Class _Ji£Llli Bonk > r foiyriglilN " > T 3 ^" COPYRIGHT DEPOSm ELEMENTARY ECONOMICS WITH SPECIAL REFERENCE TO SOCIAL AND BUSINESS CONDITIONS IN THE UNITED STATES BY CHARLES MANFRED THOMPSON, Ph.D. ASSOCIATE PROFESSOR OF ECONOMICS , UNIVERSITY OF ILLINOIS BENJ. H. SANBORN & CO. CHICAGO NEW YORK BOSTON 1919 ^■^f Copyright, 1919, By BENJ. H. SANBORN & CO. JUNdl 1919 (g)CI.A515042 -H^. I TO THE GREAT ARMY OF HIGH SCHOOL PUPILS WHO ENTER INDUSTRY EVERY YEAR THIS BOOK IS RESPECTFULLY DEDICATED PREFACE Recent events have brought the people of the United States face to face with numerous new economic problems, many of which are likely to remain unsolved for years to come ; besides, they have complicated to a marked degree those old problems which were pressing Tor solution at the outbreak of the Great War. In consequence, our leaders are becoming more and more convinced that increased attention should be given in our secondary schools to a serious consideration of the fundamental principles on which these problems rest. Such a conviction is a new one in many quarters, for hitherto the no tion_has very gener ally prevailed, especially among uni- versi ty teachers, that no formal study of the Principles of Economics should be undertaken before the sophomore year in college. Obviously such a notion carries the implication, un- conscious perhaps, that the fundamentals of Economics, even in their simplest forms, should be withheld from the great mass of young men and women engaged in industry, and restricted to the select few who are able by one means or another to be- come college students. Such a notion not only carries vicious implication, but it also is ill founded ; for hundreds of high schools the country over prove by experience that their pupils are fully capable of grasping the elements of economic science when presented concretely and in a way to show their relationship to practical affairs. The public high school is now the "finishing school" of the typical leader of American life, and it is likely to continue to perform that function for another generation at least*; and just so long as this condition prevails our high schools cannot, if they VI PREFACE would, escape the responsibility of presenting squarely and as fully as possible the elementary principles that govern our every- day business actions. Since the great bulk of the leaders of to-morrow can have no other academic training in economic principles than that gained in the public high school, it is highly essential that the text- book placed in their hands should be S Qinethinp; more than a n introduction to a college course to be pursued two or three years hence. It should, with due regard for the capacities of high school pupils, endeavor to introduce its readers to the princi- ples that u nderlie business..a7idi_dgt'P-^^T^'"P- in large measure the practices of the business world. ' ~ In preparing this text I have had four ideals in mind : to ^V choose for discussion only those topics which are fundamentally important ; to push the discussion of laws and i:)rinciples to a point where every serious-minded high school pupil would feel a real mental challenge ; to illustrate every law and principle by references to historical events and to everyday experiences, and by the use of gra]>hi(' material ; and finally, to show the relation of each taw and principle to the industrial activities in which practically every high school boy and many of our girls must engage. In keeping the viewpoint of the high school I have had the assistance of teachers in secondary schools of various types in all sections of the country ; and for their kind and disinterested cooperation I take pleasure in expressing my sincere appre- ciation. I am under special obligation to one of my col- leagues, Dr. M. H. Hunter, who has read and criticized the entire manuscript, and rendered invaluable aid in preparing the Exercises and Problems that accompany each chapter. Charles Manfred Thompson Urbana, Illinois June 1, 1919 TABLE OF CONTENTS PART I. INTRODUCTION — ECONOMICS AS A SOCIAL SCIENCE CHAPTER PAGE I. The Social Viewpoint 1. The Social Sciences ....... 3 2. The Individual and Society ...... 6 3. Wealth and Welfare 9 Exercises and Problems ...... 12 Supplementary Reading .;.... 15 II. Nature and Content of Economics 4. Nature of Economics ....... 16 5. Divisions of Economics .... o.. 19 Exercises and Problems ....... 24 Supplementary-Reading ...... 26 PART II. CONSUMPTION OF ECONOMIC GOODS III. Nature of Consumption 6. Motives behind Economic Activity . . . .29 7. Nature of Demand 32 8. Elasticity of Demand . . . . ' . . .34 Exercises and Problems ...... 38 Supplementary Reading 39 IV. Laws of Consumption 9. Human Wants Are Unlimited ..... 40 10. The Law of Diminishing Utility ..... 44 11. The Law of Marginal Utility 46 Exercises and Problems ...... 52 Supplementary Reading ...... 53 Vlll TABLE OF CONTENTS CHAPTER ' V. Demand, Supply, and Price 12. Relation of Demand and Supply to Price 13. Determination of Market Price . 14. The Competitive Market Price . Exercises and Problems Supplementary Reading VI. Some Practical Aspects of Consumption 15. Harmful Consumption 16. Unwise Consumption . 17. Conservation and Thrift 18. Substitution Exercises and Problems Supplementary Reading 54 56 69 64 66 67 69 72 78 79 81 PART III. PROBLEMS OF PRODUCTION VII. Organization of Industry 19. Historical Background . 20. The Single Enterpriser and the Partner 21. The Corporate Form of Organization Exercises and Problems Supplementary Reading ship 85 88 90 95 96 VIII. Division of Labor and Large-Scale Production 22. The Factors of Production . 23. Division of Labor 24. Territorial Division of Labor 25. Large-Scale Production Exercises and Problems . * Supplementary Reading IX. Land (Natural Resources) 26. Land as a Productive Factor 27. Natural Resources of the United States 28. The Law of Diminishing Returns Exercises and Problems Supplementary Reading 97 100 106 108 111 113 114 118 122 128 129 TABLE OF CONTENTS IX CHAPTER X. Capital as A Factor in Production 29. Source of Capital 30. Nature of Capitalistic Production 31. Different Kinds of Capital Exercises and Problems Supplementary Reading 130 132 134 138 140 XI. Competition versus Monopoly .32. Impetus of Competition 33. The Law of Monopoly Price 34. Limitations on Monopolists Exercises and Problems Supplementary Reading 141 145 147 151 153 XII. Transportation 35. Stages in the Development of Transportation in the United States 154 36. Railroad Competition ...... 158 37. Rate-Maldng . 161 38. Government Regulation of Railroads . . . 162 Exercises and Problems ...... 166 Supplementary Reading . . . . . . 168 XIII. Marketing the Products of Industry 39. Separation of Producers and Consumers 40. Indirect Methods of Marketing 41. More Direct Methods of Marketing . Exercises and Problems Supplementary Reading 169 170 176 179 182 XIV. Government and Production 42. Patents, Copyrights, and Trade-marks 43. Regulation of Industrial Monopolies 44. Regulation of Public Utilities 45. Fixing Prices Exercises and Problems Supplementary Reading 183 186 190 192 193 195 TABLE OF CONTENTS PART IV CHAPTER XV. THE EXCHANGE OF ECONOMIC GOODS Use of Money in Making Exchanges 46. Characteristics of a Good Money .... 199 47. Uses of Money 202 48. Kinds of Government Money ..... 205 Exercises and Problems ...... 210 Supplementary Reading ...... 212 XVI. Monetary Laws Illustrated From the History of THE United States 49. Some Important Monetary Laws .... 213 50. Monetary History of the United States . . .216 Exercises and Problems ...... 224 Supplementary Reading ...... 226 XVII. Banking and Its History 51. Development of the Principle of Banking . . 227 52. Different Kinds of Banks 229 53. A Bank Statement 231 54. Banking in the United States 233 Exercises and Problems ...... 238 Supplementary Reading ...... 240 XVIII. Domestic and Foreign Commerce 55. Nature and Volume of the Trade of the United States 241 56. Paying Trade Debts 243 57. The Balance of Trade 247 Exercises and Problems . . . • . . . 253 Supplementary Reading ...... 255 XIX. The Tariff in the United States 58. Historical Sketch 258 59. Basis of Free Trade . .262 60. Economic Arguments for Protection . . . 263 61. Protection and Nationalism ..... 264 Exercises and Problems ...... 265 Supplementary Reading ...... 268 TABLE OF CONTENTS XI CHAPTER XX. Fluctuations of the Price Level 62. Effects of Fluctuating Prices . 63. Measurements of Price Fluctuations 64. Price Level and Industry Exercises and Problems . Supplementary Reading . 269 272 274 277 279 PART V. DISTRIBUTION OF THE SOCIAL INCOME XXI. Distribution of Wealth in the United States 65. Differences in Wealth and Income . 66. Some Social Problems Arising from Distribution 67. Proposed Solutions ...... Exercises and Problems ..... Supplementary Reading ..... XXII. Return to Labor (Wages) 68. Noncompeting Groups of Workers 69. Efficiency and Wages 70. Methods of Wage Payment Exercises and Problems . Supplementary Reading . XXIII. The Labor Problem 71. Rise of Organized Labor 72. Aims and Methods of Organized Labor 73. Methods of Settling Labor Disputes 74. Labor Legislation .... 75. Foreign Immigration Exercises and Problems . Supplementary Reading . XXIV. Return to Land (Rent) 76. Nature and Source of Agricultural Rent 77. Urban Rents ..... 78. Economic Rent and Price Exercises and Problems . Supplementary Reading ■ . 283 287 291 292 294 295 303 303 30S 310 311 313 319 321 323 326 329 330 334 338 341 344 Xll TABLE OF CONTENTS CHAPTER PAGE XXV. Return to Capital (Interest) 79. Interest Peculiar to Modern Industry . . . 345 80. Why Interest is Paid and How Much . . .346 81. Variations in the Interest Rate .... 351 Exercises and Problems ...... 353 Supplementary Reading 355 XXVI. Return to the Business Man (Competitive Profits) 82. Place of the Business Man in Industry . . . 356 83. The Nature and Source of Profits . . . .359 84. Cooperation and Profits ..... 363 Exercises and Problems ...... 366 Supplementary Reading 368 XXVII. Socialism 85. Nature and Purposes of Socialism .... 369 86. Criticisms of the Socialistic Program . . . 374 87. Some Substitutions for Socialism .... 377 Exercises and Problems ...... 379 Supplementary Reading 381 XXVIII. Social Insurance 88. The Risks of Industry 382 89. Kinds of Social Insurance : Europe . . . 386 90. Progress and Outlook of Social Insurance in the United States 389 Exercises and Problems ...... 393 Supplementary Reading ...... 396 XXIX. The Share of the Government in Distribution (Taxation) 91. Government Revenues and Government Expendi- tures ......... 397 92. Bases of Taxation 401 93. Kinds of Taxes 404 Exercises and Problems ...... 407 Supplementary Reading ...... 410 Classified Course of Reading Index 411 415 PART I INTRODUCTION ECONOMICS AS A SOCIAL SCIENCE ELEMENTARY ECONOMICS CHAPTER I THE SOCIAL VIEWPOINT 1. The Social Sciences Nature and content of the social sciences. — The subjects of study that deal with the various phases of human activity, as expressed in social groups, are known as the social sciences. Those which we may profitably notice in this connection are history, ethics, government, law, sociology, and economics. History brings to us from the past the record of social achieve- ment, which, if properly interpreted, serves as a guide for present action and assists to forecast the future. History is not merely, as an eminent English historian once wrote, past politics ; it is a great deal more. It is, so to speak, the founda- tion on which all the other social sciences are built, since a complete understanding of any one of them depends on a correct knowledge of past events and past developments. Ethics is concerned with the human d utie s of mankind ; with the application of the golden rule to human relations. Every day we hear professional men speak of the ethics of their respec- tive professions. A physician, for example, is guided in his professional acts by an elaborate code of medical ethics. Like- wise the lawyer, the surgeon, the dentist, and the teacher, each has the ethical standards of his group to follow and to maintain. A third social science is government, or political science, known in the high school as civics. This science deals with the govern- 3 4 ELEMENTARY ECONOMICS merit of social groups as expressed in constitutions and in the administration of laws, and with numerous other social aspects, as political conventions, primaries, and elections. Closely akin to political science is law, which concerns itself primarily with laying down definite rules to govern individuals in their relations with each other and with the state. Another social science is sociology, which, in its narrow sense, deals with tho distinctively social relations among in- dividuals. Consequently, the chief concern of sociologists is with the social welfare of the people. To that end they en- gage not only in a study of the causes that produce inequalities, but also in an attempt to better social conditions. Theirs is a very practical work which leads them into the homes, as well as into the social centers now to be found in all large cities. It is well to notice in passing, however, that some authorities use the term " sociology " in a broader sense to include all the social sciences. Still another social science is economics. Unlike those al- ready mentioned, this science deals largely with the material aspects of life. It tries in a scientific spirit to explain the activi- ties of inankind in securing a living ; to study man as a ivealth- getter and a. wealth-user ; to account for the motives and forces that constantly appear in the business relations of the world. Because of the materialistic viewpoint which economics must necessarily take, many writers and teachers consider it to be a mean science, " dismal," selfish, and even soi'did. They forget, however, that the average man, irrespective of his occupation or station in life, must produce goods as well as con- sume them ; that he cannot, if he would, avoid intimate business contact with his fellow men and with his surroundings ; and that his opportunity to enjoy the higher things of life must follow aft(M-, and wait on, the satisfaction of his more material- istic needs. THE SOCIAL VIEWPOINT 5 Close interrelation of the social sciences. — We have spoken of the social sciences as if they were independent and distinct one from the other. Such, however, is not the case, for they are merely different aspects of the same science, each regarding society from its own particular viewpoint. Yet, since the human mind cannot grasp the social field as a unit, it has been found desirable to treat them as distinct sciences. In other words, we deal with the various social sciences as independent subjects of study for the sake of convenience and a clearer understanding. Consequently, in our colleges and universities, where ample opportunity is given for research and specialization, they have been developed independently under the direction and guidance of highly trained specialists. We must remember, however, that in spite of this development the study of society and social relationships is in itself a complete and single science. Numerous examples of this close relationship are to be found on every hand. Foreign immigration, to illustrate, commands the attention of the historian, the political scientist, the sociologist, and the economist. The historian accounts for the events and developments that have caused millions of men, women, and children to migrate from their old homes in Europe to America. The political scientist is chiefly concerned with the immigrant's knowledge of the forms and purposes of govern- ment, with his attitude toward American democracy, and with his influence on American politics. The sociologist studies the more distinctly social questions connected with immigration, such as housing conditions, standards of living, morals, educa- tion, and entertainment. Lastly, the economist approaches the subject from the standpoint of industry, concerning himself with the effect of immigration on such things as wages, pro- duction of wealth, and foreign trade. Each specializes on a small portion of the subject — too often as if it were the whole 6 ELEMENTARY ECONOMICS subject — but it requires the combined labors of all to produce a complete and accurate account. Some subjects, such as the Constitution of the United States, or negro slavery, for example, belong so exclusively to one or another social science as to make it appear that treatment under any other one is impossible. Obviously, the political scientist has the chief interest in the former, while the historian claims the latter. Nevertheless the economist must not neglect either. Without a proper understanding of the Constitution he could not account clearly for the various economic developments in such fields as labor legislation, interstate commerce, the protective tariff, money and banking; and no description of negro slavery can ever be complete which fails to take in consideration the economic environment in which it developed, its profitableness and unprofitableness, or its effect on the free labor with which it competed. 2. The Individual and Society The individual viewpoint of industry. — The normal in- dividual very naturally regards all industry from his own narrow point of view. He is inclined to feel that his business is the hub of industrial activity, that it is essential to the welfare of society, and that it even deserves encouragement at the hands of the government ; and this feeling he often has regardless of the best interests of society. A short wheat crop with high prices may bring joy to the wheat farmer, though it may bring distress to multitudes of consumers. Likewise, the glaziers in the neigh- borhood of numerous greenhouses may welcome a severe hail- storm as a blessing, when obviously it is detrimental to society as a whole. Even those whose special duty it is to regard in- dustry from the social point of view often fall into the same error. Every winter metropolitan newspapers view heavy falls of snow as godsends to the unemployed men of the cities, who, as a THE SOCIAL VIEWPOINT 7 result, are able to find work cleaning streets and sidewalks. Such erroneous notions arise from the practices of modern society, in which each individual produces not for his own direct consumption, but for the markets. It would be different if each supplied his own wants directly by his own labor. The wheat farmer would view a short crop with alarm ; the glazier would see no blessing in a hailstorm that compelled him to repair his own greenhouse ; nor would the residents of any city regard a heavy snowfall as a godsend if each man were compelled to shovel the snow from his own doorway. Social viewpoint of industry. — While it must be admitted that the individualistic, or selfish, viewpoint of industry is the force that drives men to seek improved methods, we must not lose sight of the fact that the welfare of society is more important than that of any individual or group of individuals ; and that no individual claim for preferment can stand as an obstacle in the way of social betterment. This broader viewpoint, the view- point of society, has made steady headway during the past generation. Not many years ago industrial leaders took the ground that it was none of society's affair how they conducted their own business. Now they think and act differently — they recognize their responsibilities to society. Recently one of America's best known captains of industry made the public statement that in the operation of his business and in the use of his wealth, he considered, not alone his own desires and needs, but also the desires and needs of society. The same spirit has permeated other industrial groups. Professional men, farmers, small business men, labor organizations, and even unorganized labor are catching the spirit that, while American democracy stands back of every individual in his efforts to be successful and happy, his success and happiness must not be acquired at the expense of the success and happiness of society at large. Because of these different viewpoints the economist and the 8 ELEMENTARY ECONOMICS business man are inclined to disagree, and too often they have a mutual disregard for each other's opinions. The economist is likely to regard the business man as selfish and self-centered, while the business man looks on the economist as a dreamer, and on his plans as visionary and impracticable. Both are right and both are wrong. The business man as such, if he is to succeed in a large measure, must conduct his business as if it were all-important, while the economist, on his part, must include society as a whole in his field of investigation, and