomplete. It professes to describe the requirements of justice as between the land- owners and capitalists on the one side, and the wage earners on the other; but it provides no rule for determining dis- tributive justice as between different classes of labour. In none of its forms does it provide any comprehensive rule or principle to ascertain the difference between the products of different labourers, and to decide how the product be- longing to any group of men as a whole should be divided among the individual members. Does the locomotive engineer produce more than the section hand, the book- keeper more than the salesman, the ditch digger more than the teamster? These and countless similar questions are, from the nature of the productive process, unanswerable. Even if it were ethically acceptable, the doctrine of the right to the whole product is hopelessly inadequate. As intimated above, the notion that if the labourer re- ceives compensation according to his product he receives SOME UNACCEPTABLE THEORIES OF WAGE-JUSTICE 347 just compensation, is one of the most prevalent and funda- mental concepts in the controversy about wage justice. Hence we find it in certain theories which reject the doc- trine of the right to the whole product. According to these theories, not only the labourer but all the agents of production should be rewarded in proportion to their pro- ductive contributions. Instead of the whole product, the worker ought to receive that portion of it which corre- sponds to his specific productivity, that is, that portion of the product which represents his productive influence as compared with the productive efficacy of land, capital, and business energy. Clark's Theory of Specific Productivity One of the theories referred to in the last paragraph is that which has been elaborated in great detail and with great ingenuity by Professor John Bates Clark. As stated by himself in the opening sentence of the preface to his " Distribution of Wealth," its main tenet is, " that the distribution of the income of society is controlled by a natural law, and that this law, if it worked without fric- tion, would give to every agent of production the amount of wealth which that agent creates." In a regime of per- fect competition, therefore, the labourer would get, not the whole product of industry, but the whole product due to his own exertions. It is impossible, and indeed unnecessary, to enter upon an extended examination of this contention. It will be sufficient to state in a summary way the most obvious and cogent objections. Without making any examination of Professor Clark's theory, we should expect to find it un- convincing. For the productive process is by analogy an organic process, in which every factor requires the co- operation of every other factor in order to turn out even the smallest portion of the product. Each factor is in its own order the cause of the whole product. Consequently 34^ DISTRIBUTIVE JUSTICE no physical portion of the product can be set aside and designated as wholly due to any one factor. Can we not, however, distinguish the proportionate productive influence exerted by each factor, and the proportion of the product which represents such productive influence? This is the question to which Professor Clark addresses himself with much ingenuity, subtlety, and labour, and to which he returns an affirmative answer.^ He contends that the amount of product added by the presence of the least productive labourer in a group or establishment describes the productivity of that and every other labourer for whom the man in question can be sub- stituted. Nevertheless this marginal labourer had the use of some capital, no matter how little or how poor; conse- quently the increment of product which follows his activity is partly due to capital. It represents something other than his own productive power. If his wage equals the value of this increment of product, he is receiving some- thing more than his specific product. In the second place, Professor Clark maintains that the difference between what a labourer produces when he uses the whole of a certain supply of capital and what he pro- duces when he has shared that capital with another labourer, represents the specific productivity of the relin- quished capital. Let us assume that in a given case the difference is ten units of product. When the first man had the whole capital to himself, the product was one hun- dred units; when he shares the use of it with another, the total product is one hundred and eighty units. As the two men are assumed to be equally productive, each has to his credit ninety units of product. Working with half the capital, the first man finds that the resulting product is ten units less than when he was using the whole capital. Hence these ten units represent the portion that the relin- quished capital contributed to the product; and if the 1 Cf. especially chap, xxi, " The Theory of Economic Causation." SOME UNACCEPTABLE THEORIES OF WAGE- JUSTICE 349 productivity of half the capital is ten units, that of the whole capital must be twenty units. Nevertheless, the ten units by which the product was enlarged when the man had the whole capital, did not come into being without his co-operation; hence they cannot be entirely attributed to the one-half share of the capital. In other words, the productivity of the relinquished capital seems to be less than ten units. It also seems to be more than ten units; for we may assume that if each man were to use one-half the capital independently of the other, the resulting total product would be less than one hundred and eighty units, or less than ninety units for each. Consequently the dif- ference between the product resulting from the first man's use of the whole capital and that resulting from his use of half the capital would be more than ten units; and this difference is specifically attributable to half the capital. Who can say which of these calculations is correct, or whether either of them is correct? The method of ascertaining specific productivity which has been described in the last paragraph is thought by Professor Clark to receive confirmation from the fact that it leads to the same conclusion as the first and more direct method; namely, that the specific productivity of labour is expressed in the product of the marginal labourer. As a matter of fact, this conclusion is yielded by both methods ; for the specific productivity of the first labourer appeared as eighty units, which was also the specific productivity of the second labourer, who was the marginal labourer. As we saw in the second last paragraph, however, the mar- ginal product is not due to labour alone ; hence the verifica- tion provided by the second method is in reality a refu- tation. Apparently the majority of economists do not accept Professor Clark's theory; for of the nine who discussed certain applications of it at the nineteenth annual meeting of the American Economic Association only one approved 350 DISTRIBUTIVE JUSTICE it, three were non-committal, and five expressed their dissent.^ Even if the theory were true its hypothetical character would deprive it of any practical value. It assumes a regime of perfect competition, but this assumption is so seldom realised that no rule based upon it can throw much light on the question of the productivity of present day labourers. Even if it were exactly applicable to existing conditions, that is, if labourers were actually getting their specific products, the theory would not provide us with a doctrine of just wages. As we have seen in former chapters, pro- ductivity is neither the only nor the highest canon of jus- tice, whether as regards the comparative claims of capital and labour, or as regards the claims of different labourers. The contention that capital ought to command interest be- cause it aids in bringing forth the product, is neither self evident nor demonstrable by any process of reasoning. Even if we should concede that the capitalist has a right to interest by virtue of the productivity of his capital, we should not therefore conclude that this right is as cogent as the corresponding right of the labourer. In the former case the productive agency is not human nor active, but only material and passive; and the recipient of the product performs no labour as capitalist, but is left free to get a livelihood by personal activity. The productivity of labour differs in all these respects, and the difference is ethically sufficient to justify the claim that the labourer may sometimes have a right to a part of the specific product of capital. To sum up the matter in the words of Pro- fessor Wicker : " To have proved that the capitalist gets in interest what his capital produces is not to have proved that the capitalist gets what he has earned. To have proved that the landlord gets what his land produces is not to have proved that the landlord earns his distributive 1 " Proceedings," pp. 23-54. SOME UNACCEPTABLE THEORIES OF WAGE- JUSTICE 35 1 share. . . . Economics is not ethics; explanation is not justification." ^ Indeed, Professor Clark nowhere explicitly asserts that productivity is an adequate rule of justice. " We might raise the question," he says, " whether a rule that gives to a man his product is in the highest sense just." ^ Scat- tered throughout his volume, however, are many expres- sions which might fairly be interpreted as answering this question in the affirmative. The statements that distribu- tion according to product is a " natural law," and that if the labourer does not get his full specific product he is " despoiled," suggest if they do not imply that wages according to productivity is not merely the economic but the ethical norm. At any rate, the assumption of pro- ductivity as the adequate canon of wage justice, is very widely adopted, and is frequently brought forward to give sanction to insufficient rates of remuneration. Hence it has been thought well to show that the economic basis of the assumption, i.e., that the labourer gets what he pro- duces, is unproved and unprovable. Carver's Modified Version of Productivity Professor Carver makes no attempt to ascertain or state the exact physical productivity of labour as compared with that of capital, but confines his attention to what he calls the " economic " productivity of a given unit of labour in a given productive process.^ " Find out accurately how much the community produces with his [the labourer's] help, over and above what it produces without his help, and you have an exact measure of his productivity." * By this rule we can determine a man's productivity not only as compared with his inactivity in relation to a given 1 " Proceedings of the 22d Annual Meeting of the American Economic Association," pp. 160, 161. 2 Op. cit, p. 8. 3 " Essays in Social Justice " ; especially ch. vii. *0p. cit, pp. 187, 188. 352 DISTRIBUTIVE JUSTICE industry or establishment, but as compared with the pro- ductivity of some other man who might be substituted for him. Thus understood, productivity expresses the eco- nomic value of a man to the industrial process in which he participates. It " determines how much a man is worth, and consequently, according to our criterion of justice, how much a man ought to have as a reward for his work." 1 While this conception of productivity is relatively simple, and the canon of justice based upon it is somewhat plau- sible, neither is adequate. To many situations the produc- tivity test is substantially inapplicable. The removal from industry of the man who works alone; for example, the in- dependent shoemaker, blacksmith, tailor, or farmer, would result not in a certain diminution, but in the entire non- appearance of the product; and the removal of the capital or tools would have precisely the same effect. According to the former method, the labourer is to be credited with the whole product, and capital with nothing; according to the latter method, capital produces everything, and labour nothing. Even when several labourers are employed in an establishment, the test is inapplicable to those who are en- gaged upon indispensable tasks ; for example, the engineer in the boiler room of a small factory, and the bookkeeper in a small store. Remove them, and you have no product at all; hence a rigid enforcement of Professor Carver's test would award them the whole product. To be sure, we can get some measure of the productivity of these men by observing the effect on the product when inferior men are put in their places; but this merely enables us to tell how much more they are worth than other men, not their total worth. Moreover, even the substitution test is not always practicable. The attempt to ascertain the produc- tivity of a workman of high technical skill by putting in his place an utterly unskilled labourer, would not yield 1 Op. cit., p. 201. SOME UNACCEPTABLE THEORIES OF WAGE- JUSTICE 353 very satisfactory results, either to the inquiry or to the industry. In the majority of such cases, the difference in the resulting product would probably far exceed the dif- ference in the existing wage rates of the two men, thus showing that the skilled worker is getting considerably less than he is *' economically worth." In the field to which it is applicable; namely, that of more or less unspecialised labour in large establishments, Professor Carver's theory violates some of the most funda- mental conceptions of justice and humanity. He admits that it takes no account of the labourer's efforts, sacri- fices, or needs, and that when unskilled labour becomes too plentiful, the value of the product may fall below the cost of supporting a decent standard of living. While he looks with some sympathy upon the demand for a minimum wage of two dollars per day, he contends that unless the labourer really earns that amount, some other man will be paid less than he earns, " which would be unjust." To " earn " two dollars a day means, in Professor Carver's terminology, to add that much value to the product of the establishment in which the labourer is employed; for this is the measure of the labourer's productivity. If all the men who are now getting less than two dollars a day are receiving the full value of their product, and if all the other workers are likewise given the full value of their product, an increase in the remuneration of the former will mean a deduction from the compensation of the latter. These conclusions of ethical pessimism are extremely vulnerable. As we have shown in chapter xvi, efforts, sacrifices, and needs are superior to productivity as claims to reward, and must be given due consideration in any just scheme of distribution. Professor Carver would leave them out of account entirely. In the second place, it is not always nor necessarily ever true that to raise the wages of the poorest paid labourers will mean to lower the remuneration of those who are better paid. Many work- 354 DISTRIBUTIVE JUSTICE ers, particularly women, are now receiving less than the measure of their " productivity," less than they " earn," less than their worth to the employer, less than he would be willing to pay rather than go without their services. Professor Carver w^ould, of course, not deny that the wages of all such labourers could be raised without affect- ing the remuneration of other workers. Even when the poorest paid class is receiving all that its members are at present worth to the employer, an increase in their com- pensation would not necessarily come out of the fund available for the better paid. It could be deducted from excessive profits and interest; for we know well that in many industries competition does not automatically keep down these shares to the minimum necessary to retain the services of business ability and capital. It could be pro- vided to some extent out of the enlarged product that would result from improvements in the productive process, and from the increased efficiency of those workers whose wages had been raised. Finally, the increased remunera- tion could be derived from increased prices. When we speak of the unskilled labourer as getting all that he pro- duces, or all that he earns, we refer not to his concrete product, but to the value of that product, to the selling price of the product. Neither this price, nor any other existing price, has anything about it that is either eco- nomically or ethically sacred. In a competitive market current prices are fixed by the forces of supply and de- mand, which often involve the exploitation of the weak; in a monopoly market they are set by the desires of the monopolist, which are likewise destitute of moral validity. Hence a minimum wage law which would raise the price and value of the product suflficiently to provide living wages for the unskilled workers, thus increasing their " productivity " and enabling them to " earn " the legal wage, would neither violate the principles of justice, nor necessarily diminish the compensation of any other labour- SOME UNACCEPTABLE THEORIES OF WAGE- JUSTICE 355 ing group. To be sure, the increased prices might be fol- lowed by such a lessening of demand for the product as to diminish employment ; but this is another matter which has no direct bearing on either the economic or the ethical phases of productivity and earning power. And the dis- advantages involved in the supposition of a reduced vol- ume of employment may possibly be not so formidable socially as those which accompany a large volume of in- sufficiently paid occupations. This question will receive further consideration in a later chapter. In the meantime, we conclude that Professor Carver's theory or rule is inapplicable to a large part of the indus- trial field, and that where it does apply it frequently runs counter to some of the fundamental principles of distribu- tive justice. CHAPTER XXIII THE MINIMUM OF JUSTICE: A LIVING WAGE Although the principle of needs is somewhat promi- nent among the theories of wage justice, it received only incidental mention in the last chapter. Considered as a comprehensive rule, this principle has been defended with less energy and definiteness than most of the other canons. Considered as a partial rule, it is sound and fundamental, and therefore could not have been classed among theories that are unacceptable. The Principle of Needs Many of the early French Socialists of the Utopian school advanced this formula of distribution : ** From each according to his powers; to each according to his needs." It was also put forward by the German Social- ists in the Gotha Program in 1875. While they have not given to this standard formal recognition in their more re- cent platforms. Socialists generally regard it as the ideal rule for the distant future.^ The difficulties confronting it are so great and so obvious that they would defer the introduction of it to a time when the operation of their system will, they hope, have eradicated the historical human qualities of laziness and selfishness. To adopt needs as the sole rule of distribution would mean, of course, that each person should be rewarded in proportion to his wants and desires, regardless of his efforts or of the amount that he had produced. The mere statement of iCf. Skelton, "Socialism: A Critical Analysis," p. 202; Menger, " The Right to the Whole Produce of Labour," pp. 8, sq. 356 THE MINIMUM OF JUSTICE: A LIVING WAGE 357 the proposal is sufficient to refute it as regards the men and women of whom we have any knowledge. In addition to this objection, there is the insuperable difficulty of measur- ing fairly or accurately the relative needs of any group composed of men, women, and children. Were the mem- bers' own estimates of their needs accepted by the dis- tributing authority, the social product would no doubt fall far short of supplying all. If the measurement were made by some official person or persons, " the prospect of jobbery and tyranny opened up must give the most fanat- ical pause." Indeed, the standard of needs should be re- garded as a canon of Communism rather than of Social- ism; for it implies a large measure of common life as well as of common ownership, and paternalistic supervision of consumption as well as collectivist management of pro- duction. While the formula of needs must be flatly rejected as complete rule of distributive justice, or of wage justice, it is valid and indispensable as a partial standard. It is a partial measure of justice in two senses : first, inasmuch as it is consistent with the admission and operation of other principles, such as productivity and sacrifice; second, in- asmuch as it can be restricted to certain fundamental requi- sites of life, instead of being applied to all possible human needs. It can be made to safeguard the minimum de- mands of reasonable life, and therefore to function as a minimum standard of wage justice. Human needs constitute the primary title or claim to material goods. None of the other recognised titles, such as productivity, effort, sacrifice, purchase, gift, inherit- ance, or first occupancy, is a fundamental reason or justi- fication of either rewards or possessions. They all as- sume the existence of needs as a prerequisite to their valid- ity. If men did not need goods they could not reasonably lay claim to them by any of the specific titles just enumer- ated. First comes the general claim or fact of needs; then 358 DISTRIBUTIVE JUSTICE the particular title or method by which the needs may be conveniently supplied. While these statements may seem elementary and platitudinous, their practical value will be quite evident when we come to consider the conflicting claims that sometimes arise out of the clash between needs and some of the other titles. We shall see that needs are not merely a physical reason or impulse toward acquisi- tion and possession, but a moral title which rationalises the claim to a certain amount of goods. ^ Three Fundamental Principles The validity of needs as a partial rule of wage justice rests ultimately upon three fundamental principles regard- ing man's position in the universe. The first is that God created the earth for the sustenance of all His children; therefore, that all persons are equal in their inherent claims upon the bounty of nature. As it is impossible to demon- strate that any class of persons is less important than an- other in the eyes of God, it is logically impossible for any believer in Divine Providence to reject this proposition. The man who denies God or Providence can refuse assent to the second part of the proposition only by refusing to acknowledge the personal dignity of the human individual, and the equal dignity of all persons. Inasmuch as the human person is intrinsically sacred and morally inde- pendent, he is endowed with those inherent prerogatives, immunities, and claims that we call rights. Every person is an end in himself; none is a mere instrument to the convenience or welfare of any other human being. The worth of a person is something intrinsic, derived from within, not determined or measurable by reference to any earthly object or purpose without. In this respect the human being differs infinitely from, is infinitely superior 1 All the questions treated in this chapter are discussed at much greater length in the author's work, "A Living Wage"; Macmillan; 1906. THE MINIMUM OF JUSTICE: A LIVING WAGE 359 to, a stone, a rose, or a horse. While these statements help to illustrate what is meant by the dignity of person- ality, by the intrinsic worth, importance, sacredness of the human being, they do not prove the existence of this in- herent juridical quality. Proof in the strict sense is irrele- vant and impossible. If the intrinsic and equal moral worth of all persons be not self evident to a man, it will not approve itself to him through any process of argumen- tation. Whosoever denies it can also logically deny men's equal claims of access to the bounty of the earth; but he cannot escape the alternative conclusion that brute force, exercised either by the State or by individuals, is the only proper determinant of possessions and of property. Against this monstrous contention it is not worth while to offer a formal argument. The second fundamental principle is that the inherent right of access to the earth is conditioned upon, and be- comes actually valid through, the expenditure of useful labour. Generally speaking the fruits and potentialities of the earth do not become available to men without pre- vious exertion. " In the sweat of thy brow thou shalt eat thy bread," is a physical no less than a moral command- ment. There are, indeed, exceptions : the very young, the infirm, and the possessors of a sufficient amount of prop- erty. The two former classes have claims to a livelihood through piety and charity, while the third group has at least a presumptive claim of justice to rent and interest, and a certain claim of justice to the money value of their goods. Nevertheless, the general condition is that men must work in order to live. " If a man will not work neither shall he eat." For those who refuse to comply with this condition the inherent right of access to the earth remains only hypothetical and suspended. The two foregoing principles involve as a corollary a third principle; the men who are in present control of the opportunities of the earth are obliged to permit 360 DISTRIBUTIVE JUSTICE reasonable access to these opportunities by persons who are wilHng to work. In other words, possessors must so administer the common bounty of nature that non- owners will not find it unreasonably difficult to get a livelihood. To put it still in other terms, the right to subsist from the earth implies the right to access thereto on reasonable terms. When any man who is willing to work is denied the exercise of this right, he is no longer treated as the moral and juridical equal of his fellows. He is regarded as inherently inferior to them, as a mere instrument to their convenience ; and those who exclude him are virtually taking the position that their rights to the common gifts of the Creator are i ^^^ Buffalo. In 1908, when the cost of living was from ten to thirty per cent, cheaper than to- day, the United States Bureau of Labour found that, " ac- cording to the customs prevailing in the communities se- lected for study," a fair standard of living for a family of five persons among mill workers, was $600.74 in the South, and from $690.60 to $731.64 in Fall River, Massa- chusetts.^ According to the " Manly Report " of the Federal Com- mission on Industrial Relations, between two-thirds and three-fourths of the adult male labourers of the United States receive less than $750.00 a year, and the same pro- portion of women workers are paid under eight dollars a 1 " A Living Wage," p. 150. 2 See Bulletins of the Federal Bureau of Labour Statistics on " Re- tail Prices " ; and Nearing, " Reducing the Cost of Living." 3 " Summary of the Report on Condition of Woman and Child Wage Earners in the United States," pp. 383, 384. The best intensive study of family cost of living is that published in the volume edited by Robert C. Chapin, " The Standard of Living Among Workingmen's Families in New York City " ; 1909. It led to the conclusion that any- thing less than eight hundred dollars was insufficient for the yearly maintenance of a husband and wife and three small children in Man- hattan. 380 DISTRIBUTIVE JUSTICE week. A considerable majority, therefore, of both male and female labourers fail to obtain living wages. We are still very far from having actualised even the minimum measure of wage justice. CHAPTER XXIV THE PROBLEM OF COMPLETE WAGE JUSTICE A LIVING wage for all workers is merely the minimum measure of just remuneration. It is not in every case complete justice. Possibly it is not the full measure of justice in any case. How much more than a living wage is due to any or all of the various classes of labourers? How much more may any group of workers demand with- out exposing itself to the sin of extortion? By what principles shall these questions be answered? The problem of complete wage justice can be conven- iently and logically considered in four distinct relations, as regards : the respective claims of the different classes of labourers to a given amount of money available for wage payments; the claims of the whole body of labourers, or any group thereof, to higher wages at the expense of profits; at the expense of interest; and at the expense of the consumer. Comparative Claims of Different Labour Groups In the division of a common wage fund, no section of the workers is entitled to anything in excess of living wages until all the other sections have received that amount of remuneration. The need of a decent livelihood consti- tutes a more urgent claim than any other that can be brought forward. Neither efforts, nor sacrifices, nor pro- ductivity, nor scarcity can justify the payment of more than living wages to any group, so long as any other group in the industry remains below that level; for the extra compensation will supply the nonessential needs of the 381 382 DISTRIBUTIVE JUSTICE former by denying the essential needs of the latter. The two groups of men will be treated unequally in respect of those qualities in which they are equal; namely, their per- sonal dignity and their claims to the minimum requisites of reasonable life and self development. This is a viola- tion of justice. Let us suppose that all the workers among whom a given amount of compensation is to be distributed, have already received living wages, and that there remains a consider- able surplus. On what principles should the surplus be apportioned? For answer we turn to the canons of dis- tribution, as explained in chapter xvi. When the ele- mentary needs of life and development have been supplied, the next consideration might seem to be the higher or nonessential needs and capacities. Proportional justice would seem to suggest that the surplus ought to be dis- tributed in accordance with the varying needs and capaci- ties of men to develop their faculties beyond the minimum reasonable degree. As we have already pointed out, this would undoubtedly be the proper rule if it were susceptible of anything like accurate application, and if the sum to be distributed were not produced by and dependent upon those who were to participate in the distribution. How- ever, we know that the first condition is impracticable, while the second is nonexistent. Inasmuch as the sharers in the distribution have produced and constantly deter- mine the amount to be apportioned, the distributive process must disregard nonessential needs, and govern itself by other canons of justice. The most urgent of these is the canon of efforts and sacrifices. Superior effort, as measured by unusual will- exertion, is a fundamental rule of justice, and a valid title to exceptional reward. Men who strive harder than the majority of their fellows are ethically deserving of extra compensation. At least, this is the pure theory of the matter. In practice, the situation is complicated by the THE PROBLEM OF COMPLETE WAGE JUSTICE 383 fact that unusual effort cannot always be distinguished, and by the further fact that some exceptional efforts do not fructify in correspondingly useful results. Among men engaged at the same kind of work, superior effort is to a great extent discernible in the unusually large prod- uct. As such it actually receives an extra reward in ac- cordance with the canon of productivity. When men are employed at different tasks, unusual efforts cannot gen- erally be distinguished and compensated. Hence the gen- eral principle is that superior efforts put forth in the pro- duction of utilities, entitle men to something more than living wages, but that the enforcement of this principle is considerably hindered by the difficulty of discerning such efforts. The unusual sacrifices that deserve extra compensation are connected with the costs of industrial functions and the disagreeable character of occupations. Under the first head are included the expense of industrial training and the debilitating effects of the work. Not only justice to the worker but a farsighted view of social welfare, dic- tate that all unusual costs of preparation for an industrial craft or profession should be repaid in the form of un- usual compensation. This means something more than a living wage. For the same reasons the unusual hazards and disability resulting from industrial accidents and dis- eases should be provided for by higher remuneration. In the absence of such provision, these costs will have to be borne by parents, by society in the form of charitable re- lief, or by the worker himself through unnecessary suffer- ing and incapacity. The industry that does not provide for all these costs is a social parasite, the workers in it are deprived of just compensation for their unusual sacrifices, and society suffers a considerable loss through industrial friction and diminished productive efficiency. In so far, however, as any of the foregoing occupational costs are borne by society, as in the matter of industrial education, 384 DISTRIBUTIVE JUSTICE or by the employer, as by the devices of accident compen- sation or sickness insurance, they do not demand pro- vision in the form of extra wages. Other unusual sacrifices that entitle the worker to more than living wages, are inherent in disagreeable or despised occupations. The scavenger and the bootblack ought to get more than the performers of most other unskilled tasks. On the principles of comparative individual desert, they should receive larger remuneration than many per- sons who are engaged upon skilled but relatively pleasant kinds of work. For if they were given the choice of expending the time and money required to fit them for the latter tasks, or of taking up immediately their present dis- agreeable labour, they would select the more pleasant oc- cupations, for the same or even a smaller remuneration. And the majority of those who are now in the more skilled occupations would make the same choice. Hence the sac- rifices inherent in disagreeable kinds of work are in many cases as great as or greater than the sacrifices of prepara- tion for the more pleasant tasks ; consequently the doers of the former are relatively underpaid. If all wages were regulated by some supreme authority according to the principles of complete justice, the workers in disagreeable occupations would receive something more than living wages. Nor would this determination of rewards be in any way contrary to social welfare or the principle of maximum net results; for the superior attractiveness of the other kinds of work would draw a sufficient supply of labour to offset the advantage conferred by higher wages upon the disagreeable occupations. The main reason why the latter kind of labour is so poorly paid now is the fact that it is very plentiful, a condition which is in turn due to the unequal division of industrial opportunity. Were the opportunities of technical education and of entrance to the higher crafts and professions more widely diffused, the labourers offering themselves for the disagreeable THE PROBLEM OF COMPLETE WAGE JUSTICE 385 tasks would be scarcer and their remuneration correspond- ingly larger. This would be not only more comfortable to the abstract principles of justice, but more conducive to social efficiency. To sum up the discussion concerning the canon of ef- forts and sacrifices : Labourers have a just claim to more than living wages whenever they put forth unusual efforts, and whenever their occupations involve unusual sacrifices, either through costs of preparation, exceptional hazards, or inherent disagreeableness. The precise amount of ex- tra compensation due under any of these heads can be de- termined, as a rule, only approximately. The next canon to be considered as a reason for more than living wages is that of productivity. This offers little difficulty; for the unusual product is always visible among men who are performing the same kind of work, and the employer is always willing to give the producer of it extra compensation. While superior productive power which is based solely upon superior native ability has only presumptive validity as a canon of justice, that is ethically sufficient in our workaday world. Moreover, the canon of human welfare demands that superior productivity receive superior rewards, so long as these are necessary to evoke the maximum net product. The canon of scarcity has exactly the same value as that of productivity. Society and the employer are well advised and are justified in giving extra compensation to scarce forms of labour when the product is regarded as worth the corresponding price. This remains true even when the scarcity is due to restricted opportunity of prep- aration, rather than to sacrifices of any sort. In that case the higher rewards are as fully justified as the superior remuneration of that superior productivity which is based upon exceptional native endowments. The amount of extra compensation which may properly be given on ac- count of scarcity is determined either by the degree of 386 DISTRIBUTIVE