formulate principles regardless of individual desires and pur- poses. Industry and free public education. — The interest of society in private industry is one of the chief reasons for the establish- ment and maintenance of free public education. Clearly, children as well as their parents have the correct notion that school attendance increases the chances for higher individual incomes in after life. Almost all college students, and, it is safe to say, a majority of high school pupils, particularly boys, frankly admit, when questioned on the subject, that they attend school primarily to prepare themselves for better-paying places in the industrial world than they otherwise could expect to get. They are encouraged to take this view by educators and teachers who dwell on the fact that each day a boy spends in high school or college adds ten dollars or more to his income in after life. The desire to increase one's earning power is laudable enough, but may we not properly ask : Can the expenditure of pubhc money be justified, from an economic point of view, on the ground that it will assist individuals to increase their own incomes? The answer involves the two aspects of industry — individual and social. Society appeals directly to the narrow motives of the individual, we may say — not improperly — to his selfishness. It gives him, at public expense, the opportunity to prepare himself to earn more than THE SOCIAL VIEWPOINT ^ 9 would otherwise be possible, knowing full well that in the long run he will normally return to society, through increased production, not only the cost of his training and education, but also something in addition. An efficient industrial society. — In spending enormous sums on public education, society has in mind an improved citizenship from the standpoint not only of culture and govern- ment, but also of industrial efficiency. At one time education stood almost exclusively for a higher appreciation of literature and art. Later it stressed the need of a better and a clearer understanding of the working of the government. Now society demands that the possessor of an education, in addition to being cultured and versed in the science of government, shall be industrially efficient. To that end commercial courses, commer- cial high schools, technical schools, and technical colleges in the universities have been established. Also the courses in the so-called literary schools and colleges have been changed to meet the new demand. There is nothing alarming in this educational tendency. It merely means that the next generation will value not less highly the cultural development and the stir of civic duty that comes from study in schools and colleges, but rather that it will also appreciate the need of an increased industrial efficiency and prepare itself through education and training to meet that need. 3. Wealth and Welfare Free goods and economic goods. — The word '' good " has two slightly different meanings. When a business man speaks of goods he means commodities, such as hay, wheat, clothing, and furniture. The student of economics gives the same word a broader meaning. He includes not only commodities, but also personal services rendered by domestic servants and others. No serious confusion, however, is likely to arise from this 10 ELEMENTARY ECONOMICS difference of meaning, for the laws and principles applying to commodities very generally apply to personal services. It is much more important to distinguish between free goods and economic goods. A free good is a gift of nature, supplied without labor and without limit. Economic goods, on the other hand, are characterized by their scarcity as compared to the demand for them. The best examples of free goods are air and sunlight, though in exceptional cases these may become economic goods. Water in a brook or spring may also be considered as free, despite the fact that some effort is always necessary to secure and utilize it. Free goods are extremely important in the life of human beings, yet the chief attention of students of economics must be directed toward economic goods. Nature of wealth. — In discussing wealth two important facts must be kept constantly in mind. First, the wealth of an individual may or may not be wealth in a social sense. Second, an increase in wealth may, owing to increased prices, be accompanied by a decrease in the world's supply of commod- ities. On first thought most of us would say that the wealth of any society is composed of the total wealth of its individual members. Such, however, is not the case. The execution of a real estate mortgage, while it places in the hands of the o^vner evidence of wealth from which he may derive an income, has not added a single item to the wealth of society. It shows merely that one party has temporarily given up his command over a portion of social wealth, which in most cases of this kind is money. Some forms of individual wealth may even represent a positive- decrease in social wealth. Such are government bonds sold to carry on war. Clearly, then, it is a mistake to attempt to estimate the total wealth of any large social group by adding the wealth of its individual members. Nor does an increase in social wealth necessarily indicate that there has been an increase in the number or amount of com- THE SOCIAL VIEWPOINT 11 modities possessed by this same society. Here again we are likely to be misled by our first thoughts on the subject. An over-abundance of wheat, for example, though it should make bread cheap and plentiful, might well cause the total value of the wheat to be less than would be the case if but one-half or one-third of the amount had been raised. Conversely, a shortage in wheat might well raise the value of the total crop, alsqlitlie value of the land on which it is produced, far above the values based on normal yields. In any case, there is no exact relation between the wealth of a social group and its stock of commocnties ; and for that reason we should not be hasty in concluding that a wealthy /community or country is necessarily prosperous. Wealth and natural resources. — Obviously, the foregoing discussion leads to the conclusion that wealth and welfare are not necessarily identical terms. Any social group that is com- pelled, for example, to consume great quantities of coal for heating purposes must of necessity be wealthier than a similar group more|favored by nature, if the two groups are to share equally in the satisfaction of wants. A New England mechanic must necessarily be wealthier than his Florida brother if during the year the two are to have exactly the same wants supplied, for he must consume wealth in the form! of fuel, warm clothing, and heat-producing foods, to enjoy exactly the same comforts which nature in warm climates furnishes freely and without limit. The same principle is involved in comparisons of the North and the South just prior to the beginning of the Civil War. The value of the northern,' hay crop occupies a large place in these comparisons, but scarcely ever does one find any mention of the value of the year-round grazing lands of the South. The mere fact that the North cured more than a hun- dred million dollars' worth of hay each year is ample evidence of , the presence of wealth in that section, but it does not prove 12 ELEMENTARY ECONOMICS that its welfare was increased over what it would have been had the climate permitted the stock to graze in the fields during the winter months. An abundance of natural gifts ordinarily produces^prosperity and a relatively high degree.'bf human wel- fare, which may or may not be accompanied by great wealth, either social or individual. Consequently, in judging the well-^^ being of a large social group, such as a state or a section of the United States, a mere knowledge of the wealth of that section or state is' not sufficient. We must first know something of the gifts of nature which it enjoys. Wealth and its distribution. — We must also remember that a large social group, as such, may be relatively wealthy and even enjoy a high degree of total welfare and still have among its members many who suffer fron|a lack of the common necessaries of life. This situation we often meet in large cities, where along- side lavish displays of wealth we find multitudes of under- nourfshed creatures dragging out a miserable existence in dirty, crowded tenement houses. On the one extreme is abundance ; on the other, poverty and want.] This inequality offers the hardest social problem we are called on to solve. It engages the attention of serious thinking people everywhere, for it seems to contradict the prevalent notion that progress in the industrial arts has been accompanied by an increase in the welfare of all classes of society.! EXERCISES AND PROBLEMS A 1. Why should history be called a social science? 2. What is the essential difference between poHtical science and law? 3. What is meant by the expression "legal ethics"? 4. Under which social science should a study of charity be made? Why? THE SOCIAL VIEWPOINT 13 5. What is the interest of the historian, the poUtieal scientist, the sociologist, and the economist in the following social subjects : a. Farm tenancy? b. Presidential elections? c. Corruption in city politics ? d. Expansion of foreign commerce? e. The Great War? /. Railroad development? g. The post of&ce? 6. What is meant by the expression "individual viewpoint"? 7. How can the expenditure of public money for river or harbor improvements be justified ? ■ 8. Why does society bear a portion of the expense of public educa- tion? 9. How does education increase industrial efficiency? 10. Can an individual be industrially efficient and at the same time be cultured? Explain. 11. Just how, if at all, does training for industrial efficiency lessen the desire and ability of an individual to be a good citizen ? 12. Define "wealth." 13. Explain the effect of prices on wealth. * 14. What is the difference between wealth and welfare? 15. Why, since nature is so bounteous in the tropics, are the people of Central America relatively poor ? 16. Why are the people of the Arctic regions relatively poor ? 1. Mention three or four public improvements in your community. What interest do they hold for you as a student of : a. History? c. Sociology? h. Political science (civics)? d. Economics? 2. Do students ever have individual viewpoints which society would not sanction, as to methods of : a. Earning money? c. Spending leisure time ? b. Securing academic credit? d. Using school equipment? 3. Enumerate the motives that cause young people to attend high school or college. a. Comment on these motives. b. Are any of them selfish? 14 ELEMENTARY ECONOMICS c. Are any of them entirely unselfish? d. Would society wholly condemn any of them? 4. Air and sunlight are free goods. Name others. 5. May a free good ever become an economic good ? Give examples. 6. Name five articles that are clearly wealth ; and five that are not wealth. Which of the following are wealth : a. Salt in the ocean? /. Egyptian mummy? b. Weeds? g. State penitentiary? c. English sparrow? h. Burglar's tools? d. Submarine? i. Mississippi River? e. Rose bush? j. Climate? C 1. What are the characteristics of a practical man? Explain your answer to each of the following : a. Is the wealthiest man in your community practical ? b. Do you know of any practical man that is not wealthy? c. Is the governor of your state a practical man? d. Is Rockefeller practical? e. Were Presidents Washington and Lincoln practical? 2. A public speaker recently declared that the typical American city would vote to have its alleys paved with sterling silver, provided the bill was paid out of the federal treasury. Comment. 3. The opinion is generally held in the United States that society ought to provide free public education. a. What does "free public education" mean? b. Are free textbooks usually provided for high schools? c. Who pays the expense of students in state normal schools and universities? d. Why do state universities usually charge law and medical students a relatively high tuition? e. Is free public education free ? 4. If $1000 a year is a fair wage for a family in Florida, what would be a fair wage for an Iowa family that spends $100 a year for coal? an Eskimo family that spends $500 a year for whale oil to be used for heating purposes? THE SOCIAL VIEWPOINT 15 SUPPLEMENTARY READING Bullock, C J., Introduction to the Study of Economics, 3d ed., (Silver Burdett & Company, publishers. New York, 1908), pages 84, 87, 129. Ely, R. T., Outlines of Economics, 3d ed., (The Macmillan Company, publishers, New York, 1916), pages 105-108. Fetter, F. A., Economics, (The Century Company, publishers, New York, 1915, 2 volumes). Vol. I, pages 3-12. Fisher, I., Elementary Principles of Economics, (The Macmillan Com- pany, publishers. New York, 1913), pages 4-13. Johnson, A. S., Introduction to Economics, (D. C. Heath & Company, publishers, New York, 1909), pages 1-19. Seager, H. R., Principles of Economics, (Henry Holt & Company, publishers, New York, 1913), pages 50-60. Seligman, E. R. a., Principles of Economics, 5th ed., (Longmans, Green & Company, publishers, New York, 1912), pages 8-20. Taussig, F. W., Principles of Economics, 2d ed., (The Macmillan Company, publishers, New York, 1915, 2 volumes), Vol. I, pages 3-14. Note. — The references found at the close of each chapter are con- fined to standard college texts in economies. For additional references, see the classified bibliography at the end of volume, pages 411-414. CHAPTER II NATURE AND CONTENT OF ECONOMICS 4. Nature of Economics How to study economics. — Before taking up the study of any new subject it is desirable, in order to avoid wasting time and effort, to learn something about the best methods to be employed in mastering it. Some subjects, like botany and physics, are best approached through experiments carried on in the school laboratories. There the pupil learns through trial and observation to formulate the laws and principles underljang his science. This is known as the inductive method of study. The same method, as we shall see presently, may be applied to a limited extent to the study of economics. More important in our work, however, is the deductive method, which requires some ability to reason abstractly — that is, independent of expepiment and observation. This method most people find difficult to master. For that very reason pupils and even business men often become discouraged and give up the study of economics. If, however, they would but remember that the chief aim of our science is not to discover laws, but rather to apply them to business, much of this discouragement can be removed. We do not need, for example, to concern ourselves with the proof that an increase in the amount of money in circulation tends to cause prices to rise. Instead, we start with the assumption that such is the case and try to ex- plain the rise of prices at some particular time or place. In other words, the student of economics finds it necessary to go 16 NATURE AND CONTENT OF ECONOMICS 17 from the general to the particular, while the student of a labora- tory science is chiefly concerned in studying particular phenom- ena from which he draws general conclusions known as laws and principles. The nature of an economic law. — Economics, like other sciences, has certain important laws which must be mastered as we progress in .our study. It is desirable, then, at the out- set to understand as accurately as possible the nature of an economic law. Scientific laws as a rule merely state tendencies. We learn from the study of physics that a metal rod shortens as its temperature falls. Suppose, however, that the two ends of such a rod be firmly secured. Obviously, then, a lowering of the temperature would not cause the rod to become shorter. We must not conclude, however, that the law is invalid, for it states only a tendency which would have become a reality had no opposing force been exerted on the rod. Similarly in economics, laws hold good only so long as they are not neu- tralized by opposing ones. For that reason it is best to qualify an economic law with the expression " tends," or " other things remaining equal." Thus, to illustrate, we should not say that the fall in price of a particular commodity will increase the demand for that commodity. Ordinarily such a statement would be correct, but not always. If at the same time the prices of all other commodities should fall as rapidly, there is no reason to believe that there would be any increase in the demand. It would be more correct, therefore, to say that as the price of a particular commodity falls, the demand tends to rise ; or, as the price of a particular commodity falls, the demand, other things remaining equal, will rise. Economics as an art. — Hitherto we have spoken of economics as a science, which it is ; yet like all other sciences it has an art side, which, in the minds of many, is by far the most impor- tant. The physicist, to draw another illustration from the 18 ELEMENTARY ECONOMICS physical sciences, is primarily concerned with the purely scientific aspects of his subject ; but his labors would be largely in vain if he or some one else did not apply to the industrial arts the scientific laws and principles which he formulates in the laboratory. Discovery of the principle of air pressure is one thing, its application to a common cistern pump is another. One is science ; the other, art. The same distinction occurs in economics. One of the best known economic laws is that the wants of any individual have varying degrees of intensity. Thus, any one of us may, at a given moment, desire a hat more than a pair of shoes, the shoes more than a fountain pen, and the pen more than a week-end excursion to some resort. There is no assurance, however, that we shall make our purchases in the order named. The hatter, the shoe merchant, the stationer, and the resort-owner, each presents his wares in the most attractive manner, usually by displays and advertising, in order to force the demand for his particular commodity or service to the fore — that is, to make the want for it more in- tense than it otherwise would have been. It may easily happen, then, that we shall forego the hat, the shoes, and the pen in order to be able to enjoy the week-end vacation. The law of the intensity of want, and its application to business in the form of attractive advertising, though intimately connected, are distinct aspects of the same thing. One is science, the other is art. Material for the study of economics. — The most important field for the study of economics is not found in books, but in the business world. He who would master even the most elemen- tary problems of economics must study the motives and actions of men as they go about the everyday tasks of making a living. To do this successfully requires a keen power of observation. The student of economics, as he progresses in his thinking on economic subjects, will observe more and more NATURE AND CONTENT OF ECONOMICS 19 what had formerly escaped his notice. The botanist, when he goes into the country, naturally observes the flowers and trees and other forms of plant life ; the geologist watches for unique rock formations ; while the student of economics speculates on the fertility of the soil, the distance to markets, the feasibility of employing labor-saving machinery, and the current wages of farm help. We can readily see, therefore, that the field from which the student of economics draws his material for study is wide and far-reaching. Furthermore, the material he finds there comprises not only physical objects such as interest both the botanist and the geologist, but also human nature of every description and even the souls of men. Consequently, judg- ments under such circumstances are difficult to form, and when • formed they are often open to hostile criticism. 5. Divisions of Economics Consumption. — The most fundamental notion in economics is consumption. It came first in the history of mankind, and it seems likely to continue to the end of time as the chief motive for economic activity. Desire to consume has been the strong- est factor in the development of modern civilization. It is the force that has brought the human race step by step from the stone age to its present civilization. It accounts for the migration of whole nations, for the conquest of continents, for the settlement of vast agricultural areas, and for the build- ing of populous cities. No other human desire, we may safely say, is so universal or so persistent. On it rest not only pleasure and enjoyment, education and culture, freedom and independ- ence, but also life itself. Consumption in its very nature is destructive, for with few exceptions we cannot consume without destroying. The food we eat is destroyed at once. We consume our clothing more gradually. Still longer does it ordinarily take to consume 20 ELEMENTARY ECONOMICS an automobile, while houses often last a lifetime. In any ease, consumption takes place, even though no immediate effect be discernible. Curiously enough, refraining from consuming a good does not usually preserve it intact, for tivie itself is an insatiable destroyer. Thus, two elements enter into the destruction of goods. One is the inability to consume without destroying, such as is the case with food and clothing ; the other, the ravages of time, which destroy ruthlessly our food, our clothing, our home, and even the pictures on the wall. Production. — Following consumption comes the notion of production. Primitive man soon found that nature did not supply a sufficient amount or variety of goods to satisfy his wants. Then and only then did he turn to productive labor. Gradually his wants drove him to extend his productive opera- tions. Stone utensils and tools appeared. Later he discovered how to make bronze, which was followed by iron and steel. Long, however, after the discovery of the process of making iron and steel, production continued to be characterized by direct, hand methods. Not in fact until well after the middle of the eighteenth century did machinery, play an important part in industry. Marvelous as have been the developments of productive processes, important as they are in the history of the progress of mankind, we must not forget that they have followed closely after an increased desire on the part of human beings to consume goods. We speak in a general way of the production and consumption of goods. It would be nearer correct to speak of the production and consumption of the utilities embodied in goods. It is a well-known fact that man cannot create matter. We may gO a step further and say that man cannot create goods. He can, however, by processes of rearrangement, create utilities, which after all are the objects of human desire. These we may call /orm utilities. He can, for example, with the assistance of nature NATURE AND CONTENT OF ECONOMICS 21 and natural laws, change raw cotton into cloth, thereby creating the various utilities embodied in the finished product. Each step in the process tends to destroy utilities as well as to create them. Spinning the cotton into thread destroys any utility the cotton may have had as a material for stuffing mattresses, but it creates a new utility in the form of sewing material. Likewise, the weaving of the thread into cloth destroys the utility of the thread for sewing purposes and creates a new utility which cloth alone possesses. All the processes necessary to raise the cotton and then to turn it into cloth are productive. Yet additional pro- cesses — that is, the further creation of utilities — are usually necessary before the cloth can be consumed. No one would think of going to a cotton mill for the purpose of getting cloth for personal consumption. Rather he depends on his local merchant to get it for him. Nor does the merchant go per- sonally to the factory for his cotton cloth. He gets it by freight or express either from the factory direct or from a wholesale dry-goods house. Thus, we see that at least two productive processes stand between the consumer who desires to utilize the cloth, and the weaver who, like the cotton farmer, has created form utilities. The railroad, or some other method of transportation, carries it to the retail merchant, thereby creating place utilities, while the retail merchant, in turn, by keeping the cloth until it is needed by his customers creates time arid posses- sion utilities. As our modern civilization has developed, all of these workers, and often a great many more, are usually neces- sary to create the total bundle of utilities embodied in finished products ready for consumption. Not all work, however, results in the creation of utilities desired by man, or even in the creation of any utilities at all. One might exert all his strength in an effort to overturn one of the pyramids and yet produce nothing. Even if he should over- 22 ELEMENTARY ECONOMICS turn it, no utilities would be created as a result. He would be much like the boy whose father made him build a rail fence and then tear it down on the plea that the work would keep him out of mischief. These are extreme illustrations, yet on every hand men labor without positive results, either because of ignorance or because of misdirected energy. We may conclude, then, that production is the creation of utilities by labor wisely and efficiently directed. Exchange. — Soon after primitive man began to produce he found himself in possession of a surplus of goods for which he had no immediate need. Naturally he sought for a neighbor who desired to possess his goods and who in turn had goods of his own to exchange. Here was the basis for an exchange, pro- vided each desired the other's goods and provided further that they could mutually agree as to exchange value. This method of exchange is known as barter, and in newer countries it per- sists to the present day. Barter, however, as we shall presently see, gradually gave way to buying and selling in the terms of those few commodities, like gold and silver, which practically everybody desired to possess. Then the phenomenon of price appeared. Men began to see the advantage of exchanging their surplus goods for go d or silver, which soon came to be known as money, supplying their own needs by purchases with the same money. Later banks arose to supply credit to take the place of money, which, with the paper money of the various governments, has finally come to occupy the most important place in exchange. Accordingly, under exchange, which is one of the four large groups into which economics is divided, we shall study the various functions of money; the principles underlying the science of banking; together with the banking history of the United States ; domestic and foreign commerce ; the tariff ; and causes and effects of price fluctuation. All these subjects, we shall see when we take up the detailed study of ex- NATURE AND CONTENT OF ECONOMICS 23 change, are closely related aspects of the same thing — the exchange of goods. Distribution. — As used in economics the term "distribution" means apportioning — that is, the division of the entire social income among those who produce it. Ordinarily, we are likely to think of distribution in the sense of transportation, of buying and selling, of marketing. Distribution, however, is static, not dynamic. It concerns itself with the shares that go to the different persons and groups that produce, and not with the methods or means by which these shares are handed over. Strangely enough, distribution, the last of the four great economic notions to develop, has become the most important. A century ago, and even less, the chief economic concern of the world was to increase the output of production. Men who built factories and employed women and children to work long hours for little pay, were hailed as benefactors of mankind. Improvements in the industrial arts have changed the social viewpoint. No longer is it feared that the supply of goods is likely to be inadequate to normal demands ; or that improve- ments and developments in productive processes will lag behind any increase in population. Rather is the fear expressed by seriously thinking people that many groups of those who assist to produce are being inadequately rewarded — that is, that they are not receiving a just share of the goods they produce. Consequently, the most important problem in economics, the one to which economists now give the greatest consideration, is concerned with the distribution of the social income. Under the subject of distribution we shall have occasion to examine the principles governing wages, rent, interest, and profits ; the cause and purposes of socialism ; the place of social insurance in industry ; and the share of the product that goes to the government in the form of taxation. Some of these subjects, notably socialism, might well be studied under 24 ELEMENTARY ECONOMICS production, for, as we shall see, the chief demand in the socialistic program is the government ownership of the instru- ments of production. Yet the whole problem of social unrest, as manifested by the socialists, arises from the feeling that distribution, as it now exists, is wrong. Also, in some books on elementary economics taxation is treated as a fifth division of the subject. It may come, however, under distribution, for usually taxes, like rent, wages, and interest, are paid directly or indirectly from current income. EXERCISES AND PROBLEMS 1. Define the word "laboratory." 2. Describe briefly a laboratory experiment. 3. What did this experiment teach? 4. Why is the laboratory method called the inductive method? 5. What is the difference between the science and the art of physics? of botany? 6. State some laws that are never m^re tendencies ; some that may be tendencies ; and some that are always tendencies. a. What is always the shortest distance between two points? b. How does pressure on a gas affect its volume? c. Do objects always move toward the center of the earth? 7. Why is consumption said to be fundamental? 8. What is the relation of consumption to production? 9. What is the difference between goods and utilities? 10. When does destruction create utilities? When does it not create utilities? IL How does a locomotive engineer add utilities to a spool of thread ? 12. What is the distinction between productive and unproductive labor? 13. How do modern methods of exchange differ from primitive methods ? 14. State exactly the meaning of the term "distribution," as used in economics. 15. Explain the difference between the exchange and the distribution of goods. NATURE AND CONTENT OF ECONOMICS 25 B 1. Would you use inductive or deductive reasoning in working a problem in algebra? in building a gas engine? in starting a gas engine? 2. Cite other instances where you have used inductive reasoning ; deductive reasoning. 3. Name five unproductive occupations. a. Why is each occupation unproductive? b. Were any of these occupations ever productive ? c. Are any of them likely to become productive ? 4. Why has money exchange very generally displaced barter ex- change ? a. Name any articles you have ever bartered. b. With what difficulties did you meet? c. How would money have obviated these difficulties? 5. Show how water may assume the various kinds of utilities. 6. Write three economic questions about a horse ; three about a house ; three about an automobile. Write about each of these three questions which are not economic. 7. Give examples of unproductive labor that is not criticized. 8. Mention some instances in which time, instead of destroying goods, increases their value. C 1. Adam Smith held that labor to be productive must "realize itself" in some "particular subject or vendible commodity." a. How would Adam Smith have classified each of the following : i. Domestic servant? v. Lawyer? ii. Soldier? vi. Merchant? iii. Policeman? vii. Opera singer? iv. Violinist? viii. Public official? b. How would you classify each of the above occupations? Why? c. What changes, if any, have occurred since the time of Adam Smith regarding unproductive labor? 2. During the summer of 1918 a ruhng of the War Department, concerning the employment of men of draft age, raised the question of productive and unproductive labor. a. Is all labor productive? Explain. 26 ELEMENTARY ECONOMICS b. Is all productive labor essential? c. Are the following productive : i. Farmers? ii. Preachers? iii. Teachers? iv. Athletic directors? V. Professional baseball players? d. Which, if any, of the above perform essential labor? Why? 3. You sell a $30 suit to an old-clothes man for $5. Does this indicate that your wealth has been diminished? that the wealth of society has been diminished? 4. Distribution has long since become the most important notion in economic problems. a. Who share in distribution? b. Which group feels most strongly that its share is inadequate ? Why? c. What is the basis of this feeling? SUPPLEMENTARY READING Ely, Outlines of Economics, 3d ed., pages 3-15. Fetter, Econoviics, Vol. I, pages 3-10. Fisher, Elernentary Principles of Economics, pages 1—4. Seager, Principles of Economics, pages 1, 2. Seligman, Principles of Economics, 5th ed., pages 23-35. PART II THE CONSUMPTION OF ECONOMIC GOODS CHAPTER III NATURE OF CONSUMPTION 6. Motives behind Economic Activity Preservation of life. — Obviously, the most fundamental motive for economic activity is the preservation of human life ; yet most people, we may assume, have never experienced any mental or physical pain owing to a lack of food to sustain mere existence or of clothing to keep them fairly comfortable. In other words, the typical man, though he may worry about meet- ing bills, and often wonder just how he is going to be able pecuniarily to do this or that, seldom, if ever, seriously con- siders the probability of death from starvation or exposure. If, however, he were driven to this extremity he would fight bitterly against any odds to secure the minimum of food, clothing, and shelter ; for not to do so would inevitably mean death. Desire for comforts. — Fortunately for the progress of civilization the normal individual is not satisfied with a bare existence. He desires more and a greater variety of food than will merely sustain his physica strength sufficient to permit him to go about his daily tasks. He might be able to get along and even thrive on the coarse fare of the early pioneer, yet he demands something more in the way of delicacies, fresh vege- tables out of season, or ice cream. Also, in so far as physical comfort is concerned, a rough woolen shirt, a pair of overalls, heavy shoes, and a shoddy coat would suffice. But no self- respecting American would be satisfied with such an outfit com- prising his whole wardrobe. Comfort in the matter of clothing 29 30 ELEMENTARY ECONOMICS means more than protection and warmth. It means some style in the way of an extra suit for Sundays and hohdays, hnen collars, neckties, and other accessories. Likewise, in the matter of the home the normal individual desires more than one or two shabbily furnished rooms with none of the comforts in the way of rocking chairs, pictures, musical instruments, or attractive dishes. Obviously, he could exist, and even live to an old age, as his early ancestors did, without any of these comforts. Yet he refuses to do so, and in his refusal we find the second chief motive for his economic activity. AVhat has been said leads naturally to the significant question : What are comforts? The term is a relative one, much like such terms as heat, cold, and dark. Wliat to one group or to one individual is a comfort may appear to another as a luxury or to a third as a necessity. For most people a fur-trimmed overcoat is a luxury. The well-to-do consider it a comfort, while the very rich might well look on it as a necessity. We may say, roughly speaking, that whether or not a social group or an individual considers goods needed above the bare line of subsistence to be necessities, comforts, or luxuries, depends in a large part on habit and standard of living, about which we shall have more to say later. Desire for luxury and ostentation. — A third motive for economic activity is the desire to consume what we may un- mistakably call luxuries, and by their consumption to be recognized as superior beings. Evidences of such a desire are to be found on every hand. Ultra -styhsh clothing made from exclusive patterns by custom tailors, luxurious automobiles, diamonds, and fine houses bring recognition, though their display for the purpose of attracting attention may be, and usually is, vulgar. Yet the desire to get these luxuries to satisfy an unhealthy appetite for the extreme, and to display them for the purpose of gaining social distinction, drives men NATURE OF CONSUMPTION 31 to gi'eater economic activities than they otherwise would under- take ; and for that reason we, as students of economic questions, must consider them seriously, even though as individuals we may look on them with indifference or even with contempt. The desire for luxuries and ostentation leads to many curious results. It might be thought on the first impulse that only rich people have these desires. Such, however, is not the case. Fine clothing and other forms of ostentation are often not safe criteria of the owner's financial standing. Many a rich man goes more poorly dressed than one of his lowest-salaried clerks, while his home may be less elegant than that of his private secretary. Any merchant of women's ready-to-wear garments will testify that many of his best customers for high- priced clothing are the poorly-paid clerks of the variety stores, telephone operators, and cheap office assistants. Sellers of jewelry, furniture, and men's clothing, and the managers of high- priced places of amusement, not to mention a great many others in similar lines of business, corroborate this testimony. The same desire leads also to much of the crime with which society is plagued. Now and then some one steals a loaf of bread or a cut of meat to keep himself or his family from starv- ing, or falsifies his books to provide the simple comforts of life. More often, we may safely say, the cause of dishonesty is the desire to purchase luxuries with which to make a display. As it is with theft, so it is with most other forms of crime : the desire of the individual to enjoy luxuries and ostentation overcomes his dread of the punishment he can expect if dis- covered. Desire for power. — Wealth is power. It gives its owner an influence which he otherwise would not possess. It manifests itself in politics, government, industry, education, and even in religious affairs. The owner of wealth, other things being equal, is usually preferred over his neighbor. He receives at 32 ELEMENTARY ECONOMICS the hands of society a distinction which few individuals are able to forego. Most people speak in more or less awe of a Rockefeller, a Morgan, or a Vanderbilt. They also defer to the local magnate. They take pride in elevating men who have succeeded in a large way financially. Consequently, the desire for the power, which wealth brings, drives men, usually those who already have large financial holdings, to exert themselves to accumulate more wealth. Thus, we see that this desire is one of the chief motives back of economic activity. Of the four motives which we have examined, the last, the desire for power, is by far the most questionable ; and in it lie grave dangers to society. No one can seriously question the purity of the motives that drive men to conserve their lives and to get the comforts that make life worth living. Also even the most serious-minded can afford to smile indulgently on those who crave luxuries and ostentation. Society cannot, however, look with indifference on the power that can be gathered into the hands of a few through the accumulation of wealth. Not long ago a prominent New York banker contended in a meeting of economists that it mattered little to society if a few men held practically all of the wealth of the United States. The basis of his contention was that these few could not possibly consume their wealth, and, consequently, that it would eventually find its way back to the masses. Clearly, he did not understand that society was keenly interested in the power and influence which the wealth itself would place in the hands of these few men. 7. Nature of Demand Demand is effective desire. — The word "demand " is used in our everyday speech in a variety of ways, but in economics it has a particular significance which we shall attach to it here- after. The mere desire for goods does not lead to the satis- NATURE OF CONSUMPTION 33 faction of wants, though desire is the first step in that direction. Practically every one, we may safely say, desires to own an automobile ; yet it is a well-known fact that only a small per cent of the people of the United States enjoy that distinction. In other words, to change shghtly a well-known expression, " If desires were horses, beggars would ride." Obviously, then, the desire for a good may or may not result in the acquisition of that good. Something more is needed. The desire must be made effective ; and when a desire becomes effective we call it demand. Thus, we can define demand as effective desire. The question may properly be asked at this point : When does a desire become effective — that is, when does a desire become a demand ? A complete answer to the question will be found a little later in the discussion of demand, for it involves the principle, underlying price. We can, however, at this stage in our progress, say that the demand for a good emerges when the one who desires to possess it is willing and able to produce the good directly or to forego the use of some other good or goods which he may exchange for it. Suppose, for example, that a shipwrecked man, like Robinson Crusoe, desires some sort of protection against the sun, such as an umbrella. He might, as he suffered from the heat, continue to desire an um- brella without having a demand for it. Suppose again that he should conceive the idea of constructing one from materials re- covered from the wreck and that he was fully aware of the labor involved. Even then there would be no demand. If, how- ever, he actually constructs the ujnbrella, we may conclude that his desire has become effective — that is, it has become a demand. Relation of demand and price. — Much more common, how- ever, are the cases when desire becomes demand as a result of the willingness of the one having the desire to pay the current market price either in money or in other goods. Suppose a 34 ELEMENTARY ECONOMICS certain individual desires to own an automobile. He has the money in the bank to pay for it, but hesitates to buy at the price named. Clearly, his desire in this case is nothing more than a desire. Certainly, it has not yet become a demand, for demand would mean a sale. Suppose, to continue the illustration, he decides to buy the automobile. Then his desire has become a demand. We have assumed above that the demand for the automobile came as a result of an increase in the intensity of desire. It might, however, have come just as easily, or even more easily, from a lowering of the price. The principle of reducing prices to change desires into demands is significant in at least two respects. First, it is the underlying reason for price reductions on the part of retail merchants. Second, it shows that demands ordinarily increase with a fall in price. In fact, as price falls demand and desire tend to become equal. When any one says, therefore, there is little or no demand for a particular good, he means a demand at the current price. Any other assumption would be incorrect, for a proper lowering of the price would ordinarily create a demand sufficient to take the entire stock. 