JUSTICE sacrifice involved or by the ordinary operation of com- petition. When men are scarce because they have made exceptional sacrifices of preparation, they ought to be rewarded in full proportion to these sacrifices. When they are scarce merely because of exceptional opportunities, their extra compensation should not exceed the amount that automatically comes to them through the interplay of supply and demand. The canon of human welfare has already received im- plicit application. When due regard is given to efforts, sacrifices, productivity, and scarcity, the demands of human welfare, both in its individual and its social aspects, are sufhciently safeguarded. In the foregoing pages the attempt has been made to describe the proportions in which a given wage fund ought to be distributed among the various classes of labourers who have claims upon the fund. The first requisite of justice is that all should receive living wages. It applies to all workers of average ability, even to those who have no special qualifications of any sort. When this general claim has been universally satisfied, those groups of workers who are in any wise special, whose qualifications for any reason differentiate them from and place them above the average, will have a right to somxCthing more than living wages. They will have the first claim upon the surplus that remains in the wage fund. Their claims will be based upon the various canons of distribution ex- plained in detail above; and the amounts of extra re- muneration to which they will be entitled, will be deter- mined by the extent to which their special qualifications differentiate them from the average and unspecialised workers. If the total available wage fund is merely suffi- cient to provide universal living wages and the extra com- pensation due to the specialised groups, no section of the labour force will be justified in exacting a larger share. Even though the employer should withhold a part of the THE PROBLEM OF COMPLETE WAGE JUSTICE 387 amount due to some weaker group, a stronger group that is already getting its proper proportion would have no right to demand the unjustly withheld portion. For this belongs neither to the employer nor to the powerful labour group, but to the weaker section of labourers. This does not mean that a powerful body of workers who are already receiving their due proportion as com- pared with other labour groups, would not be justified in seeking any increase in remuneration whatever. The in- crease might come out of profits, or interest, or the con- sumer, and thus be in no sense detrimental to the rights of the other sections of labourers. This problem will be con- sidered a little later. At present we confine our attention to the relative claims of different labour groups to a definite wage fund. Suppose, however, that after all workers have received living wages, and all the exceptional groups have obtained those extra amounts which are due them on account of efforts, sacrifices, productivity, and scarcity, there remains a further surplus in the wage fund. In what proportions should it be distributed? It should be equally divided among all the labourers. The proportional justice which has been already established can be maintained only by raising the present rates of payment equally in all cases. All the average or unspecialised groups would get some- thing more than living wages, and all the other groups would have their extra compensation augmented by the same amount. Of course, the wage- fund hypothesis which underlies the foregoing discussion is not realised in actual life, any more than was the '' wage fund " of the classical econo- mists. Better than any other device, however, it enables us to describe and visualise the comparative claims of dif- ferent groups of labourers who have a right to unequal amounts in excess of living wages. 388 DISTRIBUTIVE JUSTICE Wages Versus ProHts Let us suppose that the wage fund is properly appor- tioned among the different classes of labourers, according to the specified canons of distribution. May not one or all of the labour groups demand an increase in wages on the ground that the employer is retaining for himself an undue share of the product? As we have seen in the last chapter, the right of the labourers to living wages is superior to the right of the employer or business man to anything in excess of that amount of profits which will insure him against risks, and afford him a decent livelihood in reasonable conformity with his accustomed plane of expenditure.. It is also evi- dent that those labourers who undergo more than average sacrifices have a claim to extra compensation which is quite as valid as the similarly based claim of the employer to more than living profits. In case the business does not provide a sufficient amount to remunerate both classes of sacrifices, the employer may prefer his own to those of his employes, on the same principle that he may prefer his own claim to a decent livelihood. The law of charity per- mits a man to satisfy himself rather than his neighbour, when the needs in question are of the same degree of urgency or importance. As to those labourers who turn out larger products than the average, or whose ability is unusually scarce, there is no practical difficulty; for the employer will find it profitable to give them the correspond- ing extra compensation. The precise question before us, then, is the claims of the labourers upon profits for re- muneration above universal living wages and above the extra compensation due on account of unusual efforts, sacrifices, productivity, and scarcity. Let us call the wage that merely includes all these factors " the equitable mini- mum." In competitive conditions this question becomes prac- THE PROBLEM OF COMPLETE WAGE JUSTICE 389 tical only with reference to the exceptionally efficient and productive business men. The great majority have no surplus available for wage payments in excess of the " equitable minimum." Indeed, the majority do not now pay the full " equitable minimum " ; yet their profits do not provide them more than a decent livelihood. The relatively small number of establishments that show such a surplus as we are considering have been brought to that condition of prosperity by the exceptional ability of their directors, rather than by the unusual productivity of their employes. In so far as this exceptional directive ability is due to unusual efforts and sacrifices, the surplus returns which it produces may be claimed with justice by the em- ployer. In so far as the surplus is the outcome of excep- tional native endowments, it may still be justly retained by him in accordance with the canon of productivity. In other words, when the various groups of workers are already receiving the '' equitable minimum," they have no strict right to any additional compensation out of those rare surplus profits which come into existence in condi- tions of competition. This conclusion is confirmed by reference to the canon of human welfare. If exceptionally able business men were not permitted to retain the surplus in question they would not exert themselves sufficiently to produce it; labour would gain nothing; and the community would be deprived of the larger product. When the employer is a corporation instead of an indi- vidual or a partnership, and when it is operating in com- petitive conditions, the same principles are applicable, and the same conclusions justified. The officers and the whole body of stockholders will have a right to those surplus profits that remain after the " equitable minimum " has been paid to the employes. Every consideration that urges such a distribution in the case of the individual business holds good for the corporation. 390 DISTRIBUTIVE JUSTICE The corporation that is a monopoly will have the same right as the competitive concern to retain for its owners those surplus profits which are due to exceptional efficiency on the part of the managers of the business. That part of the surplus which is derived from the extortion of higher than competitive prices cannot be justly retained, since it rests upon no definite moral title. As we saw in the chap- ter on monopoly, the owners have no right to anything more than the prevailing rate of interest, together with a fair return for their labour and for any unusual efficiency that they may exercise. Should the surplus in question be discontinued by lowering prices, or should it be continued and distributed among the labourers? As a rule, the for- mer course would seem morally preferable. While the labourers, as we shall see presently, are justified in con- tending for more than the " equitable minimum " at the expense of the consumer, their right to do so through the exercise of monopoly power is extremely doubtful. Whether this power is exerted by themselves or by the employer on their behalf, it remains a weapon which human nature seems incapable of using justly. Wages Versus Interest Turning now to the claims of the labourers as against the capitalists, or interest receivers, we perceive that the right to any interest at all is morally inferior to the right of all the workers to the " equitable minimum." As here- tofore pointed out more than once, the former right is only presumptive and hypothetical, and interest is ordi- narily utilised to meet less important needs than those sup- plied by wages. Through his labour power the interest receiver can supply all those fundamental needs which are satisfied by wages in the case of the labourer. Therefore, it seems clear that the capitalist has no right to interest until all labourers have received the " equitable minimum." It must be borne in mind, however, that any claim of the THE PROBLEM OF COMPLETE WAGE JUSTICE 39 1 labourer against interest falls upon the owners of the pro- ductive capital in a business, upon the undertaker-capitalist, not upon the loan-capitalist. When all the labourers in an industry are receiving the " equitable minimum," have they a right to exact anything more at the expense of interest? By interest we mean, of course, the prevailing or competitive rate that is received on productive capital — five or six per cent. Any return to the owners of capital in excess of this rate is properly called profits rather than interest, and its relation to the claims of the labourers has received consideration in the immediately preceding section of this chapter. The ques- tion, then, is whether the labourers who are already getting the ^' equitable minimum " would act justly in demanding and using their economic power to obtain a part or all of the pure interest. No conclusive reason is available to justify a negative answer. The title of the capitalist is only presumptive and hypothetical, not certain and uncon- ditional. It is, indeed, sufficient to justify him in retaining interest that comes to him through the ordinary processes of competition and bargaining ; but it is not of such definite and compelling moral efficacy as to render the labourers guilty of injustice when they employ their economic power to divert further interest from the coffers of the capitalist to their own pockets. The interest-share of the product is morally debatable as to its ownership. It is a sort of no-man's property (like the rent of land antecedently to its legal assignment through the institution of private land- ownership) which properly goes to the first occupant as determined by the processes of bargaining between em- ployers and employes. If the capitalists get the interest- share through these processes it rightfully belongs to them; if the labourers who are already in possession of the " equitable minimum " develop sufficient economic strength to get this debatable share they may justly retain it as their own. 392 DISTRIBUTIVE JUSTICE The foregoing conclusion may seem to be a very un- satisfactory solution of a problem of justice. However, it is the only one that is practically defensible. If the capi- talist's claim to interest were as definite and certain as the labourer's right to a living wage, or as the creditor's right to the money that he has loaned, the solution would be very simple: the labourers that we are discussing would have no right to strive for any of the interest. But the claim of the capitalists is not of this clear and conclusive nature. It is sufficient when combined with actual pos- session; it is not sufficient when the question is of future possession. The title of first occupancy as regards land is not valid until the land has been actually occupied; and similarly the" claim of the capitalist to interest is not valid until the interest has. been received. If the economic forces which determine actual possession operate in such a way as to divert the interest-share to the labourers, they, not the capitalists, will have the valid moral title, just as Brown with his automobile rather than Jones with his spavined nag will enjoy the valid title of first occupancy to a piece of ownerless land which both have coveted. This conclusion is confirmed by reference to the rationally and morally impossible situation that would follow from its rejection. If we deny to the labourers the moral freedom to strive for higher wages at the ex- pense of the capitalist, we must also forbid them to follow this course at the expense of the consumer. For the great majority of consumers would stand to lose advantages to which they have as good a moral claim as the capitalists have to interest. Practically this would mean that the labourers have' no right to seek remuneration in excess of the " equitable minimum " ; for such excess must in sub- stantially all cases come from either the consumer or the capitalist. On what principle can we defend the proposi- tion that the great majority of labourers are forever re- strained by the moral law from seeking more than bare THK PROBLEM OF COMPLETE WAGE JUSTICE 393 living wages, and the specialised minority from demand- ing more than that extra compensation which corresponds to unusual efforts, sacrifices, productivity, and scarcity? Who has authorised us to shut against these classes the doors of a more liberal standard of living, and a more ample measure of self development? Wuges Versus Prices The right of the labourers to the " equitable minimum " implies obviously the right to impose adequate prices upon the consumers of the labourer's products. This is the ultimate source of the rewards of all the agents of pro- duction. Suppose that the labourers are already receiving the *' equitable minimum." Are they justified in seeking any more at the cost of the consumer? If all the con- sumers were also labourers the answer would be simple, at least in principle : rises in wages and prices ought to be so adjusted as to bring equal gains to all individuals. The *' equitable minimum " is adjusted to the varying moral claims of the different classes of labourers ; therefore, any rise in remuneration must be equally distributed in order to leave this adjustment undisturbed. It is a fact, how- ever, that a large part of the consumers are not labourers; consequently they cannot look to rises in wages as an offset to their losses through rises in prices. Can they be justly required to undergo this inconvenience for the benefit of labourers who are already getting the *' equitable mini- mum " ? Let us consider first the case of higher wages versus lower prices. A few progressive and efficient manufac- turers of shoes find themselves receiving large surplus profits which are likely to continue. So far as the pre- sumptions of strict justice are concerned, they may, owing to their superior productivity, retain these profits for them- selves. Seized, however, with a feeling of benevolence, or a scruple of conscience, they determine to divide future 394 DISTRIBUTIVE JUSTICE profits of this class among either the labourers or the con- sumers. If they reduce prices the labourers will gain something as users of shoes, but the other wearers of shoes will also be beneficiaries. If the surplus profits are all diverted to the labourers in the form of higher wages the other consumers of shoes will gain nothing. Now there does not seem to be any compelling reason, any certain moral basis, for requiring the shoe manufacturers to take one course rather than the other. Either will be correct morally. Possibly the most perfect plan would be to effect a compromise by lowering prices somewhat and giving some rise in wages ; but there is no strict obligation to fol- low this course. To be sure, since the manufacturers have a right to retain the surplus profits, they have also a right to distribute them as they prefer. Let us get rid_ of this complication by assuming that the manufacturers are in- different concerning the disposition of the surplus, leaving the matter to be determined by the comparative economic strength of labourers and consumers. In such a situation it is still clear that either of the two classes would be justified in striving to secure any or all of the surplus. No definite moral principle can be adduced to the contrary. To put the case in more general terms : there exists no sufficient reason for maintaining that the gains of cheaper production should go to the consumer rather than to the labourer, or to the labourer rather than to the -consumer, so long as the labourer is already in receipt of the " equi- table minimum." Turning now to the question of higher wages at the cost of higher prices, we note that this would result in at least temporary hardship to four classes of persons: the weaker groups of wage earners; all self employing per- sons, such as farmers, merchants, and manufacturers; the professional classes; and persons whose principal income was derived from rent or interest. All these groups would have to pay more for the necessaries, comforts, and THE PROBLEM OF COMPLETE WAGE JUSTICE 395 luxuries of living, without being immediately able to raise their own incomes correspondingly. Nevertheless, the first three classes could in the course of time force an increase in their revenues sufficient to offset at least the more serious inconveniences of the in- crease in prices. So far as the wage earners are con- cerned, it is understood that all these would have a right to whatever advance in the money measure of the " equi- table minimum " was necessary to neutralise the higher cost of living resulting from the success of the more powerful groups in obtaining higher wages. The right of a group to the " equitable minimum " of remuneration is obviously superior to the right of another group to more than that amount. And a supreme wage-determining authority would act on this principle. It cannot be shown, however, that in the absence of any such authority empowered to protect the " equitable minimum " of the weaker labourers, the more powerful groups are obliged to refrain from de- manding extra remuneration. The reason of this we shall see presently. In the meantime we call attention to the fact that, owing to the greater economic opportunity re- sulting from the universal prevalence of the " equitable minimum " and of industrial education, even the weaker groups of wage earners would be able to obtain some in- creases in wages. In the long run the more powerful groups would enjoy only those advantages which arise out of superior productivity and exceptional scarcity. These two factors are fundamental, and could not in any system of industry be prevented from conferring advantages upon their possessors. As regards the self employing classes, the remedy for any undue hardship suffered through the higher prices of commodities would be found in a discontinuance of their present functions until a corresponding rise had occurred in the prices of their own products. They could do this partly by organisation, and partly by entering into com- 396 DISTRIBUTIVE JUSTICE petition with the wage earners. Substantially the same recourse would be open to the professional classes. In due course of time, therefore, the remuneration of all workers, whether employes or self employed or professional, would tend to be in harmony with the canons of efforts, sacrifices, productivity, scarcity, and human welfare. Since the level of rent is fixed by forces outside the con- trol of labourers, employers, or landowners, the receivers thereof would be unable to offset its decreased purchasing power by increasing its amount. However, this situation would not be inherently unjust, nor even inequitable. Like interest, rent is a " workless " income, and has only a presumptive and hypothetical justification. Therefore, the moral claim of the rent receiver to be protected against a decrease in the purchasing power of his income, is inferior to the moral claim of the labourer to use his economic power for the purpose of improving his condition beyond the limits of welfare fixed by the " equitable minimum." What is true of the rent receiver in this respect applies likewise to the case of the capitalist. As we saw a few pages back, the wage earners are morally free to take this course at the expense of interest. Evidently they may do the same thing when the consequence is merely a diminu- tion in its purchasing power. To be sure, if capital owners should regard their sacrifices in saving as not sufficiently rewarded, owing either to the low rate or the low purchas- ing power of interest, they would be free to diminish or discontinue saving until the reduced supply of capital had brought about a rise in the rate of interest. Should they refrain from this course they would show that they were satisfied with the existing situation. Hence they would suffer no wrong at the hands of the labourers v^^ho forced up wages at the expense of prices. Two objections come readily to mind against the fore- going paragraphs. The more skilled labour groups might organise themselves into a monopoly, and raise their wages THE PROBLEM OF COMPLETE WAGE JUSTICE 397 SO high as to Inflict the same degree of extortion upon con- sumers as that accompHshed by a monopoly of capitahsts. This is, indeed, possible. The remedy would be interven- tion by the State to fix maximum wages. Just where the maximum limit ought to be placed is a problem that could be solved only through study of the circumstances of the case, on the basis of the canons of efforts, sacrifices, pro- ductivity, scarcity, and human welfare. The second ob- jection calls attention to the fact that we have already de- clared that the more powerful labour groups would not be justified in exacting more than the " equitable minimum " out of a common wage fund, so long as any weaker group was below that level; yet this is virtually what would happen when the former caused prices to rise to such an extent that the weaker workers would be forced below the " equitable minimum " through the increased cost of liv- ing. While this contingency is likewise possible, it is not a sufHcient reason for preventing any group of labourers from raising their remuneration at the expense of prices. Not every rise in prices would effect the expenditures of the weaker sections of the wage earners. In some cases the burden would be substantially all borne by the better paid workers and the self employing, professional, and propertied classes. When it did fall to any extent upon the weaker labourers, causing their real wages to fall below the " equitable minimum," it could be removed within a reasonable time by organisation or by legislation. Even if these measures were found ineffective, if some of the weaker groups of workers should sufifer through the estab- lishment of the higher prices, this arrangement would be preferable on the whole to one in which no class of labourers was permitted to raise its remuneration above the *' equitable minimum " at the expense of prices. A restric- tion of this sort, whether by the moral law or by civil regulation, would tend to make wage labour a status with no hope of pecuniary progress. 39^ DISTRIBUTIVE JUSTICE It is true that a universal and indefinite increase of wages at the expense of prices might at length leave the great majority of the labourers no better off than they were when they had merely the " equitable minimum." Such would certainly be the result if the national product were only sufficient to provide the ** equitable minimum " for all workers, and that volume of incomes for the other agents of production which was required to evoke from them a fair degree of productive efficiency. In that case the higher wages would be an illusion. The gain in the amount of money would be offset by the loss in its pur- chasing power. Even so, this condition would be greatly superior to a regime in which the labourers were univer- sally prevented from making any effort to raise their wages above a fixed maximum. Concluding Remarks All the principles and conclusions defended in this chap- ter have been stated with reference to the present dis- tributive system, with its free competition and its lack of legal regulation. Were all incomes and rewards fixed by some supreme authority, the same canons of justice would be applicable, and the application would have to be made in substantially the same way, if the authority were de- sirous of establishing the greatest possible measure of distributive justice. The main exception to this statement would occur in relation to the problem of raising wages above the " equitable minimum " at the expense of prices. In making any such increase, the wage-fixing authority would be obliged to take into account the effects upon the other classes of labourers, and upon all the non-wage- earning classes. Substantially the same difficulties would confront the government in a collectivist organisation of industry. The effect that a rise in the remuneration of any class would produce, through a rise in the prices of commodities, upon the purchasing power of the incomes of THE PROBLEM OF COMPLETE WAGE JUSTICE 399 Other classes, would have to be considered and as nearly as possible ascertained. This would be no simple task. Simple or not, it would have to be faced ; and the guiding ethical principles would always remain efforts, sacrifices, productivity, scarcity, and human welfare. The greater part of the discussion carried on in this chapter has a highly theoretical aspect. From the nature of the subject matter this was inevitable. Nevertheless the principles that have been enunciated and applied seem to be incontestable. In so far as they are en forcible in actual life, they seem capable of bringing about a wider measure of justice than any other ethical rules that are available. Possibly the applications and conclusions have been laid down with too much definiteness and dogmatism, and the whole matter has been made too simple. On the other hand, neither honesty nor expediency is furthered by an attitude of intellectual helplessness, academic hyper- modesty, or practical agnosticism. If there exist moral rules and rational principles applicable to the problem of wage justice, it is our duty to state and apply them as fully as we can. Obviously we shall make mistakes in the process; but until the attempt is made, and a certain (and very large) number of mistakes are made, there will be no progress. We have no right to expect that ready- made applications of the principles will drop from Heaven. For a long time to come, however, many of the ques- tions discussed in this chapter will be devoid of large practical interest. The problem immediately confronting society is that of raising the remuneration and strengthen- ing generally the economic position of those labourers who are now below the level, not merely of the " equitable minimum," but of a decent livelihood. This problem will be the subject of the next chapter. CHAPTER XXV METHODS OF INCREASING WAGES Proposals for the reform of social conditions are im- portant in proportion to the magnitude of the evils which they are designed to remove, and are desirable in propor- tion to their probable efficacy. Applying these principles to the labour situation, we find that among the remedies proposed the primacy must be accorded to a minimum wage. It is the most important project for improving the condition of labour because it would increase the com- pensation of some two-thirds of the wage earners, and because the needs of this group are greater and more urgent than the needs of the better-paid one-third. The former are below the level of reasonable living, while the latter are merely deprived of the opportunities of a more ample and liberal scale of living. Hence the degree of injustice suffered by the former is much greater than in the case of the latter. A legal minimum wage is the most desirable single measure of industrial reform because it promises a more rapid and comprehensive increase in the wages of the underpaid than any alternative device that is now available. The superior importance of a legally estab- lished minimum wage is obvious; its superior desirability will form the subject of the pages that are immediately to follow. The Minimum Wage in Operation Happily the advocate of this measure is no longer re- quired to meet the objection that it is novel and utterly uncertain. For more than twenty years it Has been in 400 METHODS OF INCREASING WAGES 4OI Operation in Australasia. It was implicit in the com- pulsory arbitration act of New Zealand, passed in 1894; for the wages which the arbitration boards enforce are necessarily the lowest that the affected employers are per- mitted to pay; besides, the district conciliation boards are empowered by the law to fix minimum wages on complaint of any group of underpaid workers. The first formal and explicit minimum wage law of modern times was enacted by the state of Victoria in 1896. In the beginning it applied to only six trades, but it has been extended at various legislative sessions, so that to-day it protects sub- stantially all the labourers of the state, except those em- ployed in agriculture. Since the year 1900 all the other states of Australia have made provision for the establish- ment of minimum wages. At present, therefore, the legal minimum wage in some form prevails throughout the whole of Australasia. In 1909 the Trade Boards Act authorised the applica- tion of this device to four trades in Great Britain. In 19 1 3 the provisions of the Act were made applicable to four other trades, and in 1914 to a third group of four industries. A special minimum wage law was in 1912 enacted to govern the entire coal mining industry of the country. The first minimum wage law in the United States was passed in 191 2 by Massachusetts. It has been followed by similar legislation in ten other states ; namely, Arkansas, California, Colorado, Kansas, Minnesota, Nebraska, Ore- gon, Utah, Washington, and Wisconsin. California has adopted a constitutional amendment which specifically authorises minimum wage legislation for women and minors, and Ohio added a similar provision to her con- stitution which applies to men as well. The minimum wage statutes of Australasia and Great Britain cover all classes of workers, but those of the United States are restricted to minors and women. With 402 DISTRIBUTIVE JUSTICE the exception of the Utah act, all the important laws on this subject in all three regions establish minimum wages indirectly, by authorising commissions and wage boards to determine the actual rates. In Australasia and Great Britain the statutes do not attempt to specify any standard to which the wage determinations of the boards must con- form, but the tendency in the former country in recent years has been to enforce a living wage as the minimum; that is, wage rates sufficiently high to provide a decent family livelihood for men, and a reasonable personal live- lihood for women and minors. All the laws in America but one require the commissions to establish living wages. In Utah no commission is provided for, as the law itself specifies in terms of money the minimum rates of remu- neration that the employers of women are permitted to pay. The effectiveness of the laws that have been put into operation is at least as great as their friends had dared to hope. According to Professor M. B. Hammond of Ohio, who investigated the situation on the spot in the winter of 1911-1912, the people of Australasia have accepted the minimum wage " as a permanent policy in the industrial legislation of that part of the world." Professor Ham- mond's observations, and the replies of the Chief Factory Inspector of Melbourne to the New York Factory In- vestigating Commission, show the main effects of mini- mum wage legislation to be as follows: sweating and strikes have all but disappeared; the efficiency of the workers has on the whole increased; the number of workers unable to earn the legal minimum has not been as great as most persons had feared, and almost all of them have obtained employment at lower remuneration through special permits; the legal minimum has not only not be- come the actual maximum, but is exceeded in the case of the majority of workers; no evidence exists to show that any industry has been crippled, or forced to move out of METHODS OF INCREASING WAGES 403 the country; with the exception of a very few instances, the prices of commodities have not been raised by the law.^ In the four trades of Great Britain which were first brought under the operation of the Trade Boards Act, and which presented some of the worst examples of economic oppression, the beneficial effects of the minimum wage have been even more striking than in Australasia. Wages have been considerably raised, in some cases as high as one hundred per cent. ; dispirited and helpless workers have gained courage, power, and self-respect to such an extent as to increase considerably their member- ship in trade unions, and to obtain in several instances fur- ther increases in remuneration beyond the legal minimum; the compensation of the better paid labourers has not been reduced to the level fixed by the trade boards; the effi- ciency of both employes and productive processes has been on the whole increased; the number of persons forced out of employment by the law is negligible ; no important rise of prices is traceable to the law; and the number of busi- ness concerns unable to pay the increase in wages is too small to deserve serious consideration. All these results had been established before the outbreak of the war.^ The legal minimum wage has been carried into effect in only four states of our own country. It covers practically all the industries employing women and minors in Oregon and Washington, all the working women and girls of Utah, and the women and minors of a few trades in Massa- 1 See articles by Hammond in the American Economic Review, June, 1913, and in the Annals of the American Academy of Political and Social Science, July, 1913 ; and page 62' of the Appendix to the third vohime of the Report of the New York State Factory Investigating Commission. 2 See the replies of the London Board of Trade to the N. Y. Factory Investigating Commission, on pages 77, 78 of the volume cited above ; and especially the two monographs by R. H. Tawney, " The Estab- lishment of Minimum Rates in the Chain-Making Industry," and " The Establishment of Minimum Rates in the Tailoring Industry," London ; 1914 and 1915. 404 DISTRIBUTIVE JUSTICE chusetts. The rates established for experienced women vary from $7.50 per week in Utah to ten dollars a week for some classes in Washington. As the first wage de- terminations were put into effect only in 19 13, American experience has been too short as well as too narrow to warrant certain conclusions. So far as it has been ap- plied, however, the legal minimum wage has been as suc- cessful in the United States as in Australasia or Great Britain. All competent witnesses agree that it has brought a considerable increase in wages to a considerable proportion of the women and minors in the industries in which it is operative, and that it has neither thrown any important number of workers out of employment nor forced any important concern out of business. Speaking of the three leading industries in which minimum wages were first established in Washington, the Industrial Wel- fare Commission of that state testifies : " Seldom has any piece of legislation, in prospect, engendered so much dis- cussion and so much criticism, as did the minimum wage law, with the intricacies of its ramifications touching almost every industry in the state, large or small, and the family of nearly every wage earner; seldom, too, has any law, in actuality, been so well received, its application been accomplished with so little open opposition, and, for a law of this character, has been attended with so little industrial disturbance as that same minimum wage law. None of the dire predictions made prior to the passage of the law have come about to an extent that questions the general efficiency of the law. There has been no wholesale dis- charge of women employes, no wholesale levelling of wages, no wholesale replacing of higher paid workers by cheaper help, no tendency to make the minimum the maxi- mum, while the employers of the state in general have been following the letter and spirit of the law, and aiding greatly in its application. . . . The law, in other words, has advanced the wages of practically sixty per cent, of the METHODS OF INCREASING WAGES 405 workers in these industries, and has done it without serious opposition at a time when business conditions were none too good." ^ The Bureau of Labour Statistics of the United States investigated the operation of the minimuni wage in the mercantile estabHshments of Oregon at the^ end of the first year. The conclusions of the investigators were in brief that both the number and the proportion of women getting the legal minimum ($9.25 per week) for adults had increased, that the proportion obtaining more than this rate had likewise increased, that those who had received a rise in remuneration did not show any decline in efficiency, that women had not been displaced by men, and that the average increase in the labour cost resulting from the advance in wages was only three mills on each dollar of sales.