8. Elasticity of Demand Nature of an elastic demand. — '- All demands are more or less elastic ; that is, the demand for any particular good tends to increase as its price falls. In the case of some, the increase is very rapid, of others, very slow. Somewhere between these two extremes is an indeterminate boundary line separating elastic demand from inelastic demand. Elasticity of demand is, therefore, a relative term, since no demand is absolutely elastic or absolutely inelastic. Generally speaking, the demand for luxuries is elastic, for each slight decline in price t«nds to cause a relatively large increase in demand. Literally thousands of men were persuaded a few years ago to buy a certain make NATURE OF CONSUMPTION 35 of automobile when the price was reduced but a little more than ten per cent. Conversely, a general increase in the prices of automobiles caused by the Great War had an immediate effect in curtailing demand ; though in this particular case curtailment was not as great as it would have been had there not been a y p' I \ w E \ s S' \w' \^ E' ^I' V V M M' X Fig. 1. rise in the prices of practically all other goods. Curve EE' in Fig. 1 serves to illustrate the character of an elastic demand. A fall in price from OP' to OP (that is, from MS to M'S') causes an increase in the demand from OM to OM' (P'S to PS'). Inelastic demand. — The demand for necessaries and com- forts is less elastic than the demand for luxuries. A slight decrease in the prices of common table salt or matches, for example, would be unlikely to increase appreciably the demand for either of these commodities. Even a sharp decrease in price would cause few people to increase their consumption of either, simply because more salt in the food or more matches 36 ELEMENTARY ECONOMICS on the shelf are not desired. Bread also has an inelastic demand, but to a less extent than salt or matches. So also have the plainer kinds of food, the more common articles of wear, and all the other goods that enter into everyday consumption. In Fig. 1, curve 11' represents an inelastic demand. It will be noticed that it is much more abrupt than the more gentle elastic curve EE'. At the price OP' (VW) we assume that the volume of demand is OV (P'W). As the price declines the increase in demand is slight. At the new price OP (VW) the deriiand is OV (PW), which is slightly more (VV) than it was at the old price. Elasticity of demand and price fluctuation. — On first im- pulse one might think that price fluctuation would be greater . under an elastic than under an inelastic demand. But such is not the case. The very moment the price of a good with an elastic demand starts to fall, numerous buyers will come into the market, with the result that the fall in price is retarded and soon stopped. Likewise, an increase in price diminishes at once the demand, which in turn tends to keep the price down. In the case of goods with an inelastic demand, however, such retarding influences are much less effective. A change in the price of salt affects demand but slightly. Few new customers appear when the price declines, few quit buj'ing when the price rises. The importance of this economic principle appears when we consider it in connection with the production of wealth. A bumper crop of wheat, for example, is likely to result in rock- bottom prices with a considerable loss to wheat-growers. On the other hand, the manufacturer of some luxury who should overestimate the demand for his product to the same degree, would suffer a less proportionate loss than the farmers, for multitudes of potential buyers are ready to buy just as soon as the price of the luxury is slightly reduced. The close relation of price fluctuations to the two kinds NATURE OF CONSUMPTION 37 of demand, has a practical significance in business, particularly in retailing. It is a common practice of merchants in all lines to advertise cut prices, hoping thereby to increase trade in the merchandise they advertise. Obviously, any increase in trade a merchant may hope to get must either come from his competitors or arise from an increased demand for those particular goods. Whether or not the goods advertised have an elastic or an inelastic demand, the advertising merchant will profit from any trade he may get from the regular customers of his com- petitors, provided he sells at a profit. Also, in goods subject to an elastic demand, there is always the probability that the advertising merchant may increase his sales, not at the expense •of his competitors, but by increasing demand for the goods which he advertises. In goods subject to inelastic demand the case is different. If he offers such goods at reduced prices, his customers stock up and then refrain from buying more until their stock is exliausted ; and what is not less important, his competitors reduce prices on the same goods. In such cases buyers profit at the expense of the competing merchants, who are unable to recoup themselves, simply because the goods under consideration are subject to the law of inelastic demand. A jeweler, for example, can well afford to attempt to increase his trade by selling diamonds on a lower margin of profit than his competitors, for by so doing he stands a chance, not only to sell to some of the regular customers of his competitors, but also to those who otherwise would not buy diamonds ; and thus in the long run, on account of increased sales, to increase his profits. The grocer, however, finds his position more difficult. By selling coffee or sugar or salt at reduced prices he can hope to increase sales only at the expense of his competitors or at the expense of his own future sales ; he often does, however, sell such commodities on a close margin or even at a loss in order to induce new customers to come into his store. 38 ELEMENTARY ECONOMICS EXERCISES AND PROBLEMS 1. Name as many motives for economic activities as you can. 2. Do these motives cause the same activities in all localities? in all groups ? 3. What is the distinction between necessities and luxuries? 4. Which of the following are luxuries? which necessities? a. Bread. /. Automobile. h. Bicycle. g. Face powder. c. Watch. h. Kodak. d. Diamond ring. i. Newspaper. e. Fountain pen. j. Magazine. 5. Just how is wealth power? 6. What is the difference between desire and demand ? 7. Which is the more fundamental? 8. When is the demand for a good said to be elastic ? inelastic ? 9. Why does the price of potatoes usually fluctuate more widely than the price of pineapples ? B 1. What motives for economic activity are the most noticeable among your acquaintances? 2. Make a list of your wants arising from instinct ; from habit ; and from social standards. 3. Name any wants not included in the above list. Why do they arise ? 4. Mention eight articles of your own consumption which you consider luxuries ; eight which you consider necessities. 5. How do producers in your community seek to increase the desire for goods? 6. Examine store and shop windows and try to determine whether or not the effectiveness of their display could be increased. 7. Make a list of ten articles sold by your grocer; ten by your druggist ; and ten by your hardware dealer. Arrange the articles in each list according to elasticity of demand. 8. Which of these articles, if any, have changed in elasticity during the past generation? NATURE OF CONSUMPTION 39 C 1. "The true welfare of society depends on all having the necessities of life before any has luxuries." a. What is meant by "true" welfare? 6. Would an equal distribution of goods necessarily supply all with necessities? c. After all have been supplied with necessities, which luxury should be produced first ? d. Does a demand for luxuries ever cause an increase in goods classed as necessities? 2. Explain the purpose of such advertising as, "Dollar and a half caps now ninety-eight cents"; "These gloves are worth two dollars, now a dollar and a quarter" ; "Buy now, when this supply is gone no more can be obtained." 3. A stock-raiser recently complained that the use of the auto- mobile as a pleasure vehicle tended to lower the price of driving horses. a. Are driving horses worth more or less now than they were ten years ago? b. Account for other forces that may have affected the price of driving horses. c. Would the above statement be necessarily untrue if driving horses are worth more now than they were before pleasure ears came to be so widely used? Explain. 4. Suppose the supply of several goods be doubled, would the fall in price be the same for each ? Explain. 5. "The demand for a given commodity may be elastic at one price level and inelastic at another." Illustrate and explain. 6. The claim is often made that the storage of eggs results in lower prices during the winter months than would otherwise be the case. a. How are summer prices affected? b. How is the average annual price affected ? SUPPLEMENTARY READING Bullock, Introduction to the Study of Economics, 3d ed., pages 79-110. Ely, Outlines of Economics, 3d ed., pages 103-110, 156-164. Fetter, Economics, Vol. I, pages 46, 61. Johnson, Introduction to Economics, pages 68, 69. Seager, Principles of Ecojiomics, pages 70-80. Seligman, Principles of Economics, 5th ed., pages 240-245. Taussig, Principles of Economics, 2d ed., Vol. I, pages 138-158. CHAPTER IV LAWS OF CONSUMPTION 9. Human Wants Are Unlimited Variation in the intensity of wants. — We have seen already that human wants can be arranged in a general way in the order of their intensity. Any individual at any moment of time has a variety of unsatisfied wants, which he proceeds to satisfy, as far as he is able, in the order of their intensity. Standing first of all are the wants for food, clothing, and shelter, though few of us are conscious of such wants, since they are satisfied rather automatically as they arise. Then come the wants of less intensity, the nature of which depends on the peculiar desires of each individual. In arranging these wants in their order we must necessarily assume that differences in the prices of the goods which will satisfy them are a factor ; for it is obvious, for example, that one might have a more intense want for an automobile than for a bicycle, and yet purchase the latter. Differences in the intensity of wants account in large measure for modern advertising and modern window display. Each advertiser, as we have already noticed, expects to increase his business at the expense either of his competitors in the same line or, by creating demands for his particular goods, of sellers in other lines. The first of these expectations we may neglect at the present, for it is usually realized, if at all, by lower prices, better service, and good will. The second we will examine at this point. A retail clothier, let us say, advertises through the newspapers or by handbills and display boards the 40 LAWS OF CONSUMPTION 41 excellence of the goods which he has for sale. At the same tune he also arranges his windows and displays his stock so as to make his goods appear as attractive as possible to prospective pur- chasers. If every one could determine exactly just when he needed a new suit of clothing and governed himself accordingly, the only object a clothing merchant would have in advertising would be to get business away from competitors in the same line. The normal individual makes no such calculations, and except when certain dress-up days, such as Easter, approach, few men give any serious consideration to the purchase of clothing unless prompted by some outside influence. In other words, the intensity of the want for a new suit of clothing is usually low. Knowing this, the seller of clothing exerts him- self through advertising and display to stimulate the demand for clothing ; that is, he endeavors to increase the intensity of the want for his goods to the point where sales can be made. In causing the need for a new suit of clothing to jump, as it were, over the heads of other needs more intense, the clothier has postponed, if not destroyed, the sale of goods in some other line. No limit to human wants. — We have seen also that there is no limit to human wants, though we must keep clearly in .mind that there are limits to demands for goods. If any one of us should attempt to enumerate all the goods he wanted, it would be an endless task. Each individual has wants not only beyond what eventually become demands, but also for goods which he never hopes to possess. Many of these remote wants have little intensity ; they are wants nevertheless. The child that cries for the moon or the young person that builds castles in Spain, expresses an unmistakable want, even though he does not realize the embarrassment that would come from having it gratified. The principle of the insatiability of wants has an important application to industry, particularly to production. Manufacturers and other producers need usually 42 ELEMENTARY ECONOMICS have no fear that their products will not be wanted. They must remember, however, that they can profit from these wants only when they rise to the dignity of demands. Wants and social progress. — The very fact that wants are incapable of being satisfied has led to our present state of civilization. Any individual or social group, such as a people Courtesy of Hart, Schaffner & Maij. ( innhjn, lU. Window Display of a Specialty Store. (Contrast with display on opposite page.) or a nation, that has all of its wants satisfied, is in danger of decay, if indeed it has already passed beyond the stage of savagery. Many good causes have been assigned for the lack of social and industrial progress among the American Indians, the best of which is that they did not have wants sufficiently varied and intense to compel them to give up their roaming life and to make a start in permanent agriculture — in other words, LAWS OF CONSUMPTION 43 CouTtesy of S. S. Kresge Co.. Chicago, III. Window Display of a Variety Store. (Contrast with display on opposite page.) 44 ELEMENTARY ECONOMICS to go to work. The same influence partially explains the differ- ences in the social and industrial developments among various peoples. The inhabitants of tropical and subtropical regions are notoriously unprogressive. They feel no need for permanent shelter and warm clothing, and even the getting of sufficient food is a simple matter. Granted that the warm climate dampens their enthusiasm for work, the significant fact remains that the kindness of nature in supplying their primitive wants robs them of their best energies. Very cold climates, on the other hand, compel so much labor to provide bare necessities as to leave little time for supplying higher wants. It is, there- fore, in the temperate regions where we find the highest develop- ment of civilization. There nature is neither too liberal nor too exacting. There men, though they must supply their primitive wants by labor, have a sufficient surplus of time and energy left to supply their wants for higher things. On the ground that an increase in wants produces social progi'ess we find one of the chief justifications for much of modern advertising. There are some who contend that advertising merely results in changing the demand either from one kind of a good to another or from one good to a similar good merely of a different make and brand ; in other words, that advertising is largely a social waste. Such a contention is certainly sound to a degree, but above and beyond is the infiu- ence which advertising has on stimulating individuals to greater endeavors through an increase in the intensities of their wants. 10. The Law of Diminishing Utility Statement of the law. — Although the sum total of human wants is incapable of being satisfied, each individual experiences daily the satisfaction of particular wants, in any one of which he can observe the law of diminishing utility. This law, stated briefly, is that as identical units of a good are consumed, the LAWS OF CONSUMPTION 45 satisfaction derived from any unit is less than the satisfaction derived from the preceding one. By substituting the word " possessed " for the word " consumed " in the above definition the law may be made to apply to a stock of identical goods not actually in the process of consumption. The law illustrated. — The most obvious illustrations of the law of diminishing utility are found in the consumption of food. A healthy boy with a plate of apples before him will eat the first one eagerly. The second he will consume with relish. Likewise, the third, the fourth, the fifth, and perhaps the sixth yield satisfaction. Finally, no matter how great his appetite may be, the point will be reached when he cannot eat another one. This point of satiety could be pushed ahead somewhat by sub- stituting other kinds of fruit and especially such foods as meat, potatoes, and bread, thus offering a variety. Even then the law holds true, though its operation is not so easily seen as it was in the case where apples alone were considered. As it is with food so it is with all other consumable goods. One suit of clothing is a necessity. A second suit for Sundays and holi- days is desirable. A third suit perhaps would serve a good purpose. Each yields less satisfaction than the preceding one, until finally the most fastidious dandy in the world would not care to have another. Obviously, as in the case of food, the satisfaction derived from each additional suit will diminish more rapidly if all the suits are exactly alike ; yet no matter how great the variety in color, texture, weave, or style, the law of diminish- ing utility holds true. Occasionally there are outstanding exceptions to the law, which, however, do not invalidate it. The first mouthful of some foods often gives less satisfaction than the second or third. Because of this fact many persons are compelled " to learn " to eat, for example, oysters or olives. Similarly, some habitual drinkers find that they like the second or third glass of liquor better than the first. 