^ The effects of the Utah law during the first year of its operation were summarised by the Labour Commissioner, Mr. H. T. Haines, as follows: a rise in the wages of a '' number of women and girls who most needed the additional sums of money " ; increased effi- ciency of female workers admitted by most employers; but few cases of women or girls utterly deprived of employ- ment by the law; none of the higher paid women suffered a reduction in wages; and ninety per cent, of the employers are satisfied with the minimum wage statute.*^ So far as the law has been applied in Massachusetts, it seems to be relatively as successful as in the other three states.* The Question of Constitutionality The principal reason why the minimum wage laws on the statute books of the other seven states have not been 1 " First Biennial Report of the Industrial Welfare Commission of Washington," pp. 13, 15. 2 " Effect of Minimum Wage Determinations in Oregon." Bulletin No. 176 of United States Bureau of Labour Statistics. 3 From a paper read before the National Convention of the Associa- tion of Government Labour Officials, Nashville, Tenn., June 9, 1914. * See Bulletins of Massachusetts Minimum Wage Commission. 406 DISTRIBUTIVE JUSTICE carried into effect, is the uncertainty of the vaHdity of minimum wage legislation in our constitutional system. In November, 1914, a district judge granted a writ of injunction, restraining the Minimum Wage Commission of Minnesota from enforcing their wage determinations, on the ground that the law attempted to delegate legisla- tive power, and that its provisions violated that section of the fourteenth amendment to the United States Constitu- tion which forbids any state to deprive a person of life, liberty, or property without due process of law. One of the courts of Arkansas has taken substantially the same position. The second objection urged by the Minnesota judge is probably much the more serious of the two, and is the one upon which chief emphasis has been laid in the briefs filed in various courts by the opponents of minimum wage legislation. As regards labour legislation, *' due process of law " may be practically translated, " reason- able and necessary exercise of the State's police power." And the police power means that indefinite power of the State to legislate for the health, safety, morals, and wel- fare of the community.^ Now it is obvious that a mini- mum wage law deprives both employer and employe of some liberty of contract, and also that it virtually deprives the former of some property, inasmuch as it generally in- creases his outlay for wages. On the other hand, this restriction of liberty and equivalent diminution of property seem to be carried out in harmony with due process of law, since they constitute an exercise of the police power of the State on behalf of the general welfare. Some months before the Minnesota judge granted the writ of injunction against the enforcement of the minimum wage law of that state, a lower court and the Supreme Court of Oregon had pronounced the Oregon statute constitutional, 1 See the excellent and varied series of papers on the subject in Orth's " The Relation of Government to Property and Industry," pp. 103-178. Ginn & Company; 1915. METHODS OF INCREASING WAGES 407 as a legitimate exercise of the police power. An appeal from this judgment was argued in the Supreme Court of the United States, Dec. 17, 19 14, but no decision has yet (October, 1916) been rendered. Until the highest court has spoken on the question of constitutionality, no state is likely to take any further step toward establishing mini- mum wages. Should the decision of the Supreme Court be unfavourable valid minimum wage legislation will be impossible without an amendment of the United States Constitution.^ The Ethical and Political Aspects Whether it be considered from the viewpoint of ethics, politics, or economics, the principle of the legal minimum wage is impregnable. The State has not only the moral right but the moral duty to enact legislation of this sort, whenever any important group of labourers are receiving less than living wages. One of the elementary functions and obligations of the State is to protect citizens in the enjoyment of their natural rights; and the claim to a liv- ing wage is, as we have seen, one of the natural rights of the person whose wages are his only means of livelihood. Therefore, the establishment of minimum living wages is not among the so-called " optional functions "of the State in our present industrial society. Whenever it can be successfully performed, it is a primary and necessary func- tion. So far as political propriety is concerned, the State may as reasonably be expected to protect the citizen against the physical, mental, and moral injury resulting from an unjust wage contract, as to safeguard his money against the thief, his body against the bully, or his life against the iThe arguments for and against the constitutionality of a legal minimum wage are adequately presented in the briefs, respectively, of Louis D. Brandeis and Rome G. Brown, in the cases of Stettler vs. O'Hara and Simpson vs. O'Hara. The former is published by the National Consumers' League, New York, and the latter by the Review Publishing Company, Minneapolis. 408 DISTRIBUTIVE JUSTICE assassin. In all four cases the essential welfare of the individual is injured or threatened through the abuse of superior force and cunning. Inasmuch as the legal mini- mum wage is ethically legitimate, the question of its enact- ment is, politically speaking, entirely a question of expediency. The Economic Aspect Now the question of expediency is mainly economic. A great deal of nonsense has been written and spoken about the alleged conflict between the legal minimum wage and " economic law." Economists have used no such lan- guage, indeed; for they know that economic laws are merely the expected uniformities of social action in given circumstances. The economists know that economic laws are no more opposed to a legal minimum wage than to a legal eight hour day, or legal regulations of safety and sanitation in work places. All three of these measures tend to increase the cost of production, and sometimes carry the tendency into reality. A minimum wage law is difficult to enforce, but not much more so than most other labour regulations. At any rate, the practical considera- tion is whether even a partial enforcement of it will not result in a marked benefit to great numbers of underpaid workers. It may throw some persons, the slower workers, out of employment; but here, again, the important ques- tion relates to the balance of good over evil for the ma- jority of those who are below the level of decent living. At every point, therefore, the problem is one of concrete expediency, not of agreement or disagreement with a real or imaginary economic law. Some of those who oppose the device on the ground of expediency set up an argument which runs about as fol- lows: the increase in wages caused by a minimum wage law will be shifted to the consumer in the form of higher prices; this result will in turn lead to a falling off in the METHODS OF INCREASING WAGES 409 demand for products ; a lessened demand for goods means a reduced demand for labour ; and this implies a diminished volume of employment, so that the last state of the workers becomes worse than the first. Not only is this conception too simple, but it proves too much. If it were correct every rise in wages, howsoever brought about, would be ill advised ; for every rise would set in motion the same fatal chain of events. Voluntary increases of remunera- tion by employers would be quite as futile as the efforts of a labour union. This is little more than the old wages fund theory in a new dress. And it is no less contrary to experience. The argument is too simple because it is based upon an insufificient analysis of the facts. There are no less than four sources from which the increased wages required by a minimum wage law might in whole or in part be ob- tained. In the first place, higher wages will often give the workers both the physical capacity and the spirit that make possible a larger output. Thus, they could them- selves equivalently provide a part at least of their addi- tional remuneration. When, secondly, the employer finds that labour is no longer so cheap that it can be profitably used as a substitute for intelligent management, better methods of production, and up to date machinery, he will be compelled to introduce one or more of these improve- ments, and to offset increased labour cost by increased managerial and mechanical efficiency. This is what seems to have happened in the tailoring industry of England. According to Mr. Tawney, " the increased costs of pro- duction have, on the whole, been met by better organisa- tion of work and by better machinery." ^ In the third place, a part of the increased wage cost can be defrayed out of profits, in two ways: through a reduction in the profits of the majority of business concerns in an industry; but more frequently through the elimination of the less 1 " Minimum Rates in the Tailoring Industry," p. 161. 4IO DISTRIBUTIVE JUSTICE efficient, and the consequent increase in the volume of business done by the more efficient. In the latter estab- lishments the additional outlay for wages might be fully neutralised by the diminished managerial expenses and fixed charges per unit of product. This elimination of unfit undertakers would not only be in the direction of greater social efficiency, but in the interest of better em- ployment conditions generally; for it is the less competent employers who are mainly responsible for the evil of *' sweating," when they strive to reduce the cost of pro- duction by the only method that they know; that is, the oppression of labour. Should the three foregoing factors fall short of providing or neutralising the increased wages, the recourse would necessarily be to the fourth source; namely, a rise in the price of products. However, there is no definite reason for assuming that the rise will in any case be sufficient to cause a net decrease of demand. In Oregon the increased labour cost due to the minimum wage law amounted, as we have seen, to only three mills per dollar of sales in mercantile establishments. Even if this were all shifted to the consumer — something that is practically impossible — it would be equivalent to an in- crease of only three cents on each ten dollars' worth of purchases, and thirty cents on each hundred. The reduc- tion in sales on account of such a slight rise in prices would be infinitesimal. In the case of possibly the majority of products, the lessened demand on the part of the other classes might be entirely counterbalanced by the increased demand at the hands of the workers whose purchasing power had been raised through the minimum wage law. The effect upon sales, and hence upon business and pro- duction, which follows from an increase in the effective consuming power of the labouring classes is frequently ignored or underestimated. So far as consumers' goods are concerned, it seems certain that a given addition to the income of the wage-earning classes will lead to a greater METHODS OF INCREASING WAGES 4I I increase in the demand for products than an equal addition to the income of any other section of the people. Nevertheless, the possibility must be admitted of some diminution of employment, owing to higher prices and decreased demand. And it is certain that some workers would not be worth the legal minimum to their employers. A part, but probably not all, of these could find employ- ment at a lower wage, through a system of permits for " slow workers." Whatever the amount of unemploy- ment resulting from both these causes, it would undoubt- edly be an evil of lesser magnitude than that which at present follows from the under-payment of a majority of the labouring population. And it could be remedied by two measures which are in any case necessary for social welfare, and which would be hastened by the establish- ment of a legal minimum wage. These are adequate and scientific laws and institutions to deal with the general problem of unemployment, and a comprehensive system of industrial and vocational training. These conclusions, then, seem to be justified: the eco- nomic objections to a legal minimum wage are not essen- tially different from those that may be urged against any other beneficial labour legislation; and they have been sufficiently refuted by experience to throw the burden of proof upon the objectors. Expediency suggests, however, that in the United States the device should be applied gradually in two respects : for a few years it ought to be confined to women and minors; and when it is extended to men, the rates should approach the level of a complete family living wage by stages, covering, say, three or four years. The former restriction would enable the law to be carried through its experimental stages with a minimum disturbance to industry as a whole, and with a minimum of opposition, and the latter would greatly reduce the danger of male unemployment.^ 1 One of the best statements of the economic aspect of the minimum 412 DISTRIBUTIVE JUSTICE Opinions of Economists When the present writer made an argument for the legal minimum wage something more than ten years ago, he was able to find only one American economist who had touched the subject, and the verdict of that one was unfa- vourable.^ A little over a year ago, Dr. John O'Grady sent an inquiry to one hundred and sixty economists of the United States to ascertain their opinions on the same sub- ject. Of the ninety- four who replied seventy were in favour of a minimum wage law for women and minors, thirteen were opposed, and eleven were noncommittal; fifty-five favoured such legislation for men, twenty were against it, and nineteen were disinclined to give a cate- gorical answer. About three- fourths of those who responded expressed the opinion that the measure would tend to increase the efficiency both of the workers and of methods of production.^ It is worthy of note that the nine members of the late Federal Commission on Industrial Relations, although dis- agreeing widely and variously on most other important questions and proposals, were all favourable to a minimum wage law for women and minors.^ The most comprehensive and most searching criticism of the legal minimum wage from the viewpoint of eco- nomic theory has been made by Professor F. W. Taussig.* While he does not commit himself definitely to the asser- wage is that by Sidney Webb, in the Journal of Political Economy, Dec, 1912. Probably the most varied and comprehensive general dis- cussion is the symposium in the Survey, Feb. 6, 191.5. See especially the excellent presentation in Commons and Andrews' " Principles of Labour Legislation/' pp. 167-200. 1 See* pages 303, 304 of " A Living Wage " ; Macmillan, 1906. 2 O'Grady, "A Legal Minimum Wage"; Washington, 1915. 3 " Final Report," pp. loi, 255, 364. * The Quarterly Journal of Economics, May, 1916. A somewhat less unfavourable criticism is contained in the paper by Professor John Bates Clark in the Atlantic Monthly, September, 1913. METHODS OF INCREASING WAGES 4I3 tion that a universal minimum wage of, say, eight dollars per week, would cause a notable amount of unemployment among women, he regards this consequence as sufficiently probable to indicate the " need of going slow in the regula- tion of women's wages." Specifically, he would have public wage boards refrain from fixing the minimum rates high enough to maintain women living away from home. His final and only serious argument for this position re- lates to the marginal effectiveness of women workers. He assumes that all " the fitful, untrained, indifferent women are got rid of; that all who offer themselves for work at the age of (say) eighteen years have had an industrially helpful education, — " and then raises the question whether all of them will be " able to get distinctly higher wages than are now current." ^ Obviously the question is not serious unless it contemplates the probability of unemploy- ment for a considerable proportion. If only one per cent, or less of the women should be unable to find employment at the higher wages, the net social advantage of the mini- mum wage device would be so obvious as to render Pro- fessor Taussig's opposition quite unreasonable. Making the assumptions quoted above from his pages, let us try to see whether his apprehensions are economically justifiable. If they are reasonable or probable they must rest on one of two fundamental conditions : the occupations avail- able to women are too few to absorb all that would seek to become wage earners at eight dollars per week; or a considerable section of them would be unable to produce such a high wage. Possibly the first of these assumptions is true, but neither Professor Taussig nor any other authority has presented evidence to support it, and it is on the face of things not sufficiently probable to justify hesi- tation in the advocacy of a minimum living wage. If the second assumption be correct, if the product of a con- siderable section of women (all adequately trained) would 1 Page 436. 