46 ELEMENTARY ECONOMICS 11. The Law of Marginal Utility The law stated. — We have already established the principle that the possessor of a suit of clothing values that suit more highly than he would a second one exactly like it, and that a third would yield even less satisfaction than the second. Let us suppose, then, assuming that he has three suits exactly alike, that he attempts to determine the value to him of any one of the suits. We have seen that one suit was absolutely necessary, and that the other two were much less so. Certainly, then, being in possession of three suits, he will not say that any one of them is necessary, for he would still have two left if one were taken away. Obviously, therefore, the valuation he will place on any one of the three suits would be less than the val- uation he would place on one suit if he possessed no other. Nor, by the same reasoning, will he value any two of the three suits as highly as he would if he had but two. He will, however, consider any one of the three suits as having exactly the same value to him as another suit would have if he already possessed two. We are now ready to state the law of marginal utility : The marginal utility of a series of goods is the utility of the last unit. This utility, we may say, is measured by the use to which the last unit can be put. If, to use an extreme example, he used the third suit to dress a manikin, then the value he would attribute to any one of the three suits would depend entirely on the satisfaction, slight as it might be, which he would derive from that particular use. The law further illustrated. — We can understand more clearly how the law of marginal utility operates by selecting our illustrations from fanciful though striking conditions of life. Let us suppose that a lone traveler in a large forest has among other things a gun and ten cartridges. Let us suppose further that he calculates that five of the cartridges will suffice LAWS OF CONSUMPTION 47 to protect him from wild beasts and savages ; that three will provide him with game, which it is not absolutely necessary to have since he has a sufficient supply of bread and salted meat to sustain him on the journey ; and that two will furnish him amusement in firing at a target. We may now properly raise the question : What value does our traveler place on any one of the ten cartridges, which, we have assumed, are exactly alike in every respect? To arrive at an answer, let us suppose that before he has had a chance to use a single one of them he accidentally loses two. Since they are all exactly alike, which two has he lost? Two of the five which he expected to use in defending his life? Two of the three he expected to use in procuring fresh meat? Assuredly not. Being a sensible traveler he will forego shooting at the target. Here, then, we find the answer to our question. The value which our traveler places on any one of his ten cartridges is measured by the satis- faction he will derive from the least important use to which he has planned to put them. To push the illustration, let us suppose that the traveler loses five of the ten. What now will be his conduct ? Will he shoot at a target ? Will he shoot game for food? Here again the answer is. No. The decrease of the number of cartridges from five to four may mean the loss of his life, which certainly he values more highly than the pleasure he would get from shooting at a mark or from feasting on fresh meat. Conversely, if after losing five of the cartridges he finds a sixth, we may believe that the possession of the sixth cartridge causes his marginal utility for cartridges to fall, since now he can and will use one of them to gratify a want which he was un- willing to gratify when he had but five. To illustrate the same law in another way, let us suppose that a shipwrecked sailor finds himself adrift in a rowboat with his dog and two biscuits. Let us also assume that the sailor values his own life more highly than he does that of the 48 ELEMENTARY ECONOMICS dog, and that he knows that one biscuit for him and one for the dog will sustain the life of both until they are picked up. With these notions clearly fixed in mind, the sailor loses one of the biscuits in the water. Which biscuit did he lose, his biscuit or the dog's biscuit? Supposing, as we have, that he values his life more highly than he does that of the dog, and that he will need to consume an entire biscuit to sustain life until picked up, our answer must be that it was the dog's biscuit which fell overboard. Applications of the law. — The law of marginal utility, though we may not be conscious of the fact, is closely related to many of our everyday acts and to many of our comparisons of values. Usually, for example, when we purchase a pair of shoes, we could, if we cared to do so, purchase a second pair exactly like the first. Our reason for not purchasing the additional pair is that the use to which we could put any one of the two pairs will yield less satisfaction than we can get from the same amount of money spent for some other good, say a hat. We will, however, purchase the second pair if the mer- chant reduces the price sufficiently to meet the satisfaction which we estimate a second pair of shoes would give us. Practi- cally all of the buying in quantities of consumable goods is governed more or less by this law. In making comparisons of the values of certain goods we often fail to arrive at correct conclusions because we ignore the law of marginal utility. Suppose the question were asked : Which is the more valuable, gold or iron? diamonds or bread? perfume or water? Obviously, bread and water are necessary to sustain life, while modern civilization is built on iron. Yet water is usually free for the taking, while bread and iron are among the cheapest of staple goods. To clear the way for a correct answer we must first contrast the marginal utility of a good with its total utility. The marginal utility of gold is much LAWS OF CONSUMPTION 49 greater than the marginal utility of iron ; that is, the loss of a unit of gold would be more keenly felt than the loss of a similar unit of iron. The total utility of iron, however, is much greater than the total utihty of gold. Perhaps the matter will be clearer if instead of gold and iron we consider perfume and water. We use water in a great variety of ways, some of which yield satisfactions of a very low degree. On the other hand, the poor- est use to which we put perfume is likely to yield a relatively high satisfaction. For this reason the marginal utility of perfume is greater than the marginal utility of water. We must, however, keep clearly in mind the fact that the total utility of water is greater than the total utility of perfume, for without the former we would find it impossible to sustain life itself. While the latter we could forego entirely with no serious effect other than a comparatively few people being incon- venienced. The relation of marginal utility of water to its total utiliiy is shown graphically in Fig. 2. The incompleted rectangle A, which we will leave open at the top since few if any would be willing to set a value on their own lives, represents the greatest satisfaction an individual can get from the consumption of water. Rectangle B represents the satisfaction derived when a second unit of water is put to a less important use, say in cooking, while rectangles C to M represent decreasing satis- factions resulting from decreasingly important uses. Since water is practically a free good we can assume that the height of M is zero. In this case the marginal utility of water would be zero while its total utility would be infinitely great. We may now properly consider the relation between the marginal utility and the total utility of a good which is neither necessary to sustain life nor free for the using. A good example is dining-room chairs. Obviously, as was the case in the earliest frontier homes, any American family could do entirely without 50 ELEMENTARY ECONOMICS the use of chairs in the dining-room. We will assume, however, that common decency demands two chairs, each yielding exactly the same satisfaction, represented in Fig. 3 by rectangles A and B. A third chair (C) may also be desired, though it would yield less satisfaction than the first or second. Even a fourth (D), fifth (E), and sixth (F) can be used occasionally to advan- tage. The marginal utility of the six chairs is represented by the rectangle F. The total utility of the six is found not by mul- tiplying the rectangle F by six, but by adding all the rectangles. Consumers' surplus. — The rectangle F in Fig. 3 represents not only the marginal utility of the six chairs, but also the price paid for each of the six. The total price, therefore, of the six is represented by the rectangle PO. Clearly, then, the LAWS OF CONSUMPTION 51 purchaser of the six chairs enjoys a greater satisfaction from five of them than he would have enjoyed had he spent his money for other goods, for we may assume that the utihty yielded by the sixth chair is measured by the price of each of the six chairs. This excess satisfaction is known as consumers' surplus. In the case of each chair it is the difference between the price paid, represented by the margin, and the price that would have been paid rather than to forego its use. The principle of the consumers' surplus is the basis of all trade and exchange. In the middle ages the opinion prevailed that only one party to a trade could be benefited. This opinion y p P A B C D E F X Fig. 3. we now hold to be erroneous. In practically all of our pur- chases and exchanges, even though we desire but a single unit of any good, we enjoy a consumers' surplus. If such were not the case few exchanges would take place, since each one would prefer his own goods to the goods of another. 52 ELEMENTARY ECONOMICS EXERCISES AND PROBLEMS 1. What evidence is there that the sum total of human wants cannot be satisfied? 2. Why does a clothier often advertise without mentioning prices? 3. How does variety affect consumption? 4. Does the law of diminishing utility apply to the possession of money ? 5. If the supply of goods be increased, how would the value of each unit be affected? the value of the total stock? Explain. 6. Why is money usually said to have a " reflected " marginal utility? 7. Explain the conditions under which a large consumers' surplus would exist ; a small consumers' surplus. 8. Why is it more difficult to measure the consumers' surplus of water than of oranges? B 1. Compare the window display of a ten-cent store with the window display of a dealer in ladies' ready-to-wear garments in the following respects : a. Variety of goods displayed. h. Price tags. c. Attractiveness. d. Effect on intensity of wants. 2. Name 25 nationally advertised goods. Why does a monopolist advertise his products? 3. Make a list of ten of your personal wants in the order of their intensity. Would this order be changed if each were multiplied by ^ve? 4. Make a list of the articles you would buy if you had .SIOO. How would this list be affected if, instead of 1100, you had $200? a. Would the number of items be increased? h. Would the first list contain items not included in the second list? c. Would the second list contain the same amount of any item or items included in the first list? d. Is it likely that the second list will contain but one item? LAWS OF CONSUMPTION 53 5. Call to mind some recent purchases you have made. In which did each of the foUoAving have an influence : a. LaA^^ of diminishing utility ? h. Law of marginal utility? c. Consumers' surplus? 6. Estimate the amount of consumers' surplus in the purchase of a lead pencil, a pair of shoes, a dish of ice cream, a loaf of bread, a suit of clothing. 1. Many people condemn window displays and advertising as an economic waste. Discuss from the standpoint of : a. Social progress. h. Service to the consumer. c. Good will in merchandising. 2. A prominent lawyer recently told the story of how his greatest, unattained ambition when a boy had been to own a shotgun. Now he has wealth enough to buy hundreds of such guns, but has not one. c. Account for his change in desires. h. Did he have a demand for a gun when he was a boy? c. Has he now a demand for a gun? 3. "A clothier, when he goes into the market to buy goods, usually has some adequate notion of the marginal utilities of his customers.'" a. Why do some clothiers handle only expensive clothing ? h. Why do others handle cheaper grades? c. Why do some handle both expensive and cheap grades? SUPPLEMENTARY READING Bullock, Introduction to the Study of Economics, 3d ed., pages 84r-96. Ely, Outlines of Econo7nics, 3d ed., pages 132-139. Fisher, Elementary Principles of Economics, pages 281-300. Johnson, Introduction to Economics, pages 23-28. Seager, Principles of Economics, pages 89-100. Seligman, Principles of Economics, 5th ed., pages 173-184. Taussig, Principles of Economics, 2d ed., Vol. I, pages 124-137. CHAPTER V DEMAND, SUPPLY, AND PRICE 12. Relation of Demand and Supply to Price Nature of demand and supply. — No two terms employed in the language of economics are better known and oftener mis- used than demand and supply. One of the most severe critics of our subject once said that a parrot could be made an economist by merely teaching him to answer " demand and supply " to every question put to him. This statement was extreme and meant to ridicule. Yet it has a sound foundation, for relatively few people have ever seriously attempted to analyze the nature of these terms. We have already seen that demand is effective desire ; also that an individual has a demand only when he is willing and able to satisfy it by foregoing the use of other goods — that is, to pay the current price. Desires, therefore, are constantly becoming demands. In the light of this knowledge we can, by recasting slightly the meaning of the word demand, say that there are active demands (demands in the strict sense of the word) and potential demands (desires or wants) . Likewise, supply may mean one of three things. First, it may mean the supply of goods offered at the current price — • that is, the supply which owners are willing to furnish on the instant at the market price. Second, supply may mean, in addition to the amount supplied, goods that would be offered at higher prices. Third, it may mean goods not yet produced, owing either to a lack of time or to an unsatisfactory market 54 DEMAND, SUPPLY, AND PRICE 55 price. When we speak, therefore, of demand and supply we ought to have clearly in mind the exact nature of each. Other- wise, we are almost sure to create confusion, and to acquire habits of loose thinking. It is apparent no doubt that neither demand nor supply works independently of the other; that there is a close mutual relationship. Any increase in demand, other things remaining equal, produces a change in supply; and conversely, ahy change in supply produces a change in demand. Professor Marshall has likened them to the two blades of a pair of shears, both of which are necessary if any cutting is to be done. It is also apparent from this analogy that supply and demand naturally tend to approach each other. , Increase in demand tends to raise price, and, consequently, causes an increase in supply. An increase in supply, on the other hand, tends to lower price, thus increasing the demand. Effect of demand and supply on price. — From what has just been said we may conclude that the price of any good is deter- mined by the demand for, and the supply of, that particular good. Generally speaking, such is the case ; but a few modifi- cations in the statement will lead to a more definite under- standing. Demand is used here as nothing more or less than the willingness and the ability of those who desire to possess the good, to pay the market price. Supply, as we have just seen, may mean one of several things. In this case it means the quantity of the particular good offered for sale, and does not include, as many think, the whole amount of such good in existence. In other words, the price is set not by desires for any good on the one hand, and the total supply of that good on the other ; but by demand (effective desire) and the volume freely offered to fill this demand. The effect of price on demand and supply. — Usually when the statement is made that price is determined by demand 56 ELEMENTARY ECONOMICS and supply, the one making the statement does not reahze the full significance of the effect of prices on demand and supply. Let us assume, as is always the case, a given market price for some particular good on a given day. Producers who are selling their goods advantageously, and they are likely to pre- dominate, will exert themselves to increase the supply. An increased supply at the old price will not be taken. Conse- quently, sellers will reduce prices, thiereby increasing demand. Enough has been said to enable us to make several additional general statements of principles that underlie the relatio-n of the three notions — demand, supply, and price. (1) Demand and supply mutually affect each other through price. (2) Price is the immediate factor in the determination of the volume of demand or supply. 13. Determination of Market Price Maximum and minimum prices. — When buyers and sellers come into a market, each buyer has in mind the maximum price he will pay for a good, while each seller, on his part, has deter- mined on a minimum price. Provided nothing occurs to change these determinations, no exchange will take place unless the maximum price of the buyer is equal to, or greater than, the minimum price of the seller. Here, then, is the most funda- mental notion in the determination of market price. In determining a maximum price the buyer estimates the marginal utility of the good he desires, measuring it by com- paring the satisfaction which this good will yield with the satisfaction yielded by some other good or goods of the same price. If he desire more than one unit of the good, the marginal utility will ordinarily be lower than if he desired but one unit. The seller's problem of determining a minimum price is a much simpler matter. Whereas the buyer's determination is largely an estimate, often, as we have seen, wholly disproportionate to DEMAND, SUPPLY, AND PRICE 57 his wealth, the seller's determination is, except under extraor- dinary circumstances, fixed for him by the expense he has incurred in procuring the good. The prospective buyer of a suit of clothing, for example, can, at the best, have but a hazy notion of the maximum price he will pay for a particular suit. The merchant, on the other hand, knows almost exactly the minimum price he can accept for it without suffering a loss. Buyers' and sellers' surplus. — Assuming that the buyer's maximum price exceeds the seller's minimum price, we may conclude that an exchange will take place at some point between these extremes. If the exchange is for one unit of goods at or near the buyer's maximum price, it is readily seen that he will enjoy little or no consumers' surplus. If, however, the exchange is at or near the maximum price set by the buyer for each of several units he will, as we have seen, enjoy a consumers' surplus. The seller also enjoys a sellers' surplus, which we may define as the difference between his minimum price and the market price. Since market price is usually somewhere between the buyers' maximum and the sellers' minimum, each group enjoys a surplus, the size of which in a barter regime would be largely determined by the higgling ability of the parties to the trade. Four possible market conditions. — A market price may result from any one of four conditions : (1) One buyer and one seller, (2) one buyer and several sellers, (3) several buyers and one seller, and (4) several buyers and several sellers. The first of these, one buyer and one seller, is now of no great importance, though it characterized trade at an earlier day, when men lived far apart and exchanged goods with little reference to community demands. Occasionally even now exchanges are made in which there are but one buyer and one seller : the owner of a family heirloom, a stranger let us say, offers to sell the heirloom to the only remaining member of the 58 ELEMENTARY ECONOMICS family. The determination of price in this case bears two char- acteristics not usually met. First, both the buyers' surplus and the sellers' surplus are likely to be exceptionally large. Second, the good exchanged is incapable of reproduction. Almost as rare under free competition are the cases where there are one buyer and several sellers. Frequently, however, some buying monopolist controls the market. While, as we shall see presently, he is restrained from pretending to have a ridiculously low maximum price, he can, and often does, as in the case of crude oil, iron ore, and leaf tobacco, enjoy an excessive buyers' surplus. Fortunately for the sellers, law and popular feeling frown on buyers' monopolies. Monopolistic also is the third condition, where there are several buyers and one seller, though usually, as under the second condition, the monopoly is not complete. Any one of the so-called trusts we may consider the single seller; the public, the several buyers. The Standard Oil Company, for example, while its monopoly is not complete, represents the single seller, while the users of gasoline, to name only one group of its customers, comprise the buyers. The fourth, and by far the most important condition under which a market price is established, is when there are several buyers and several sellers. Here we find each buyer with his own notion of a maximum price, and each seller knowing rather definitely his minimum price, which, as we have seen, is deter- mined by his expenses of production. Here too, we must assume competition to be free and active, and each buyer and seller to be desirous to drive the best bargain possible. With these assumptions in mind we can now turn our attention to the determination of market price under competitive con- ditions. DEMAND, SUPPLY, AND PRICE 59 14. The Competitive Market Price Buyers' schedule. — To simplify matters, let us suppose that seven men, each desiring to purchase one bicycle, attend a bicycle auction where the goods offered for sale are alike in every respect, and where both buyers and sellers are permitted freely y Fig. 4. X to make offers. These seven buyers we will indicate by the letters A, B, C, D, E, F, G. To complete our supposition let us attach to each of the seven buyers the following maximum prices: A — 30, B — 28, C — 27, D — 24, E — 21, F — 16, G — 11. Clearly, the valuations differ widely, but that is exactly the situation under actual business conditions; for the valuations we have attached to these seven buyers rep- resent desires which may or may not become demands ; and we can know whether or not they become demands only when we 60 ELEMENTARY ECONOMICS know the exact location of the market price. If, for example, the market price should be fixed at 25, D, E, F, and G would not have a demand for bicycles, for demand implies both the willingness and the ability to pay the market price. Obviously, then, we must next turn our attention to the sellers, who are equally as necessary as the buyers in fixing a market price. Sellers' schedule. — Each seller, as we have seen, has in mind a minimum price under which he cannot go without sustaining a loss. Accordingly, each of the sellers of bicycles — seven, let us say, with one bicycle each — who attends our assumed bicycle auction has settled on the lowest price he will take for his bicycle. As in the case of the buyers we can represent the sellers by letters, as R, S, T, U, V, W, Z. Also we can attach minimum prices to each of them as follows: R— 17, S— 18, T — 20, U — 23, V — 28, W — 31, Z — 40. In the preceding section it was noted that we could not deter- mine the number of bicycles demanded until the market price was fixed. A similar difficulty exists in the determination of the available supply, since, according to our assumption, those sellers whose minimum price exceeds the market price will withdraw their bicycles from the auction. Fig. 4 illustrates graphically the character of the various demands; Fig. 5 of the various supplies. Fixing the market price. — Before proceeding to determine just where the price would be fixed, it will simplify matters to eliminate those buyers and sellers who clearly have no chance to participate in the auction — that is, those buyers who cannot possibly have a demand and those sellers with minimum prices above the maximum price of the highest bidder among the buyers. Buyer G, whose maximum price is 11, cannot have a demand, for the lowest minimum price among the sellers is- 17. For the same reason, F must withdraw from the auction. Similarly, sellers W and Z must withdraw, for the minimum DEMAND, SUPPLY, AND PRICE 61 price of either exceeds the maximum price of any one of the buyers. There remain, then, five buyers and five sellers, who, so far as we have determined up to this point, will assist to fix the market price. We are now ready for the auction to open. X Fig. 5. Buyer A announces, let us say, that he will pay 30 for one bicycle. Immediately five sellers each offer him a bicycle at that price. Seeing that he may be able to get a better bargain by holding off, A refuses to buy. The sellers then begin to reduce their prices. When they drop to 28 a second buyer (B) comes into the market. We then have five sellers and two buyers. Prices will continue to fall. When they pass below 28, V will drop out, leaving two buyers and four sellers. At 27 62 ELEMENTARY ECONOMICS a third buyer's desire becomes a demand. Then we have four sellers and three buyers. Clearly, no one of the four sellers would permit the downward movement of the price to stop at this point if it resulted in his making no sale, and that is exactly what would happen. One bicycle would remain unsold. At 26 the same condition remains ; so also at 25. Wlien 24 is reached, however, a fourth buyer (D) cries out that he will Fig. 6. take a bicycle at that price. Now we are near the market price, which is likely to be found anywhere between 24 and 23, the exact point being determined largely by the ability of either group to bargain successfully. With the market price estab- lished between these two limits, 23 and 24, we find that three DEMAND, SUPPLY, AND PRICE 63 of the seven buyers do not have a demand for bicycles, and that three of the seven sellers are unwilling to furnish any of the supply at that price. We find also that the market price is that which produces the greatest number of sales. To make the matter clearer let us bring Figs. 4 and 5 together in Fig. 6. Here we see that buyers A, B, C, and possibly D, have a buyers' surplus. A's surplus is represented by the verti- cal distance from A on the demand curve to the horizontal line marked PP'. Similarly, the surpluses of B, C, and D may be determined. To express the same thing mathematically, we say that the surplus of each buyer is the difference between his maximum price and the market price. Likewise, the surplus of any one of the sellers is the difference between his minimum price and the market price. In the above assumptions the simplest condition possible has been chosen, though the conclusion reached holds true for the most complex condition in fixing market price. It is con- ceivable, first of all, that any one of the buyers might have had a desire for more than one bicycle. If, for example, A had been willing not only to pay 30 for one but also to pay 29 for each of two, the market price would have been fixed between 23 and 27 instead of between 23 and 24. Second, the three sellers who found the market price below their minimum prices might, in a moment of panic, have thrown their bicycles on the market at a sacrifice rather than to hold them. In this case the market price would have been fixed still lower. Third, under actual business conditions it is improbable that the bicycles would have been exactly alike. Such complexities, however, merely comphcate the fixing of market prices under free competition, and do not, as one might think at first glance, run contrary to the principle we have worked out under simpler conditions. 64 ELEMENTARY ECONOMICS EXERCISES AND PROBLEMS 1. What is meant by the expression "supply and price"? 2. How is price affected by demand? by supply? 3. How does price affect demand? supply? 4. Why do sellers have minimum prices ? 5.. How does each determine his minimum price? 6. Why do buyers have maximum prices? 7. How does each determine his maximum price? 8. What are some of the different meanings of "market"? 9. Does the supply of a commodity include what is in the hands of the consumer? 10. Which buyers in a market cannot buy? IL Which sellers cannot sell? 12. Why do many summer tourists like to go where no other tourists have gone? B 1. Make a list of goods that advanced in price during the Great War and try to determine how these advances affected production. 2. Attach maximum prices to five articles you have recently pur- chased. a. Compare these prices with the prices you paid. b. Determine your approximate consumers' surplus on each purchase. . c. Would a lower price have caused you to buy more of any article than you did buy? d. Did you feel the influence of other buyers? 3. Give examples from your own experience or observation of the four possible market conditions. 4. Mention the names of any articles you have seen sold at "cut prices." Discuss these sales under the following heads : a. Elasticity of demand. b. Competition among sellers. c. Competition among buyers. d. Seasonableness. 5. How has your refusal to buy any article which was on sale affected the market price of that article? DEMAND, SUPPLY, AND PRICE 65 c 1. During the winter of 1918-19, the statement was often made that the high wages per ton paid to miners during the preceding summer had tended to decrease rather than to increase the production of coal. a. Assuming this statement to be correct : i. Why were wages increased? ii. Why did not an increase in wages increase the coal output ? iii. Can we conclude that wages vary inversely with output? h. Assuming this statement to be incorrect : i. What caused it to be made? ii. Why did many people believe it to be true? iii. Why was it not refuted? 2. Analyze the medieval notion that in every exchange of goods one of the parties to the exchange lost exactly what the other party gained. 3. Explain how the market price of wheat would be determined under the follomng conditions : Amount Offered , 10,000,000 bu $1.50 8,000,000 bu. ... 7,000,000 bu. . . . 6,000,000 bu. ... 3,000,000 bu. ... 1,000,000 bu. . . . RICE Amount Demanded 1.50 . . . . 3,000,000 bu. 1.25 . . . . 4,000,000 bu. 1.10 . . . . 5,000,000 bu. 1.00 . . . . 6,000,000 bu. .80 . . . . 8,000,000 bu. .60 . . . . 10,000,000 bu. a. At what price will the greatest amount be bought and sold? h. What effect will the market price have on consumption of wheat? on future production of wheat? 4. If competitive prices are determined by an equilibrium between demand and supply, how can a store maintain a "one-price system"? 5. "The price of pork has never gone as high as $2 a pound nor as low as ten cents a barrel." a. Why are there any fluctuations in price? h. Why are the prices higher now (1919) than ten years before? c. Are there any conditions under which the price of pork might fluctuate as much as suggested by the above statement? d. What classes of people would buy pork if it were $2 a pound? What would other classes do? 66 ELEMENTARY ECONOMICS 6. Suppose at potato-digging time a gardener finds that the market price of potatoes is but twenty cents a bushel. a. What would be his attitude toward storing potatoes? b. If he stored his potatoes would he be a seller in the market ? Explain. c. Suppose he had no faciUties for storing : i. Would he dig his potatoes? Why, or why not? ii. Might he sell them undug? How? d. What would be his attitude toward the next crop of potatoes ? e. Suppose he turns his attention to wheat-raising : i. What would be the possible effect on the future price of potatoes? ii. How might the price of wheat be affected? SUPPLEMENTARY READING Bullock, Introduction to the Study of Economics, 3d ed., pages 192-222. Ely, Outlines of Economics, 3d ed., pages 164-182. Fetter, Economics, Vol. I, pages 61-72. Fisher, Elementary Principles of Economics, pages 268-353. Johnson, Introduction to Economics, pages 36-42. Seager, Principles of Economics, pages 109-122. Seligman, Principles of Economics, 5th ed., pages 222-238. Taussig, Principles of Economics, 2d ed., Vol. I, pages 138-158. CHAPTER VI SOME PRACTICAL ASPECTS OF CONSUMPTION 15. Harmful Consumption Consumption from the standpoint of economics. — Strictly speaking, the student of economics, as such, must confine his attention to demands for goods, however much as an individual he may deplore the manner in which many goods are produced and the evil results which their consumption often entails. A suit of clothing made in a sweatshop fills the same need as a similar one turned out from the most up-to-date manufacturing plant. Both are produced, both are distributed in the form of money among those who assist in production, both are con- sumed. Likewise, a box of cigars is just as much an object of economic inquiry as is a sack of flour, though society would be greatly profited by an increase in the one and a decrease in the other. But just as long as there is a demand for cigars, the student of economic questions must include them in his in- vestigation. This does not mean, however, that we should ignore the effects of the production or consumption of any particular good. Rather does it mean that we should study every economic demand irrespective of its evil results and every effort that is put forth to supply this demand. Nature of harmful consumption. — It is impossible, we may as well say at the outset, to draw a line through consumption, marking off, on the one side, the satisfactions of desires that bring nothing but an increased welfare both individual and social, and on the other, the satisfactions that produce the 67 \ 68 ELEMENTARY ECONOMICS opposite effect. Every one will agree that bread contributes to our well-being, and that opium does not. Yet in a complete classification of goods there comes a time when disagreement will appear, when even learned and unbiased authorities will differ. The best we can do under these circumstances, there- fore, is to weigh the facts in each case, both as individuals and in small social groups, hoping thereby to arrive at the truth. It is obvious that a considerable portion of human con- sumption is unwise and even actually harmful. Intemperance abounds not alone in the consumption of such positively harm- ful goods as drugs and intoxicating liquors. Its baneful in- fluence extends even to the use of food, of clothing, and of enter- tainment. Few people would now deny that the use of drugs or intoxicating liquors is detrimental, as well to the best interests of society as to the individual. The opinion once generally held that alcohol increased and sustained mental and physical energy has been discarded. Unfortunately, the great majority stop at that point in their opposition to intemperance, forgetting that it is also harmful to consume intemperately other economic goods. The typical American is much more likely to be overfed than underfed. The more frugal Europeans often marvel at our capacity for food, while many a physician can testify that his practice consists largely in doctoring the ailments that arise from overeating. Such consumption, we may safely say, is harmful as well as unwise. Also in the matter of dress many of us, perhaps a majority, protect our bodies with more care than nature demands, thereby lowering the physical vitality, instead of raising it. Entertainment, too, may be carried to an extreme, particularly that kind which consists of late hours, undue excitement, or inactivity. Consumption and efficiency. — It will readily be seen that con- sumption is an important factor in efficiency. Large industries clearly recognize this fact; hence their insistence on sobriety SOME PRACTICAL ASPECTS OF CONSUMPTION 69 among their employees. The manager of many a large indus- trial plant views the week-end with horror, knowing from expe- rience that his force will be depleted on Monday by Sunday's carousals. The effects of these excesses are too obvious to merit discussion. Other excesses, however, not so easily dis- cerned, or if discerned allowed to go unchallenged, have a similar influence on the industrial efficiency of society. Office workers, students, and all others that follow a sedentary life, often fail to work as efficiently as they might if they took more exercise and ate less food. Who has not experienced the languor that comes so frequently just after the noonday meal? the fine feeling of bodily and mental energy that comes with an empty stomach? Efficiency is increased also by keeping the temperature of the body normal. Overheated rooms, which means an overconsumption of fuel, and garments too thick and heavy for the occasion, produce depression in mind and body, thereby lessening normal efficiency. From what has been said it is apparent that society is in- terested in the consumption of its members ■ — that is, that it is not altogether an individual matter what one eats, or drinks, or wears. Already steps have been taken to discourage the use of intoxicating liquors, not alone because it is felt that their use is more or less immoral, but also because it has been proved beyond dispute that alcohol and industrial efficiency do not mix. Further than this, society has not yet attempted to go. Consequently it is the business of each one of us to keep fit mentally and physically by relieving the mind and body of over- work in combating intemperance of every sort. 16. Unwise Consumption The meaning of economical consumption. — Another type of consumption, which in itself is not positively harmful to the body or mind, we may designate as unwise consumption. 70 ELEMENTARY ECONOMICS Whenever either of two goods is capable of satisfying a want, obviously, the use of the one which involves the greater labor to procure is unwise. The early colonists, and later the frontiers- men in the West, found it necessary to substitute corn for wheat as a material for making bread. They preferred wheat bread, but their good sense soon taught them the advantages of eating corn bread instead. Here is an example of economical con- sumption. It was economical for the simple reason that corn was easier to grow than wheat. Some of the early settlers, however, went to great extremes in an effort to satisfy tastes which they had acquired in Europe, and which could be satisfied only in old settled countries. They planted vineyards, from which they expected to get, in a short time, a supply of wine sufficient for their needs. Almost without exception their expectations were not realized. Consequently, they turned to apple cider and corn whisky, both of which were easily produced on the frontier. Modern business conditions tend to lessen the differences in value between two goods equally serviceable, yet even today there is need to compare the disadvantages arising from the higher price of one good with the disadvantages one may feel in having to adjust his taste to another good more easily procured. The gospel of plain living. — Closely related to economical consumption is plain living. At the very outset we must rob our minds of any feeling that plain living is something mean or contemptible, or that it is associated with poverty or want. On the contrary, plain living is the real basis of industrial efficiency, of education, of culture, and of happiness. It begets contentment of mind, adds to physical energy, and prolongs life. We find it associated with achievement in every line of endeavor. In fact, an old philosophy made plain living and high thinking the only sure corner stones on which a successful life could be built. SOME PRACTICAL ASPECTS OF CONSUMPTION 71 The most superficial observation of American living con- ditions reveals, not only a remarkable degree of poor taste in consumption, but also poor judgment as to the relative merits of similar goods. Otherwise there would not be the widespread demand for the study of home economics. Everywhere serious- minded men and women are coming to realize that incomes are not being spent to the best advantage, that they are virtually being thrown away, too often through ignorance, in buying goods that satisfy the most transitory demands. Social unrest. — Unwise consumption is one of the several causes of the social unrest which has manifested itself in this country during the past generation. The consuming standards of most individuals are set to some degree by neighbors and friends. In a democracy, such as ours, where every one feels that he is equal to every one else, there is always the temptation to display equality through the consumption of goods. Conse- quently, many people live beyond their income in a fruitless endeavor, as they say, to keep up appearances. The result is debt, worry, and discontentment. Debt keeps out of their reach business opportunities which they might easily have grasped had they lived within their means. Worry destroys efficiency, while discontentment causes them to overlook the small things which would in time lead to something better. Here, then, is an important source of social unrest, which we can counteract and finally eliminate by having a proper regard for economic values. It would be misleading to close this discussion without saying something more about the sources of social unrest. The rapid increase in the number of wealthy men, the display of lavish expenditures on every hand, and the concentration of industry, lead many to believe that American industrial society needs to be reconstructed in some way so as to equalize more evenly the distribution of wealth and to place in the hands 72 . ELEMENTARY ECONOMICS of the workers greater control over production. Further dis- cussion along these lines, however, must be deferred to later chapters. 