414 DISTRIBUTIVE JUSTICE be insufficient to yield them eight dollars per week, in addi- tion to the other costs of production, the conclusion is inevitable that the same result would follow the attempt to pay all male adults (likewise adequately trained) a family living wage of, say, fifteen dollars per week. For the product of the average man does not exceed that of the average woman by even as great a ratio as fifteen to eight. If the average woman is not worth eight dollars a week to an employer in any kind of woman's occupation, the average man is not worth fifteen dollars. Therefore, we cannot hope, even with the aid of a thorough system of industrial and vocational training, to provide all adult males of average capacity with a family living wage and the minimum means of living a reasonable life. This is a veritable counsel of despair. It implies either that the law of diminishing returns is already operating in this country in such a way as to prevent the national product from being sufficiently large to provide a mini- mum wage of fifteen dollars a week for men, and eight dollars a week for women; or that the product, though ample for this purpose, and for all the other necessary pay- ments to the higher priced workers and to the other agents of production, cannot under our present industrial system be so distributed as to attain the desired end. For the first of these hypotheses there is no evidence worthy of the name. If Professor King is right in his estimate of an average family income of 1494 dollars annually ^ the difficulty before us does not lie in the field of production. Professor Taussig seems to rest his fears on the second hypothesis, on the assumed impossibility of bringing about the required distribution; for he points out that increased efficiency of the workers may, like increased efficiency of the material instrumentalities of production, in the long run redound mainly to the benefit of the consumers, while 1 " The Wealth and Income of the People of the United States," p. 129. METHODS OF INCREASING WAGES 415 wages may be little if any above the old level. If these fears are justified, if the difficulty is entirely one of the mechanism of distribution, and if it cannot be overcome by legal enactment, then is our competitive organisation of industry bankrupt, and the sooner we find out that fact definitely the better. If the legal minimum wage will help to expose such a situation, will show that, no matter how much the productivity of the workers may be increased, a large proportion of them must by the very nature of the competitive system be forever condemned to live below the level of decent existence, then the minimum wage is worth having merely as an instrument of economic enlightenment. Professor Taussig's argument and illustrations -^ seem to contemplate a condition in which the number of women who become fitted for a certain trade is excessive rela- tively to the demand for its products, and to the supply of women in other industries. Were industrial training thus misdirected, and were the trained persons unable or un- willing to distribute themselves over other occupations, they would, indeed, face precisely the same dilemma as do the unskilled workers to-day. That is; a majority would be condemned to insufficient wages, or a minority to un- employment. But we have been assuming an adequate system of industrial and vocational training, a well- balanced system, one that would enable the workers to adjust their supply to the demand throughout the various occupations. In these conditions the economic axiom that a supply of goods is a demand for goods should become beneficently effective: the workers should all be able to find employment, and to obtain the greater part of their increased product. Surely Professor Taussig does not mean to commit himself to the view that every increase in the productive power of the workers will in the long run help them only inasmuch as they are consumers, the lion's share of the additional product being taken by other 1 Page 437. 41 6 DISTRIBUTIVE JUSTICE classes. Probably such is the usual result in a regime of unregulated competition, and unlimited freedom as regards the wage contract. But this is precisely what we expect a minimum wage law to correct and prevent. We rely upon this device to enable the workers to retain for themselves that share of the product which under free competition would automatically go to the non-labouring consumers. We hope that blind and destructive economic force can be held in check by deliberate and beneficent social control. The fact of the matter seems to be that Professor Taus- sig's argument is too hypothetical and conjectural to justify his pessimistic conclusions. It is unpleasantly sug- gestive of the reasoning by which the classical economists tried to show the English labourers the folly and futility of trade unionism. Other Legislative Proposals The ideal standard of a minimum wage law is a scale of remuneration adequate not only to the present needs of individuals and families, but to savings for the contin- gencies of the future. Until such time as the compensa- tion of all labourers has been brought up to this level, the State should make provision for cheap housing, and for insurance against accidents, sickness, invalidity, old age, and unemployment. The theory underlying such meas- ures is that they would merely supplement insufficient remuneration, and indirectly contribute to the establish- ment of genuine living wages. In Europe, housing and insurance legislation is so common that no reasonable and intelligent person any longer questions the competency or propriety of such action by the State. If an adequate legal minimum wage, in the sense just defined, were universally established, the State would not be required to do anything further to effectuate wage justice, except in the matter of vocational and industrial education. This would qualify practically all persons to METHODS OF INCREASING WAGES 417 earn at least a living wage, and would enable those who underwent unusual sacrifices either before or during their employment to command something over and above. In other words, all workers would then be able to obtain what we have called ''the equitable minimum." And the labouring class as a whole would possess sufficient eco- nomic power to secure substantially all that was due by any of the canons of distributive justice. Labour Unions The general benefits and achievements of labour organi- sations in the United States down to the beginning of the present century, cannot be more succinctly nor more au- thoritatively stated than in the words of the United States Industrial Commission : " An overwhelming preponder- ance of testimony before the Industrial Commission indi- cates that the organisation of labour has resulted in a marked improvement in the economic condition of the workers." ^ Some of the most conspicuous and unques- tionable proofs of rises in wages effected by the unions are afforded by the building trades, the printing trades, the coal mining industry, and the more skilled occupations on the railroads. Between 1890 and 1907 wages increased considerably more in the organised than in the unorgan- ised trades.^ Nevertheless, when all due credit is given to the unions for their part in augmenting the share of the product re- ceived by labour, there remain two important obstacles which seriously lessen their efficacy as a means of raising the wages of the underpaid. The first is the fact that the unions still embrace only a small portion of the total number of wage earners. Ac- cording to Professor Leo Wolman, a little more than 1" Final Report," p. 802. Washington, 1902. 2 See article by Professor Commons in " The New Encyclopedia of Social Reform," p. 1233. 41 8 DISTRIBUTIVE JUSTICE twenty-seven million of the thirty-eight million persons en- gaged in " gainful occupations " in the United States in 1910 were wage earners in the ordinary sense of that phrase, and of these twenty-seven million only 2,116,317, or "j.y per cent., were members of labour organisations.^ The membership to-day is about two and three quarter millions. If the total number of wage earners increased between 19 10 and 19 16 at the same rate as during the preceding decade, the organised portion is now somewhat less than y.y per cent, of the whole. Evidently the la- bour unions have not grown with sufficient rapidity, nor are they sufficiently powerful to warrant the hope that they will be soon able to lift even a majority of the under- paid workers to the level of living wage conditions. The second obstacle is the fact that only a small minor- ity of the members of labour unions are drawn from the unskilled and underpaid classes, who stand most in need of organisation. The per cent, of those getting less than living wages that is in the unions is almost negligible. With the exception of a few industries, the unskilled and the underpaid show very little tendency to increase notably their organised proportion. The fundamental reason of this condition has been well stated by John A. Hobson: " The great problem of poverty . . . resides in the con- ditions of the low-skilled workman. To live industrially under the new order he must organise. He cannot or- ganise because he is so poor, so ignorant, so weak. Be- cause he is not organised he continues to be poor, ignorant, weak. Here is a great dilemma, of which whoever shall have found the key will have done much to solve the problem of poverty." ^ The most effective and expeditious method of raising the wages of the underpaid through organisation is by means of the " industrial," as distinguished from the 1 The Quarterly Journal of Economics, May, 1916, p. 502. 2 " Problems of Poverty," p. 227. London, 1891. METHODS OF INCREASING WAGES 419 " trade," or " craft," union. In the former all the trades of a given industry are united in one compact organisa- tion, while the latter includes only those who work at a certain trade or occupation. For example: the United Mine Workers embrace all persons employed in coal mines, from the most highly skilled to the lowest grade of unspe- cialised labour; while the craft union is exemplified in the engineers, firemen, conductors, switchmen, and other groups having their separate organisations in the railroad industry. The industrial union is as much concerned with the welfare of its unskilled as of its skilled members, and exerts the whole of its organised force on behalf of each and every group of workers throughout the industry which it covers. The superior suitability of the industrial type of union to the needs of the unskilled labourers is seen in the fact that more of them are organised in the coal min- ing than in any other industry, and have received greater benefits from organisation than their unskilled fellow workers in any other industry. Were the various classes of railway employes combined in one union, instead of being organised along the lines of their separate crafts, it is quite improbable that the unskilled majority would be getting, as they now are getting, less than living wages. While it is true that the various craft unions in an indus- try are often federated into a comprehensive association, the bond uniting them is not nearly so close, nor so help- ful to the weaker groups of workers as in the case of the industrial unions. Human nature being what it is, however, the members of the skilled crafts cannot all be induced or compelled to adopt the industrial type of organisation. The Knights of Labour attempted to accomplish this, and for a time enjoyed a considerable measure of success, but in the end the organisation was unable to withstand those funda- mental inclinations which impel men to prefer the more narrow, homogeneous, and exclusive type of association. 420 DISTRIBUTIVE JUSTICE The skilled workers refused to merge their local and craft interests in the wider interests of men with whom they had no strong nor immediate bonds of sympathy. Among labourers, as well as among other persons, the capacity for altruism is limited by distance in space and occupational condition. The passion for distinction likewise affects the wage earner, impelling the higher groups consciously or unconsciously to oppose association that tends to break down the barrier of superiority. Owing to their greater resources and greater scarcity, the skilled members of an industrial union are less dependent upon the assistance of the unskilled than the latter are dependent upon the former ; yet the skilled membership is always in a minority, and therefore in danger of being subordinated to the in- terests of the unskilled majority. For these and many other reasons it is quite improbable that the majority of union labourers can be amalgamated into industrial unions in the near future. The most that can be expected is that the various occupational unions within each industry should become federated in a more compact and effective way than now prevails, thus con- serving the main advantages of the local and craft asso- ciation, while assuring to the unskilled workers some of the benefits of the industrial union. Organisation Versus Legislation In the opinion of some labour leaders, the underpaid workers should place their entire reliance upon organisa- tion. The arguments for this position are mainly based upon three contentions: it is better that men should do things for themselves than to call in the intervention of the State; if the workers secure living wages by law they will be less likely to organise, or to remain efficiently or- ganised; and if the State fixes a mimimum wage it may some day decide to fix a maximum. Within certain limits the first of these propositions is METHODS OF INCREASING WAGES 421 incontestable. The self education, self reliance, and other experiences obtained by the workers through an organised struggle for improvements of any kind, are too valuable to be lightly passed over for the sake of the easier method of State assistance. Indeed, it would be better to accept somewhat less, or to wait somewhat longer, in order that the advantages might be secured through organisa- tion. However, these hypotheses are not verified as re- gards the minimum wage problem. The legal method promises with a high degree of probability to bring about universal living wages within ten or fifteen years. The champions of organisation can point to no solid reasons for indulging the hope that their method would achieve the same result within a half a century. Therefore, the advantages of the device of organisation are much more than neutralised by its disadvantages. The fear that the devotion of the workers to the union would decline as soon as living wages had been secured by law, seems to have no adequate basis either in experience or in probability. Speaking of the establishment of mini- mum wages in the tailoring industry of Great Britain, Mr. Tawney declares that it " has given an impetus to trade unionism among both men and women. The mem- bership of the societies connected with the tailoring trade has increased, and in several districts the trade unions have secured agreements fixing the standard rate considerably above the minimum contained in the Trade Board's de- termination." ^ Similar testimony comes from Austral- asia. Indeed, this is precisely what we should be in- clined to expect; for the workers whose wages had been raised would for the first time possess the money and the courage to support unions; and would have sufficient in- centives thereto in the natural desire to obtain something more than the legal minimum, and in the realisation that organisation was necessary to give them a voice in the 1 " Minimum Rates in the Tailoring Industry," p. 96. 422 DISTRIBUTIVE JUSTICE determination of the minimum, and to enable them to co- operate in compelHng its enforcement. Indeed, general experience shows that organisation becomes normally ef- ficient and produces its best results only among workers who have already approximated the level of living wages. To be sure, the State could set up maximum instead of minimum wages, — if the employing classes were suffi- ciently powerful. But all indications point to a decline rather than an increase in their political influence, and to a corresponding expansion in the governmental influence of the labouring classes and their sympathisers. Moreover, the labour leaders who urge this objection are inconsist- ent, inasmuch as they advocate other beneficial labour legislation. The distinction which they profess to find between laws that merely remove unfair legal and judicial disabilities and laws that reduce the length of the working day or fix minimum wages, has no importance in practical politics or in the mind of the average legislature. If the political influence of labour should ever become so weak and that of capital so strong as to make restrictive labour legislation generally feasible, legislators would not confine their unfriendly action to the field of positive measures. They would be quite as ready to pass a law prohibiting strikes as to enact a statute fixing maximum wages. The formal legalisation of strikes, picketing, and the primary boycott which is contained in the Clayton Act, and for which the labour unions worked long and patiently, could conceivably be seized upon by some future unfriendly Congress as a precedent and provocation for legislation which would not only repeal all the favourable provisions of the Clayton Act, but subject labour to entirely new and far more odious restraints and interferences. The fact that governments passed maximum wage laws in the past is utterly irrelevant to the question of wage legislation to-day. A legal minimum wage, and a multitude of other protective labour laws are desirable and wise in the twen- METHODS OF INCREASING WAGES 423 tieth century for the simple reason that labour and the friends of labour are sufficiently powerful to utilise this method, and because their influence seems destined to in- crease rather than decrease. The contrary hypothesis is too improbable for serious consideration. The conclusions that seem justified by a comprehensive and critical view of all the facts of the situation, are that organisation is not of itself an adequate means of bringing about living wages for the underpaid, but that it ought nevertheless to be promoted and extended among these classes, not only for its direct effect upon wages, but for its bearing upon legislation. The method of organisa- tion and the method of legislation are not only not mutu- ally opposed, but are in a very natural and practical man- ner complementary. Participation in Capital Ownership While those workers whose remuneration is below the level of decent maintenance are not ordinarily in a posi- tion to become owners of any kind of capital, many of them, especially among the unmarried men, can accumu- late savings by