17. Conservation and Thrift The sin of waste. — Americans are proverbially the greatest wasters the world ever saw. It is a common expression among European travelers in this country that a frugal French house- wife could easily feed her family with the food wasted in a well- to-do American home. Granting the extravagances of such a statement, the significant fact remains that only a relatively few of us are normally thrifty. Not only in food, which may be wasted by overeating as well as by throwing it in the garbage barrel, but also in clothing, in house furnishings, and in a variety of different ways, we fail to get maximum satisfaction from our consumption. The broken pieces of bread, left-over vegetables, and bits of meat, which are too often thrown away, might very well, if sensibly and properly prepared, serve as the basis of another meal. Likewise, the overcoat, discarded after a season's wear, or the shoes thrown away simply because they need a *new pair of soles, represent waste which might otherwise be utilized to the advantage of society as well as of the in- dividual. Any discussion of waste must necessarily involve two con- flicting viewpoints : that of society, which suffers a loss ; and that of those individuals who reap a profit from waste. Clearly, the cattle-raiser, as such, is profited by the waste of meat. The manufacturers and retailers of men's clothing likewise profit by a waste of hats, overcoats, and furnishings. Not one of these men perhaps would openly encourage waste of any sort, and it is only fair to them to say that they see no waste when the goods they themselves sell are concerned. Society, however, must view the whole field and not a particular industry, SOME PRACTICAL ASPECTS OF CONSUMPTION 73 though this view should be detrimental to individual enter- prises. The country as a whole experienced during the first year of our war with the Central Powers this conflict between indi- vidual and^social aims in the matter of waste. The government called for millions of men and billions of dollars which could be supplied only from the non-war industries. The answer was " business as usual," which from the social point of view was impossible. Individual business men set up claims that the ends of war could be furthered by buying their goods. Finally, such claims became absurd. Even florists in some sections adopted the slog'an, " give flowers and win the war," while theatrical managers everywhere insisted that the morale of the people demanded an increased attendance at vaudeville and motion-picture shows. The twofold aspect of thrift. — The practice of thrift may result in a twofold benefit. First, the individual is sure to profit if he does not permit his thrift to degenerate into parsimony. The very spirit of wholesome saving stimulates sobriety, tem- perance, efficiency, and contentment. It creates a feeling of independence, tends to guard against accidental reverses, and provides for old age. Not less important, it makes the saver a better citizen, giving him an interest in society and government which he cannot have if he spends every dollar as it comes in. It is a well-known fact that a city of home-owners is likely to be a city of enterprise, of good government, and of good schools and churches. Back of all this lies the willingness of the in- dividual to save. Second, society is also the gainer in the long run, though individual producers would feel the pinch of a decreased demand for their goods. But even they in time would as a class adjust themselves to the new condition. Society would, if thrift prevailed, possess not only more efficient and more contented members, but also a greater supply of wealth to be used in productive enterprises. No real sacrifice, it 74 ELEMENTARY ECONOMICS must be said, is involved, either from an individual or a social standpoint, in an increase of thrift. It makes no demand that the individual shall forego any necessity or even comfort. It does, however, stand for sensible consumption, for a judicious comparison of values, and for the elimination of waste. Some avenues for saving. — Thrift, we have every reason to expect, would be stimulated by a better understanding of the avenues through which savings can be made. The most out- standing institution in this respect is the savings bank, which readily accepts small amounts, paying depositors a reasonable rate of interest, usually in the neighborhood of three or four per cent. Even the national government has entered this field with its postal savings bank system. A much higher rate of interest can be got from stock in building and loan associations. Unlike deposits in savings banks, which can be made in any amount at any time, building and loan dues are payable at stated times in stated amounts. This very characteristic, the definiteness in time and amount, though it is galling to many people, works effectively to create habits of thrift and saving. What at first appears to be a burden, soon, by the very force of habit, becomes a fixed charge against income, which is handled exactly like rent or regular store bills. Small accumulations like these are first steps to larger investments. Periodically the savings bank depositor or the owner of building and loan shares is able to buy government or industrial bonds or even real estate mortgages. The interest from these larger invest- ments becomes the nucleus of further savings, which in time ripen, as it were, into more bonds or mortgages. Thus, the process goes on until in time many a man finds himself in possession of a greater income from his savings than he can possibly get from his labor. The hardest part of saving, as any successful man will testify, is the beginning. A dollar appears too insignificant to be saved. Besides, there are so many things SOME PRACTICAL ASPECTS OF CONSUMPTION 75 its possessor feels that he ought to buy. But with foresight and a spirit of abstinence the typical American can save. As a practical problem saving seldom appeals to young people of high school and college age. Yet of all classes they ought to Investment . Investment Inter- est in Five Years Investment Interest in Ten Years . Investment Interest in Fifteen Years Investment Interest in Twenty Years Investment Interest in Twenty-five Years Growth of an Investment Compounded Annually at Six Per Cent. acquire the habit, for a dollar saved at twenty is worth several dollars saved at forty. Early savings mean an early start in business, early home-owning, and early independence. A first- year high school boy who can begin to put five dollars a month into a building and loan association will, in the middle of his junior year in college, find himself in possession of five hundred dollars. Likewise the high school graduate who is about to take his first step into the business world can, by investing ten dollars a month in the same way, have a thousand dollars at the age of twenty-five. The saving problem becomes easy, to repeat what has already been said, after the first step has been taken. 76 ELEMENTARY ECONOMICS Report of the Peoples Building and Loan Association, April 1, 1919 Assets Loans on Real Estate \ $418 100 00 Loans on Stock Pledged / Interest due and unpaid 475.06 Fines due and unpaid 96.90 Installments due and unpaid 837.00 Real Estate 4,197.97 Judgments or Master's Certificates .... 6,445.07 Real Estate Sold on Contracts 1,231.00 Taxes advanced 174.89 Insurance advanced 19.08 Furniture and Stationery 400.00 Cash in hands of Treasurer 102.66 Cash in hands of Secretary 176.90 $432,256.53 Receipts Cash in Treasury $233.25 Cash in hands of Secretary 24.44 Installments received 108,909.75 Interest received 31,884.52 Membership Fees received 77.00 Transfer Fees received 17.50 Fines received 478.50 Pass Book Fees received 45.00 Loans repaid or matured 103,600.00 Taxes repaid 408.49 Insurance Premiums repaid 67.70 Real Estate 242.00 Judgments 1,612.73 Real Estate sold on Contract 316.75 Contingent Fund 268.00 Installment Suspense 28.75 Expense Fees 447.72 Accounts payable 158,900.00 $407,562.10 SOME PRACTICAL ASPECTS OF CONSUMPTION 77 Report of the Peoples Building and Loan Association, April 1, 1919 Liabilities Installments paid in , .. . $299,829.00 Installments paid in advance 185.00 Installments due and unpaid 837.00 Interest paid in advance 15.77 Interest 1,857.78 Profit (divided) 50,184.93 Profit (undivided) .30 Installment Suspense 28.75 Accounts payable 76,050.00 Contingent Fund 3,268.00 $432,256.53 Disbursements Loans on Real Estate \ $ 93 000 00 Loans on Stock Pledged / Installments on Stk. withdrawn and matured 104,650.75 Interest or Profit on Stock withdrawn . . . 25,582.67 Real Estate 254.14 Judgments or Master's Certificates . . . 5,135.95 Taxes advanced 86.74 Insurance advanced 58.38 Accounts payable 170,800.00 Interest 5,454.88 Expenses — general 408.92 Expenses — salaries 1,500.00 Stationery, postage, and printing .... 82.09 Cash in hands of Treasurer 102.66 Cash in hands of Secretary 176.90 Miscellaneous Disbursements 268.02 $407,562.10 78 ELEMENTARY ECONOMICS Table of Values and Shares Series Dues Paid Profits Value Per Share 25-A $72.00 $18.40 $90.40 26-A 60.00 ' 12.78 72.78 27-A 48.00 8.18 56.18 28-A 36.00 4.60 40.60 29-A 30.00 3.20 33.20 30-A 24.00 2.04 26.04 31-A 18.00 1.15 19.15 32-A 12.00 .51 12.51 33-A 6.00 .13 6.13 1-B 15.00 1.60 16.60 2-B 12.00 1.02 13.02 3-B 9.00 .57 9.57 4-B 6.00 .26 6.26 5-B 3.00 .06 3.06 18. Substitution Force of habit in consumption. — Very naturally one of the first points where thrift begins is the substitution of one good for another. Strongly opposed, however, to substitution — or to any other change — is the force of habit. All of us con- sume goods daily without giving second thought to the needs we feel, or to the satisfaction we secure. It is true that if such goods were entirely removed we should feel their absence and even complain of privation. Yet if some other good of like appearance were substituted we should not, in many cases, detect the deception. People become accustomed to use, for example, creamery butter, lard, pure apple cider, leather shoes, or solid silverware, and feel that nothing else could serve so well the purpose to which these goods are put. The basis for these wants goes scarcely deeper than taste or looks, for seldom if ever do we stop to analyze the satisfaction of deeper wants, such as cleanliness, comfort, or good health. SOME PRACTICAL ASPECTS OF CONSUMPTION 79 Extent of substitution. — The rise in prices which began about 1896 and which was accelerated by the Great War naturally turned the attention of both producers and consumers to the question of substitutes. The result has been that many goods have been compelled to compete with substitutes. At times the battle between the two has become intense. Butter and oleomargarine, for example, have contested for supremacy, the producers of each basing their claims for preference on uniformity in texture, cleanliness, and nutrition. In support of what was said in the preceding paragraph, the fact may be cited that tons of the latter have been consumed by hotel and restaurant patrons who, if they were questioned in the matter, would have declared ,their inability to eat any substitute for butter. Substitutes have been found for many other foods, such as wheat bread, ohve oil, maple sirup, and eggs. Likewise, substitutes for numerous other kinds of goods have been discovered, until one scarcely knows just when he is buying leather, silk, cloth, furs, paints, or oils. Merit in substitution. — The first feeling toward substitution is that it is more or less of a fraud, and that no substitute can possibly possess the merits possessed by the good it attempts to displace. Obviously, no such sweeping conclusion can be justly drawn, for until a careful comparison of the utilities yielded by two competing goods is made, no one can say which is the better either from the individual or from the social standpoint. We can conclude, however, that as between the two, all other things being equal, the cheaper is preferred. 80 ELEMENTARY ECONOMICS EXERCISES AND PROBLEMS A 1. What is the economic viewpoint of consumption? 2. How does this viewpoint differ from the ethical viewpoint? 3. How is consumption related to industrial efficiency? 4. Distinguish between unwise consumption and harmful consump- tion. 5. What are some of the motives that lead to unwise consumption? harmful consumption? 6. Why does the saving problem become easy after the first step? 7. How does substitution encourage tlirift? 8. Distinguish between the social and the individual viewpoint of waste. 9. What is the relation between plain living and high thinking? B 1. Make a list of ten articles the consumption of which is harmful. fl. Would each be harmful at all times? b. Would each be harmful to all persons at any time? c. Which, if any, become harmful only with excessive con- sumption? d. Would everybody agree with your list? 2. Mention ten instances of waste that have come under your observation. a. How many of the ten were conscious wastes? How many unconscious? b. How could these wastes have been avoided? c. Were any of these wastes beneficial to any individual? Whom? d. Were any of them beneficial to society? Explain. 3. Suppose you begin now to save ten dollars a month, investing it in building and loan stock at seven per cent. o. In how many years would your stock be worth $1000? b. How could you invest this amount to an advantage? c. How many times could you repeat this operation before you are fifty years of age? SOME PRACTICAL ASPECTS OF CONSUMPTION 81 d. What would then be the total value of your investment? e. Is this amount more or less than the total wealth of the average well-to-do individual at that age? 4. Make a list of food substitutions. a. Why are these substitutions consumed? b. Which are less palatable than the foods for which they are substituted? c. Is there any popular prejudice against any of these sub- stitutes? d. How, if at all, is this prejudice being destroyed? C 1. In discussions of the liquor business, what is the essential differ- ence between temperance and prohibition? How could an individual support one without supporting the other? Which of the two is more intimately connected with government regulation? with moral educa- tion? 2. A few years ago a large manufacturing concern established its pay days on Wednesdays. Shortly afterward it changed back to Saturdays. Give reasons for the last change. 3. A farmer usually consumes much more food than a man living in the city. Does this mean that the farmer is overeating or that the city man is undereating? How, then, shall we determine how much food is sufficient for any individual? 4. "Americans grumble at the high cost of living. If they would look about they would see that a much greater evil is the cost of high living." a. Has there been an increase in the cost of living? h. What is meant by the expression "cost of high living"? c. Is there any relation between the two? 5. "Americans are notorious spendthrifts. European shopkeepers have three prices for their goods : one for their native customers in moderate circumstances ; another for native millionaires ; and the highest for American tourists." a. Why is the typical American liberal with his money? b. What is the general notion about one who spends his money with care? c. Account for the prevalence of the tipping habit in this country. 82 ELEMENTARY ECONOMICS SUPPLEMENTARY READING Bullock, Introduction to the Study of Economics, 3d ed., pages 107-113. Ely, Outlines of Economics, 3d ed., pages 122, 123, 497-500. Fetter, Economics, Vol. I, pages 285-299. Johnson, Introduction to Economics, pages 197-199. Seager, Principles of Economics, pages 83, 316-321. Taussig, Principles of Economics, 2d ed.. Vol. I, pages 90-92, Vol. II, pages 16-21. PART III PROBLEMS OF PRODUCTION CHAPTER VII ORGANIZATION OF INDUSTRY 19. Historical Background The domestic system. — Until less than two hundred years ago practically all of the productive processes were carried on in the homes, either by hand or with the aid of crude tools and machinery which showed little improvement over those employed in the Middle Ages. Weaving, the chief manufactur- ing industry in England at that time, was done by men, like Silas Marner, who gave it their entire attention, or by the peasant farmers and their families, who combined weaving with agriculture. At one time the typical weaver bought his thread in the market and there he also disposed of his cloth. Later, so-called capitalists furnished thread to weavers and paid them for their labor, sometimes even supplying them with looms. Gradually, then, there began to emerge, in addition to the independent weavers, two classes of producers : one owned a portion or all of the capital invested ; the other class did the weaving. Iron-smelting, machine-making, the manufacture of shoes, clothing, and hats, and practically every other form of production was carried on in a similar manner. The important thing to notice in this connection is the rise of a capitalist class which undertook to supply workmen with raw materials and machines and to dispose of the finished product. The English industrial revolution. — Beginning about 1760, with the invention of improved spinning and weaving machines 85 86 ELEMENTARY ECONOMICS and with the successful apphcation of steam to machinery, Enghsh industry soon underwent radical changes. Home manufactures gave way to the factory system with its hum and noise, its long and steady hours, its discipline, and its deadening influence. The old-type capitalists became owners. The independent weavers and spinners became operatives, being compelled as a result of the change to leave their little plots of land with their gardens, poultry, and hogs, and to crowd about the factories in poorly built hovels. A similar change took place in all other lines of manufacturing. Workers gave up their tools and machines, and whatever hereditary rights they had in the land, thus cutting themselves off from a great deal of their traditional independence. The American industrial revolution. — Fifty years later (1810) the American industrial revolution was under way. Samuel Slater, twenty years before, had introduced the factory system into the United States. The repressive commercial measures of Great Britain in her Orders in Council (1806 and 1807) and the edicts of Napoleon (1806 and 1807) had turned enormous quan- tities of American capital and thousands of laborers from com- merce and agriculture to manufactures. Our own Embargo Act (1807) and Non-Intercourse Act (1809) had practically completed what the two great European powers had begun — the industrial isolation of the United States. The three years' war with Great Britain (1812-1814) further encouraged manu- factures by providing them a government market. Thus, by 1816, when the first tariff law for the protection of American manufacturers was enacted, the American industrial revolution was an established fact. In comparing these two great indus- trial revolutions, it must be kept clearly in mind that the one in England was characterized by a change from home to factory methods, while the one in the United States was characterized by a change from commerce and agriculture to manufacturing. ORGANIZATION OF INDUSTRY 87 Later developments in manufactures. — Both in England and in the United States the factory system spread until in time it characterized all forms of production. Home manufacture in either of these countries at the present time is a rarity. Practi- cally every manufactured good we consume comes from some factory. Along with the factory system went the development of division of labor. From the first simple English weaving mills in which each operative carried on all the processes from the thread to the finished cloth, we have finally arrived at the place where each operative devotes himself to one specific, simple task. Consequently, he becomes a specialist in a short time. Our chief concern in this connection is to remember that the growth and spread of the factory system has been largely responsible for important changes in business organization. Railroad development. — Railroads, like manufactures, have undergone important changes since the first line in the United States was opened for business in 1830. Originally projected as local enterprises with local capital, they gradually became national in character and in service. Further consolidation and extension transformed them into great, through trunk lines, each line embracing thousands of miles and employing tens of thousands of workmen. Here again our chief interest lies in the fact that these developments have shaped, to a large extent, our methods and forms of business organization. Developments in American agriculture. — Unlike manu- factures and transportation, agriculture has undergone no radical changes in the matter of organization. Now, as has been the case for centuries, the typical farmer operates a single farm largely with his own labor and that of his family. He assumes all the business risks and enjoys all the profits. There have, however, been three developments in our agriculture which we must notice at this point. First, farmers produce more for the markets than they formerly did, selling their 88 ELEMENTARY ECONOMICS products for money and buying goods which their predecessors had produced on the land and in the home. Along with this change has gone a growth of specialized farming in which each farmer concentrates on a few crops. Second, the invention and improvement of farm machinery has set free multitudes of laborers for other industries. Third, there has been a significant increase in the number of farm operators known as tenants, who, as the term signifies, do not own the land they operate. 