making large sacrifices. As a matter of fact, hundreds of thousands of the underpaid have be- come interest receivers through the medium of savings banks, real estate possessions, and insurance policies. Every effort in this direction is distinctly worth while, and deserving of encouragement. Labourers who are above the minimum wage level can, of course, save much larger amounts, and with less sacrifices than the under- paid classes. In all cases the main desideratum is that the workers should derive some income from capital; but it is almost equally important that their capital ownership should wherever possible take the form of shares in the industry in which they are employed, or the store at which they buy their goods. This means co-operative produc- tion and co-operative distribution. The general benefits 424 DISTRIBUTIVE JUSTICE of the co-operative enterprise have already been described in chapter xiv. For the wage earner proprietorship in a co-operative concern is preferable to any other kind of capital ownership because of the training that it affords in business management and responsibility, in industrial democracy, and in the capacity to subordinate his immedi- ate and selfish interests to his more remote and larger welfare. Co-operative ownership of the tools with which men work has advantages of its own over co-operative owner- ship of the stores from which they made their purchases, inasmuch as it increases their control over the conditions of employment, and gives them incentives to efficiency which results in a larger social product and a larger share thereof for themselves. As already pointed out in chap- ter xiv, the ideal type of productive co-operation is that known as the " perfect " form, in which the workers are the exclusive owners of the concern where they exercise their labour. Nevertheless, the '* federal " type, in which the productive concern is directly owned by a wholesale co-operative, indirectly by the retail co-operative store, and ultimately by the co-operative consumers, — presents one important advantage. It could be so modified as to enable the employes of the productive enterprise to share the ownership of the latter with the wholesale establishment. Such an arrangement would at once give the workers the benefits of productive co-operation mentioned above, and render probable a satisfactory adjustment of the conflict- ing claims of producers and consumers. As intimated in chapter xxiv, such a conflict is inherent in every system of industrial organisation, and will become more evident and more acute in proportion to the strengthening of the position of labour. A final reason for ownership of capital by labour de- serves mention here, even though it has no immediate bear- ing upon the question of remuneration. Were all la- METHODS OF INCREASING WAGES 425 bourers receiving the full measure of wages to which they are entitled by the canons of distributive justice, it would still be highly desirable that the majority if not all of them should possess some capital, preferably in the pro- ductive and distributive concerns in which they were im- mediately interested. It does not seem probable that our economic system as now constituted, with the capital owners and the capital operators for the most part in two distinct classes, will be the final form of industrial organi- sation. Particularly does this arrangement seem unde- sirable, incongruous, and unstable in a society whose po- litical form is that of democracy. Ultimately the workers must become not merely wage earners but capitalists. Any other system will always contain and develop the seeds of social discontent and social disorder. REFERENCES ON SECTION IV Adams and Sumner: Labour Problems. Macmillan; 1905. Commons and Andrews : Principles of Labour Legislation. Harpers ; 1916. Walker: The Wages Question. New York; 1876. Ryan : A Living Wage. Macmillan ; 1906. Snowden : The Living Wage. London ; Hodder & Stoughton. O'Grady: a Legal Minimum Wage. Washington; 1915. Broda : La Fixation Legale des Salaires. Paris ; 1912. N. Y. Factory Investigating Commission. Appendix to Vol. III. Tawney: Minimum Rates in the Chain-Making Industry. London; 1914. Minimum Rates in the Tailoring Industry. London; 1915. Turman: Le Catholicisme Social. Paris; 1900. PoTTiER : De Jure et J ustitia. Liege ; 1900. iPolier: L' Idee du Juste Salaire. Paris; 1903. Menger : The Right to the Whole Produce of Labour. London ; 1899. Garriguet : Regime du Travail. Paris ; 1908. Nearing: Reducing the Cost of Living. Philadelphia; 1914. Chapin: The Standard of Living in New York City. New York; 1909. Also the works on co-operation cited in connection with Section II, and those of Hobson, Carver, Nearing and Streightoff. CHAPTER XXVI SUMMARY AND CONCLUSION Throughout this book we have been concerned with a twofold problem : to apply the principles of justice to the workings of the present distributive system, and to point out the modifications of the system that seemed to promise a larger measure of actual justice. The mechanism of distribution was described in the introductory chapter as apportioning the national product among the four classes that contribute the necessary factors to the process of pro- duction, and the first part of the problem was stated as that of ascertaining the size of the share which ought to go to each of these classes. The Landowner and Rent We began this inquiry with the landowner and his share of the product, i.e., rent. We found that private owner- ship of land has prevailed throughout the world with practical universality ever since men began to till the soil in settled communities. The arguments of Henry George against the justice of the institution are invalid because they do not prove that labour is the only title of property, nor that men's equal rights to the earth are incompatible with private landownership, nor that the so-called social production of land values confers upon the community a right to rent. Private ownership is not only socially preferable to the Socialist and the Single Tax systems of land tenure, but it is, as compared with Socialism cer- tainly, and as compared with the Single Tax probably, among man's natural rights. On the other hand, the land- 426 SUMMARY AND CONCLUSION 42/ owner's right to take rent is no stronger than the capital- ist's right to take interest; and in any case it is inferior to the right of the tenant to a decent livelihood, and of the employe to a living v^age. Nevertheless, the present system of land tenure is not perfect. Its principal defects are : the promotion of cer- tain monopolies, as, anthracite coal, steel, natural gas, petroleum, water power, and lumber; the diversion of ex- cessive gains to landowners, as indicated by the recent great increases in the value of land, and the very large holdings by individuals and corporations; and the exclu- sion of large masses of men from the land because the owners will not sell it at its present economic value. The remedies for these evils fall mainly under the heads of ownership and taxation. All mineral, timber, gas, oil, grazing, and water-power lands that are now publicly owned, should remain the property of the states and the nation, and be brought into use through a system of leases to private individuals and corporations. Cities should purchase land, and lease it for long periods to persons who wish to erect business buildings and dwellings. By means of taxation the State might appropriate the future in- creases of land values, subject to the reimbursement of private owners for resulting decreases in value; and it could transfer the taxes on improvements and personal property to land, provided that the process were suffi- ciently gradual to prevent any substantial decline in land values. In some cases the State might hasten the disso- lution of exceptionally large and valuable estates through the imposition of a supertax. The Capitalist and Interest The Socialist contention that the labourer has a right to the entire product of industry, and therefore that the cap- italist has no right to interest, is invalid unless the former alleged right can be effectuated in a reasonable scheme of 428 DISTRIBUTIVE JUSTICE distribution; and we know that the contemplated Socialist scheme is impracticable. Nevertheless, the refutation of the Socialist position does not automatically prove that the capitalist has a right to take interest. Of the titles ordinarily alleged in support, of such a right, productivity and service are inconclusive, while abstinence is valid only in the case of those capital owners to whom interest was a necessary inducement for saving. Since it is uncertain whether sufficient capital would be provided without inter- est, and since the legal suppression of interest is imprac- ticable, the State is justified in permitting the practice of taking interest. But this legal permission does not justify the individual interest-receiver. His main and sufficient justification is to be found in the presumptive title which arises out of possession, in the absence of any adverse claimant with a stronger title to this particular share of the product. The only available methods of lessening the burden of interest are a reduction in the rate, and a wider diffusion of capital through co-operative enterprise. Of these the former presents no definite or considerable reasons for hope, either through the rapid increase of capital or the inevitable extension of the industrial function of govern- ment. The second proposal contains great possibilities of betterment in the fields of banking, agriculture, stores, and manufacture. Through co-operation the weaker farmers, merchants, and consumers can do business and obtain goods at lower costs, and save money for investment with greater facility, while the labourers can slowly but surely become capitalists and interest-receivers, as well as em- ployes and wage-receivers. The Business Man and Profits Just remuneration for the active agents of production, whether they be directors of industry or employes, depends fundamentally upon five canons of distribution; namely, SUMMARY AND CONCLUSION 429 needs, efforts and sacrifices, productivity, scarcity, and human welfare. In the Hght of these principles it is evi- dent that business men who use fair methods in competi- tive conditions, have a right to all the profits that they can obtain. On the other hand, no business man has a strict right to a minimum living profit, since that would imply an obligation on the part of consumers to sup- port superfluous and inefficient directors of industry. Those who possess a monopoly of their products or com- modities have no right to more than the prevailing or competitive rate of interest on their capital, though they have the same right as competitive business men to any surplus gains that may be due to superior efficiency. The principal unfair methods of competition; that is, discrimi- native underselling, exclusive-selling contracts, and dis- crimination in transportation, are all unjust. The remedies for unjust profits are to be found mainly in the action of government. The State should either own and operate all natural monopolies, or so regulate their charges that the owners would obtain only the competitive rate of interest on the actual investment, and only such surplus gains as are clearly due to superior efficiency. It should prevent artificial monopolies from ^practising extor- tion toward either consumers or competitors. Should the method of dissolution prove inadequate to this end, the State ought to fix maximum prices. Inasmuch as over- capitalisation has frequently enabled monopolistic concerns to obtain unjust profits, and always presents a strong temptation in this direction, it should be legally prohibited. A considerable part of the excessive profits already accu- mulated can be subjected to a better distribution by pro- gressive income and inheritance taxes. Finally, the pos- sessors of large fortunes and incomes could help to bring about a more equitable distribution by voluntarily comply- ing with the Christian duty of bestowing their superfluous goods upon needy persons and objects. 430 DISTRIBUTIVE JUSTICE The Labourer and Wages None of the theories of fair wages that have been exam- ined under the heads of " the prevaiUng rate," " exchange- equivalence," or ** productivity " is in full harmony with the principles of justice. The minimum of wage justice can, however, be described with sufficient definiteness and certainty. The adult male labourer has a right to a wage sufficient to provide himself and family with a decent live- lihood, and the adult female has a right to remuneration that will enable her to live decently as a self supporting individual. At the basis of this right are three ethical principles: all persons are equal in their inherent claims upon the bounty of nature; this general right of access to the earth becomes concretely valid through the expenditure of useful labour; and those persons who are in control of the goods and opportunities of the earth are morally bound to permit access thereto on reasonable terms by all who are willing to work. In the case of the labourer, this right of reasonable access can be effectuated only through a living wage. The obligation of paying this wage falls upon the employer because of his function in the industrial organism. And the labourer's right to a living wage is morally superior to the employer's right to interest on his capital. Labourers who put forth unusual efforts or make unusual sacrifices have a right to a proportionate excess over living wages, and those who are exceptionally ■productive or exceptionally scarce have a right to the extra compensation that goes to them under the operation of competition. Labourers who are receiving the '' equi- table minimum " described in the last sentence have a right to still higher wages at the expense of the capitalist and the consumer, if they can secure them through the processes of competition; for the additional amount is an ethically unassigned or ownerless property which may be taken by SUMMARY AND CONCLUSION 43 1 either labourer, capitalist, or consumer, provided that there is no artificial limitation of supply. The methods of increasing wages are mainly three: a minimum wage by law, labour unions, and co-operative en- terprise. The first has been fairly well approved by ex- perience, and is in no wise contrary to the principles of either ethics, politics, or economics. The second has like- wise been vindicated in practice, though it is of only small efificacy in the case of those workers who are receiving less than living wages. The third would enable labourers to supplement their wage incomes by interest incomes, and would render our industrial system more stable by giving the workers an influential voice in the conditions of em- ployment, and laying the foundation of that contentment and conservatism which arise naturally out of the posses- sion of property. As a matter of convenience, the foregoing paragraphs may be further summarised in the following abridgment: The landowner has a right to all the economic rent, modi- fied by the right of his tenants and employes to a decent livelihood, and by the right of the State to levy taxes which do not substantially lower the value of the land. The capitalist has a right to the prevailing rate of inter- est, modified by the right of his employes to the '' equi- table minimum " of wages. The business man in com- petitive conditions has a right to all the profits that he can obtain, but corporations possessing a monopoly have no right to unusual gains except those due to unusual effi- ciency. The labourer has a right to living wages, and to as much more as he can get by competition with the other agents of production and with his fellow labourers. Concluding Observations No doubt many of those who have taken up this volume with the expectation of finding therein a satisfactory 432 DISTRIBUTIVE JUSTICE formula of distributive justice, and who have patiently followed the discussion to the end, are disappointed and dissatisfied at the final conclusions. Both the particular applications of the rules of justice and the proposals for reform, must have seemed complex and indefinite. They are not nearly so simple and definite as the principles of Socialism or the Single Tax. And yet, there is no escape from these limitations. Neither the principles of indus- trial justice nor the constitution of our socio-economic system is simple. Therefore, it is impossible to give our ethical conclusions anything like mathematical accuracy. The only claim that is made for the discussion is that the moral judgments are fairly reasonable, and the proposed remedies fairly efficacious. When both have been realised in practice, the next step in the direction of wider distribu- tive justice will be much clearer than it is to-day. Although the attainment of greater justice in distribu- tion is the primary and most urgent need of our time, it is not the only one that is of great importance. No con- ceivable method of distributing the present national prod- uct would provide every family with the means of sup- porting an automobile, or any equivalent symbol of com- fort. Indeed, there are indications that the present amount of product per capita cannot long be maintained without better conservation of our natural resources, the abandonment of our national habits of wastefulness, more scientific methods of soil cultivation, and vastly greater efficiency on the part of both capital and labour. Nor is this all. Neither just distribution, nor increased produc- tion, nor both combined, will insure a stable and satisfac- tory social order without a considerable change in human hearts and ideals. The rich must cease to put their faith in material things, and rise to a simpler and saner plane of living; the middle classes and the poor must give up their envy and snobbish imitation of the false and degrad- ing standards of the opulent classes; and all must learn SUMMARY AND CONCLUSION 433 the elementary lesson that the path to achievements worth while leads through the field of hard and honest labour, not of lucky " deals " or gouging of the neighbour, and that the only life worth living is that in which one's cher- ished wants are few, simple, and noble. For the adoption and pursuit of these ideals the most necessary requisite is a revival of genuine religion. INDEX Abstinence: as a title to interest, 182-186. Adams, T. S. : 301, 302. Adam Smith: 331, 341. Agriculture: co-operation in, 217- 220. Alaska : leasing system in, 96. Altruism : efficacy of under Social- ism, 165-167 ; promoted by co- operation, 229. Ambrose, Saint : 305. American Sugar Refining Com- pany: 267, 272, 289. American Tobacco Company: 263, 267, 288. Analogy: economic, as justifying interest, 205, 206, Anthracite coal: a monopoly, 7^, 78, 95, 132. Antoine, Charles: 337-340. Antoninus, Saint : 270. Aquinas, Saint Thomas : 63, 64, 175, 181, 208, 304, 306, 307, 333- Arbitration : failure of, 324. Ashley, W. J. : 9. Astor estate : 88, 89. Augustine, Saint: 305. Australasia : special land taxes in, 1 18-120, 131; minimum wage in, 401, 402, Authorities : Catholic and Protest- ant, on living wage, 277, 278. Basil, Saint : 305. Bible, the : on the duty of benevo- lence, 303, 304, 316, 317. Brandeis, Louis D. : 265, 275. Business man: functions and re- wards of, 237-239, 255-258; no right of to minimum profits, 258-260, 362, 363 ; the superflu- ous, 260, 261. Canada: special land taxes in, 117- 120. Canonist : doctrine of wage justice, 333-33(i- Canons of distributive justice: 243-253- Capital: meaning of, 137, 138; power of to create value, 146- 148; Catholic teaching con- cerning interest on, 175-177; titles of to interest, 177-186; value of in a no-interest regime, 188-190; need for a wider distribution of, 213, 214; need for ownership of by labour, 214, 229, 230. Capitalists: two kinds of, 138; ex- propriation of, 154-158; right of to take interest, 201-209; claims of, versus claims of la- bourers, 367-369, 390-393, 396. Carnegie, Andrew : 300. Carver, T. N. : 351-355- Catholic Church : attitude of toward interest, 172-176. Child workers : right of to a liv- ing wage, 373. Christian conception of welfare: 316-318. Clark, J. B. : 271, 347-351- Compensation : to landowners, 34- 39; to capitalists under So- cialism, 154-158. Competition : alleged failure of, 275-278. Confiscation : of land values under the Single Tax, 34-39; of cap- 435 436 INDEX ital under Socialism, 154-158; of wealth by taxation, 297, 298. Constitutionality of minimum wage laws: 405-407. Consumer: injury to through stockwatering, 282-288 ; obli- gations of to business man, 258, 259, 362, 363; versus la- bourer, 393-398. Contract: onerous, 326; free, as a rule of wage justice, 328-330, 370-372. Co-operation : as a partial solvent of capitalism, 210-233; essence and kinds of, 214, 215; in banking, 216, 217; in agricul- ture, 217-220; in stores, 220- 222\ in production, 222-228; efifect of on social stability, 229, 230 ; as compared with in- dividualism and Socialism, 230, 231 ; province and limita- tions of, 231-233; bearing of on the superfluous business man, 260, 261 ; and on the la- bouring classes, 423-425. Copartnership : 222^, 224. Corporation : profits of a, 241, 242, 257, 258, 262, 389. Cost of living: 378, 379. Cost of production : of capital, 188, 189. Credit societies: co-operative, 216, 217. Defects of our land system: 74- 93; monopoly, 75-^; exces- sive gains, 80-89; exclusion, 90-93. Devas, Charles: 184. Disagreeable tasks : 384, 385. Dixon, F. H. : 323. Discriminative transportation con- tracts : 272, 273. Discriminative underselling: 267- 270. Distribution of superfluous wealth: 303-319. Distributive justice: canons of, 243-253, 381, 382. Earth: right of access to, 358- 360. Economic determinism : inconsist- ent with ethical judgments, 20, 145, 146, 343, 344. Efficiency : monopolistic, 265-267, 27S-'2^77, 279; exceptional, 388- 390. Eff"orts : exceptional, as claim to rewards, 382-383. Efforts and sacrifices : as canons of distribution, 245-247. Ely, R. T.:330. Employer: gains of from wage contract, 327, 328; obligation of to pay a living wage, 365- 272. Engels, F. : 20. Ensor, E. K. : 50. Equal gains: as a canon of wage justice, 326-328. Equality : as a canon of justice, 243, 244; of men's claims to the bounty of nature, 358, 359; of rights to a decent liveli- hood, 360-363. " Equitable minimum " : of wages, 388, 390, 392, 393, 395, 397, 398, 399, 417- Equity : meaning of, 256. Exchange-equivalence : theories of, 326-340; equal gains, 326- 328; free contract, 328-330; market value, 330-332; me- diseval, 332-33^) modern, 336- 340. Exclusion from the land : 90-93. Exclusive-sales contracts : 270- 272. Expropriation : of capitalists un- der Socialism, 154-158. Extrinsic titles : of interest, 172. Family living wage: 373-376. Fathers of the Church : on private INDEX 437 property in land, 62; on duty of beneficence, 305, 306. • Fay, C. R. : 214, 221, 227. Fisher, Irving: 196. Fortunes : legal limitation of, 291- 302 ; directly, 292-295 ; by tax- ation, 296-302. France : co-operative production in, 223. Fustel de Coulanges: 9. Gains: excessive from land, 80- 89; from monopolies, 263-265. Germany : co-operation in, 216. Giffen, Sir Robert: 189. Godwin, W. : 341. Government ownership : 93-95 ; limitations of, 163-165; and rate of interest, 212. Great Britain: co-operation in, 220-222 ; income taxes in, 299- 300; minimum wage in, 401, 402. Haines, H. T. : 405. Hammond, M. B. : 402. Henry George : on primitive com- mon ownership, 17; on first occupancy, 21-24; on title of labour, 24-29 ; on natural right to land, 30-39; on right of community to land values and rent, 39-47; on Single Tax, 51, 52. Hillquit, Morris: 159. Hobson, J. A.: 418. Howe, F. C: 76-78. Hyndman and Morris : 20. Human welfare : the test of prop- erty rights in land, 36-38 ; and of a system of land tenure, 74; and of increment taxes, 109-111 ; and of titles of prop- erty, 150, 151, 244, 293-295; as a canon of distributive justice, 252, 253; as justifying profits, 256, 257, 389; as justifying higher than living wages, 386. Income: distribution of national, 81-83. Incomes : injustice of equal, 244 ; progressive taxation of, 297- 302. Increment taxes: 102-117. Inefliciency: of leadership and la- bour under Socialism, 158-168. Inheritance: legal limitation of, 293-295; progressive taxation of, 296-302. Interest: nature of, 137-140; rate of, 141-144; alleged in- trinsic justifications of, 171- 186; attitude of Church toward, 172-176; extrinsic ti- tles of, 172; and the title of productivity, 176-181; and the title of service, 181, 182; and the title of abstmence, 182- 186; social and presumptive justifications of, 187-209; necessity of, 191-199; civil authorization, 201-204 ; how justified, 204-209; a "work- less" income, 210; possibility of reducing rate, 211-213; dis- tinguished from profits, 238,' 239; versus wages, 390-393- Investor: the "innocent," 286, 287/ Ireland : reduction of rents in, 69- 71 ; compulsory sale of land in, no; co-operation in, 217- 219. Italy : co-operation in, 223. Justice : dependence of on charity, 318; not found in prevailing- rate theory, 325; nor in ex- change-equivalence theories, 326-340; nor in productivity theories, 340-355; and the wage contract, 370-372; and the legal minimum wage, 407. Kautsky, Karl : 153. King, W. I.: 82, 83, U2, 123, 155, 240, 310, 414. 438 INDEX Labour: as a title to land, 24-29; and to products, 45 ; and to the entire product of industry, 145-152; 341-347; productiv- ity of, 178, 179; inefficiency of under Socialism, 162-167; mediaeval measure of cost of, 336, 337; claims of different groups of, 381-387; legislative proposals for, 416, 417. Labour unions : efficacy and limit- ations of, 417-420; and legis- lation, 420-423. Labourer, the: claim of to rent, 71-73 ; right of to his product, 25, 26, 28, 43, 45, 149, 150, 179, 180; gains of from wage con- tract, 327, 328; right of to a living wage, 363-369, 373, 373 ; versus the capitalist, 390-393, 396; versus the consumer, 393-398; and co-operative en- terprise, 423-425. Land: distribution of, 16, 17, 87- 89; large holdings of, 89, 90; accessibility to, 91-95; the leasing system, 95-97; public ownership of, 98-100. Landowner: right of to rent, 67- 73; his share of product, 80- 89. Landownership : in history, 8-18; two theories of, 8, 9; in pre- agricultural conditions, 10-12; origin of private, 12-14; prev- alence and benefits of, 15-18; arguments against private, 19- 47, by Socialists, 19-21, by Henry George, 21-47; private, the best system of tenure, 48-55; four elements of, 48; a natural right, 55-56. See Henry George, Occupancy, Labour, Right, Compensation, Confiscation, Defects, Rent. Land System : defects of the exist- ing, 74-93. Land values: how created by the community, 40-47 ; increase of. 83-86; taxation of, 117-130. Langenstein : 335. Lassalle, F. : 183. Large estates: special taxation of, 130-132. Leadership : industrial, under So- cialism, 158-167. Leasing system: 95-97. Legislation: for labour, 120-123, 416. Liberty: under Socialism, 168-170. Liebknecht, W. : 152. Life : right to, 57 ; true conception of, 317. Limitation of fortunes: 291-302; directly, 292-295; by taxation, 296-302. Livelihood, decent: 360-363; the labourer's right to, 363-365; the employer's, 366. Living wage : the minimum of wage justice, 356-380; three fundamental principles, 358- 360; and a decent liveli- hood, 360-363; right of la- bourer to, 363-369; obligation of employer to pay, 365-372; for a family, 373-376; and social welfare, 376, 377; au- thorities for, 377, 378; money measure of, 378-380; versus other titles of reward, 381, 382, 386. Loan capitalist: and the claims of the labourer, 366, 367, 390, 391. Loans : attitude of Church toward interest on, 172^174; and pro- ductive capital, 174, 175. Maine, Sir Henry: 17. Market value: and wage justice, 330-332, 370, 375. Marriage: right to, 57, 58; and reasonable life, 374. Marx, Karl : 145-148, 342, 343, 374. Materialism : in current concep- tion of welfare, 314-318. Meade, E. S. : 265, 266. Menger, A.: 342. INDEX 439 Middle Ages, doctrines of : on in- terest, 172, 175, 176, :2oi; on titles of gain, 175; on wage justice, 332-336' Minimum: of wage justice, 356- 380. Minimum profits: question of right to, 258-260. Minimum wage : 353-355, 400-423 ; in operation, 400-403; ethical and political aspects of, 407, 408; economic aspect of, 408- 416; opinions of economists on, 412-416, 420-423. Modern : version of exchange- equivalence, 336-340. Monopoly : in relation to land, 75- 80; moral aspect of, 262-278; excessive gains of, 263-265 ; efficiency of, 265-267, 275-277 ; discriminative underselling by, 267-270; favors to by rail- roads, 262, 273; natural, 273- 275 ; suppression versus regu- lation of, 275-278; by labour, 390, 397. Natural monopolies : 273-275. Natural rights : 57-59. See Rights. Nearing, Scott: 83-85; 154, 210, footnote. Needs : as a canon of justice, 244, 246, 356-358; classification of, 308, 309; exaggerated con- ception of, 314-318; a standard of wage justice in Middle Ages, 335, 336' Occupancy, first : as a title to land, 21-24; as exemplified in in- crement taxes, 109. Occupation : question of right to a livelihood from a present, 362, 363. Original titles: See Occupancy, Labour. Ownership : titles of determined by reasonable distribution, 150, 151. Overcapitalization : 279-290. See Stockwatering. Perkins, G. W. : 276. Personality: as basis of industrial rights, 358-371, 374. Pesch, H. : 215. Pope Benedict XIV: 173. Clement IV: 23. Gregory the Great: 306. Innocent XI: 316. Leo XIII: 64-66, 306, 309, 377. Sixtus V: 176. Population: excessive increase of urban, 86. Possession: as a partial justifica- tion of interest: 205, 206. Possessors : obligation of to non- possessors, 359, 360. Presumption : as a partial justifica- tion of interest, 2os ; and the canon of productivity, 248. Prevailing rate theory: of wage ^ justice, 323-325. Prices: test of extortionate, 269, 270; legalized agreements fix- ing, 277, 278; versus wages, . 393-399. Prmciples: three fundamental to living wage doctrine, 358-360. Product: distribution of national, 181-183. See Labour, Labour- er, Right. Production : of land values by the community, 39-47; co-opera- tion in, 222-228. Productivity: as a title to the product, 25, 26, 28, 43, 45, 149, 150, 179; as a title to interest, 172, 173, 176-181, 204, 205 ; of labour and capital, 178-180; as a canon of distribution, 246^249, 350, 351; as justify- ing large profits, 2255-258, 262, 388, 389; as a title to wages, 341-355, 385; Clark's theory of, 347-351 ; Carver's theory of, 351-355. Profits: nature of, 237-242; as 440 INDEX compared with interest and rent, 139, 140, 238, 239; amount of, 239, 240 ; in a cor- poration, 241, 242; in condi- tions of competition, 254-261 ; indefinitely large, 255-258 ; minimum, 258-260 ; surplus and excessive, 263-265; in natural monopolies, 273, 274; versus wages, 388-390. "Progress and Poverty": 21, 22, 24, 25, 30, 34, 39, 51, 52. Proudhon: 342. Public honour: efficacy of under Socialism : 165-167. Pullman Company: 289. Reform: versus revolution, 94.^ Rent: economic, 3-7; commercial, 5 ; how produced by society, 39-47; right of landowner to, 67-75; right of tenant and labourer to, 69-73, 396; in- crease and amount of, 80^-87; distribution of, 87-89; in United States, 122. Rent charges : attitude of theolog- ians toward, 175, 176. " Res f ructificat domina " ; limita- tions of this formula, 60, 61, 104, 105, I IT, 180, 345. Revolution: versus reform, 94. Riches: from land, 88, 89. Right: of the individual to land, 30-39; of the community to land values and rent, 39-47; of the producer to his product, see productivity; of private landownership, 56-66; to take rent, 67-73 ; of access to the earth, 358-360; to a decent livelihood, 360-363; to a liv- ing wage, 363-369, ?,T2, 376. Rights: three principal kinds of natural, 57-59; of property, as created by the State, 202. Rodbertus, K. : 342. Roman Congregations : on lawful- ness of interest taking, 173, 174- Saint-Simon: 342. Sacrifice: principle of in taxation, 131, 297; as a title to interest, 185--188; as a title of reward, 383-385. Savers : three kinds of, 183-185. Scarcity: effect of on rewards of productive agents, 80; as a canon of distributive justice, 250, 251 ; as justifying very large profits, and more than a living wage, 255-258. Schmoller: 253. Schoolmen: doctrines of on wage justice, 2>lZ-Z2)^. Seligman, E. R. A.: loi, 296, 297. Service: as a title to interest, 181, 182, 204, 205. Shifting: of land taxes, 102, 103. Sidgwick, H. : 329. Single Tax: injustice of, 33-39, 100; proposals and defects of, 51, 54, 108. Skelton, O. D.: 165. Small, A. W. : 171. Social benefits : of special taxes on land, 127-130. Socialisrn : as regards land, 49, 51 ; not inevitable, 153 ; expropria- tion of capitalists by, 154-158; inefficiency of, 158-168 ; hostile to individual liberty, 168-170; not co-operation, 230, 231. Socialists : on private landowner- ship, 19-21 ; on interest, value, and labour, 145-148; on the collectivist State, 152, 153; on morality of profits, 254; on wage justice, 341-347; on the principle of needs, 356. Socialist party: of the United States, on landownership, 51. Spargo, John: 51. Specific productivity: as a measure of wage justice, 347-351- INDEX 441 Speculation : effect of on land val- ues, 92, 93, 103. Spencer, Herbert: 23. Standard Oil Company: 76, 263, 267. State, the: should permit interest, 199-201 ; power of to create property rights, 202^204; not obliged to guarantee living profits, 259; fixing of maxi- mum prices by, 275-278; and the "innocent" investor, 286, 287; and the prevention of stockwatering, 289, 290; and the limitation of fortunes, 291- 302; and payment of living wages, 365 ; and minimum wage, 407, 408, 420-423; and other labour legislation, 416, 417. Stockholders: claim of to surplus gains, 257, 258, 262; as re- lated to stockwatering, 2'](^ 281, 285. Stockwatering: moral aspect of, 279^-290; definition of, 280; in- jurious effects of, 281-286; and the " innocent " investor, 286, 287; magnitude of, 288, 289; prevention of, 289, 290. Stores : co-operation in, 220-222. Superfluous wealth : duty of dis- tributing, 303-319; kinds of, 308, 309 ; a false conception of, 314-316; true conception of» 318, 319. See Wealth. Supertax : on large landed estates, 130-132. Supply and demand : as determin- ing rent, 80; as determining interest, 143, 144. Taussig, F. W. : 198, 214, 282, 289, 290; on minimum wage, 412- 416. Tawney, R. H. : 421. Taxation: as a social instrument, loi, 102; of increases in land value, 102-117; faculty theory of, 107, 108; progressive, as a method of limiting fortunes, 296-302. Taxes: shifting of to land, 117- 130; social benefits of, 127-130. Tenant: claim of to rent, 69-71. Theologians: on private landown- ership, 62-64; on interest, 172-176, 202-204; on civil creation of property rights, 202; on duty of benevolent distribution, 308, 309. Thompson, W. : 341. Undertaker: See Business man. United States: special land taxes in, 119; co-operation in, 218, 263; minimum wage in, 401, 403-407. United States Commissioner of Corporations, reports of: on Standard Oil Company, 76, 263, 267, 268, 272; on Steel Corporation, 79, 89, 263, 267, 285 ; on water power owner- ship, 79, 95; on the lumber industry, 85, 89, 94, 132; on American Tobacco Company, 263, 267, 288; on American Sugar Refining Company, 267, 272, 289. United States Shipbuilding Com- pany: 288, 289. United States Steel Corporation: 79, 89, 267, 285, 289. Use: right, as a confirmatory jus- tification of interest taking, 206-208. Value: Marxian theory of, 145- 148, ZZZ, 343, 344; relation of to wage justice, 330-340; and to a living wage, 370, 375- Van Hise, C. R.: 266, 2lbT, 277, 278, 288. Wage justice: unacceptable theo- ries of, 323-355; prevailing rate theory, s^SS^S', ex- 442 INDEX change equivalence theory, 326- 340; productivity theories, 341- 355 ; the minimum of, 35^38o ; problem of complete, 381- 399; claims of different labour groups, 381-387; wages versus profits, 388-390; wages versus interest, 390-393; wages ver- sus prices, 393-399- Wages: versus profits, 388-390; " equitable minimum " of, 388 ; versus interest, 390-393; ver- sus prices, 393-399; methods of increasing, 400-425; legal minimum, 400-416; other leg- islation for, 416, 417; labour unions, 417-423; co-operative enterprise, 423-425. Wagner, A. : 342. Watered stock: 279-290. See Stockwatering. Water power: in the United States, 79, 95. Wealth, superfluous : duty of dis- tributing, 303-319; as regards a part, 303-307 ; as regards the whole, 308-314; a duty of charity or of justice, 305-307; the supply of capital and busi- ness ability, 311-313; false and true conceptions of, 314- 316. Welfare: a false conception of, 314-316; true conception of, 316-318; social, demands a living wage for all, zi^, Z77' See Human welfare. Whittaker, Sir Thomas : 10, 14, 28. Wicker, G. R. : 350, 35 1- Williams, A.: 232. Wolman, L. : 417, 418. Women : right of to a living wage, i 37 Z- PRINTED IN THE UNITED STATES OF AMERICA 17541 Date Due MAR 1 MAR g|^ €