20. The Single Enterpriser and the Partnership Place of the single enterpriser in production. — The organi- zation of a productive industry may take any one of three different forms : the single enterpriser, the partnership, the corporation. Each possesses advantages as well as disadvan- tages. Usually one of the three is better adapted than either of the others to this or to that industry, depending on its size, on the nature of its product, or on the character of its operations. We cannot say, therefore, which form of organi- zation is best adapted to any particular industry until we know something about its character. We can, however, without special reference to particular industries, point out the advan- tages and disadvantages of each form of organization and draw general conclusions as to their adaptability. The single-enterprise form of industry predominates in most lines of production. It has almost a complete monopoly in farming, it is the form most often met in retailing, and it still holds an important place in manufactures. Wherever small capital is sufficient and close supervision is required, we may expect to find a single enterpriser, who assumes all the risks of the business and enjoys all of its profits. Obviously, he controls his business alone and without interference. He can decide on policies and carry them out without consulting others. Thus, we can see why farming, retailing, and even manufacturing ORGANIZATION OF INDUSTRY 89 are adapted to the single-enterprise form of organization. Few farmers would care to share the cultivation of a piece of land with others. Neither does the druggist, the grocer, or the confectioner ordinarily feel the need of dividing responsibiUty or profits ^vith some one else. Advantages and disadvantages of the partnership. — A part- nership, to be brief, is nothing more than a mutual agreement between two or more individuals to undertake an enterprise. In business such an agreement is usually confined to production. Compared with the single enterpriser the partnership is at a disadvantage in the matter of business policy and authority. Unlike a single enterpriser, the member of a partnership must share more or less authority with others. Consequently, as often happens, the partners work at cross purposes, one advo- cating one business policy, a second advocating a different poHcy, while a third partner may disagree with both policies. Oftentimes, under such circumstances, it is found desirable to dissolve the partnership, it being necessary for the parties to agree mutually on some plan of dissolution. Profits, which the single enterpriser enjoys alone, must be divided among the partners. This division is made on the basis set forth in the agreements which partners usually makewhen the partner- ship is formed. The mere fact that authority and profits must be divided among partners is not in any way indicative that partnerships are not necessary and profitable. We can easily imagine a situation where men desire to share authority with others, and where the profits going to each partner exceed what any one of them could possibly make in the same business. The old adage that "two heads are better than one " applies very well to the typical partnership. In the retail business, for example, one partner may possess special skill as a buyer of goods, another may be an exceptionally good organizer of hired help, 90 ELEMENTARY ECONOMICS while a third may have marked abihty in handhng the finances of the business. Sometimes one partner merely furnishes the capital, taking no active part in the direction of affairs. Such a one is usually called a " silent partner." We may conclude, then, that a partnership offers advantages in at least two ways. First, it permits men possessing different kinds of abilities to unite, thereby increasing efficiency. Second, it makes possible the employment of larger capital, which, as we shall see later, contributes to increased production. 21. The Corporate Form of Organization Nature of the corporation. — The corporation was the last of the three forms of organization to develop ; and it developed only when single enterprisers and partnerships found that they could not, usually on account of insufficient capital, carry on certain kinds of industry to the best advantage. The govern- ment then stepped in and created artificial persons, which we know as corporations. The corporation, while it possesses many characteristics of a natural person, such as the ability to make contracts and to sue in the courts, has certain distinctive characteristics of its own. Its life is either limited to a specific number of years, or it is definitely unlimited, there being no uncertainty as in the case of a natural person. Its business operations are restricted to the purposes for which it was organized, and these purposes are stated specifically in its charter. Ordinarily, the manner in which it carries on its business, such as its methods of bookkeeping, is subject to more or less regulation by the government. The owners of a corporation are known as stockholders, who regularly elect a small number of directors from their ranks to manage the busi- ness. The directors in turn elect the president, secretary, treasurer, and other officers, to whom they usually delegate the actual management of affairs. ORGANIZATION OF INDUSTRY 91 Advantages and disadvantages of the corporate form of organization. — The corporate form of organization has an advantage over its two rivals in at least three respects : (1) it diffuses financial responsibility, (2) it survives the death of its owners, and (3) it permits of larger accumulations of /iSflX HARDWARE 1 1 a^HKS CLEEK3 CU..H. GOODS 1 1 CLERKS CIERKS F^ ORGANIZATION OF A RETAIL HARDWARE SYCW- ^illustrative] capital. A single enterpriser, as we have seen, must assume all of the financial risks of his business. Likewise, in a part- nership each partner is financially liable for the entire in- debtedness of the partnership. For that reason few persons, 92 ELEMENTARY ECONOMICS unless they can assist directly in managing its affairs, care to assume the financial responsibilities which a partnership imposes. In a corporation, however, the situation is different. There each stockholder is ordinarily liable only for the stock he owns ; that is, he cannot be held for the debts of the cor- poration. In other words, his liability to loss is confined to the investment he has already made. Moreover, the death of a stocldiolder does not, as in the partnership, dissolve the organi- zation of which he is part owner. Consequently, many men who could not or would not become either single enterprisers or partners are easily persuaded to become stockholders in corporations. The result is the much larger accumulation of capital than otherwise would be possible. Stockholders and bondholders. — Strictly speaking, stock- holders are enterprisers ; that is, they are the individuals who assume the tisks of business and enjoy the profits of their enterprise. In other words, they are the owners. The ev- idence of ownership in any corporation is the stock certificate, which bears on its face three important facts : (1) name of the owner, (2) number of shares, (3) par value of each share. Many corporations issue two kinds of stock, preferred and common. Preferred stock bears a definite dividend rate, which, so far as the corporation may be able, is guaranteed. It may also carry a preference in voting or in the division of assets, should the corporation decide to liquidate. Common stock, on the other hand, yields its owner dividends only after dividends have been paid on the preferred stock. To state the same fact in another way, the owners of common stock get all the profits over and above the amount necessary to pay dividends on preferred stock. Here we find the explanation for the wide variation in the value of many common stocks. When a corporation is merely able to pay its preferred dividends the value of its common stock ordinarily drops very low. When, on the ORGANIZATION OF INDUSTRY . 93 other hand, the same corporation is exceedingly prosperous the same common stocks rise in value, often selling for more than preferred stocks. If, to illustrate the case, a corporation which has equal amounts of preferred and common stocks should earn but seven per cent, which is a normal rate, on its entire capitali- zation, it is likely that its common stock would sell in the neigh- borhood of par. If, however, the same corporation should earn twenty per cent instead of seven, the common stock would command a high price, say 400. Thus far in our discussion of corporations we have assumed that the stockholders alone furnish all the capital required. In practice, however, corporations, like single enterprisers and partnerships, usually find it necessary to secure funds from out- side sources. The two last named secure their funds on prom- issory notes ; the first, on bonds. These bonds are similar to real estate mortgages in that property in each case is the basis of security, and like mortgages they are evidences of indebted- ness. Bonds bear a definite rate of interest, and do not entitle holders to share in any extra prosperity the corporation might enjoy. Consequently, fluctuations in the value of bonds are much less than they are in the case of stocks. Of the two forms of investment, bonds are less speculative, being preferred by those who place security and a low rate of income above risk and a higher rate. The stock exchange. — With the beginning of the corporate form of organization there also begian a desire on the part of persons to buy and sell stocks and bonds. Soon a need was felt for some sort of central market where buyers and sellers, or their agents, could meet to bargain. The result was the stock exchange, such as the one in New York City, where the members come together daily for the purpose of buying and selling stocks and bonds, usually for their customers. The development of such a central market has affected favorably the growth and 94 ELEMENTARY ECONOMICS spread of corporations. Investors are easily persuaded to buy stocks and bonds, since they know that they can dispose of them without difficulty. In other words, investments in stocks and bonds are liquid investments. Consequently, billions of dollars have been saved to industry, which otherwise would have been consumed or invested to less advantage. Corporations and funded incomes. — Corporation develop- ment has made savings and investments permanent as well as easy. Not many years ago it was a common saying that in America it was but " three generations from shirt sleeves to shirt sleeves," meaning thereby that one generation saved, the next squandered, the next saved, and so on in an endless round. Whatever may have been the validity of this saying a half cen- tury ago, it certainly has not been true since corporations have come to occupy such a large place in American industrial life. Now a boy does not need to be able to succeed in business in order to keep his inheritance intact. He can invest it safely in bonds, or even in stocks, enjoying the income while he lives, passing the principal on to the next generation. Such an income is known as a funded income. The facility to invest huge sums of money with a reasonable degree of safety accounts in large measure for numerous other modern developments. Life insurance companies, for example, owe much of their growth and prosperity to the ease and slight expense with which they can invest their funds. Otherwise, their chief source of investment would be real estate mortgages, which, while safe, are expensive to handle. Many colleges and universities, too, owe their rapid development not more to the generosity of friends than to the opportunity they have to invest their endowments. Numerous other institutions, such as libraries, hospitals, learned societies, and settlement houses, have their endowments invested in the same way. ORGANIZATION OF INDUSTRY 95 EXERCISES AND PROBLEMS 1. What was the essential difference between the English Industrial Revolution and the American Industrial Revolution? 2. What does an "industrial revolution" mean? 3. Is there likely to be another industrial revolution ? Why, or why not ? 4. Name three important changes in agriculture during the past half century. 5. How did the tariff act of 1816 differ from preceding tariff acts? 6. What is meant by the expression "domestic manufactures"? ' ' factory system ' ' ? 7. What are the disadvantages of a partnership? 8. Why did the corporative form of business organization develop? 9. What are the chief merits of this form? 10. What is a "corporation charter"? 11. Where and how is it usually obtained? 12. Distinguish between stocks and bonds. 13. Why are most farms operated by single enterprisers? B 1. Make lists of single enterprisers, partnerships, and corporations in your neighborhood. a. In which list are found the concerns that employ the largest capital ? 6. What kinds of business, in general, characterize each of these lists? 2. Get, if possible, a partnership agreement from some business man. a. How much money did each partner invest ? b. What specific duties are required of each partner? c. How may the partnership be voluntarily dissolved? 3. Write up what you would consider a good partnership agreement for three men about to engage in the grocery business. 4. Examine a stock certificate, and notice the following facts : a. Name of owner. b. Number of shares. c. Par value of each share. d. Common or preferred. 96 ELEMENTARY ECONOMICS 5. Study a stock report, to be found in any metropolitan newspaper. a. Notice the wide variation in the prices of stocks. h. Why do not bonds vary so widely? c. Compare price of common stock and price of preferred stock of the same concern. d. Which is subject to wider fluctuations? Why? C 1. Comment on the following statement: "The enactment of corporation laws by the various states is the most important step in the development of American manufactures made during the past century." 2. "A corporation is nothing more than a person without a soul." a. Explain the general attitude of corporations toward society. h. Why do many persons think it permissible to cheat a cor- poration ? c. Can a corporation die ? Explain. 3. A corporation with a capital of S50,000, having outstanding four per cent bonds with a par value of S50,000, earns $5000 annually. a. How will these earnings be divided? h. What will be the di\-idend rate : i. If all the stock is common? ii. If all the stock is preferred? iii. If one-half of the stock is eight per cent preferred? c. What would be a fair market price of stocks under each condition? 4. Suppose a corporation with a capital of $100,000, having out- standing five per cent bonds with a par value of $50,000, should fail. How would settlement be made if the total assets sold for $45,000? for $55,000? for $75,000? for $100,000? How, if a partnership? SUPPLEMENTARY READING Bullock, IntroducHon to the Study of Economics, 3d ed., pages 153-166. Ely, Outlines of Economics, 3d ed., pages 212-232. Fetter, Economics, Vol. II, pages 408-411. Johnson, Introduction to Economics, pages 125, 126. Seager, Principles of Economics, pages 153-169. Seligman, Principles of Economics, 5th ed., pages 96-98, 325-327. Taussig, Principles of Economics, 2d ed., Vol. I, pages 86-96. CHAPTER VIII DIVISION OF LABOR AND LARGE-SCALE PRODUCTION 22. The Factors of Production Primary factors of production. — We have come thus far in our study of production without stopping to inquire about the factors, or forces, that make production possible. But there is need at this point to classify these factors and to examine briefly the part each plays in producing goods. The two primary factors of production are land and labor. Of these two, the most important, certainly the one that came first in point of time, is land. The term ''land " in economics includes more than farm lands. It embraces city lots, railroad rights-of-way, forests, mines, lakes, rivers, harbors, and oceans. Land furnishes not only our food and clothing, but also our homes, our automobiles, and every other commodity we may possess. Besides, it provides a place on which to live, to work, to play, to sleep. Even before the first man had felt the need to labor, land had been producing for ages. Witness our vast coal beds. What man or group of men had anything to do with their formation? Yet we mine the coal and carry it away without even a thought of the force that land has exerted to produce it. We do, however, approach a proper appreciation of the importance of land, when it fails unexpectedly to produce, as is the case when a widespread drought prevails in grain- growing regions, when we feel a deprivation resulting from the extinction of some fur-bearing animal, or when we see the havoc caused by a mine subsidence within the limits of a populous city. 97 98 ELEMENTARY ECONOMICS YEAR 1600 1810 1820 1830 1840 i860 1860 1870 1880 1890 1900 I9l0 / / INCREASE OF POPULATION IN THE UNITED STATES AND THE PRINCIPAL COUNTRIES OF EUROPE: I800-19I0 / / / ; / / / / / / / / / / y / / .#. ^ / / / ■ ^ / fj f / -^ y // y / y X ■y ,/ ^ y / ^ ^ ^ ,.^< v^ .0^ r^^ .=^^ " V^ r ^^ ^-- ^ — '^ll« ■:>^ <- ^^^ ..•^■*' """"z -■' .r-r- '^. 52°°^^ _- li^h"! :^^ ;^ .^^^-^ ^-' ^^ y ^■rif^ ^_._ — ,^ ^_^ NORV »y AND S» ^°5.1..... .....-..• '•"'"■"•" •"'""'•• '"-•"" PORTUGAl. 1800 ISIO 1820 1830 1840 1850 1860 YEAR 870 1880 1890 1900 I9J0 DIVISION OF LABOR, LARGE-SCALE PRODUCTION 99 Land works blindly, and apparently without purpose. The same force that stored the coal in the earth raised useless moun- tain peaks. This force can, however, be directed. In fact it is directed by man. This direction we call labor. Historically, as well as in degree of importance, labor ranks second to land, since without land labor could not even exist, much less produce. Whatever our own narrow experience may be, we know that the most universal, conscious activity, aside from consumption, is labor. On the farm, in the shop, store, and office, about the home, men and women, and even children, labor daily to produce commodities for the satisfaction of human wants. Strange as the statement may appear, labor in large part is a habit, which robs it fortunately of much of its irksomeness. Secondary factors of production. — Obviously, the third factor of production, capital, came after labor and land. Primi- tive man soon learned, in a blundering way perhaps, that he could well afford to spend labor on the making of a bow and arrow, or on a stone ax, since by their use he could secure more game or more fuel than was possible working with his hands alone. At that moment capital came into existence. It is well to notice that this first capital was itself the product of a combination of land and labor, and that all capital, rather in- directly to be sure, rests on the same two primary factors of production. This very fact is the basis for the claim that all the products of industry belong to labor. Turning again to the creation of the first capital, let us formulate a definition of the term as used in economics. Obviously from what has been said, it was the product of industry, also it was used to further production. Capital, then, is a product of industry used for further production. On the basis of this definition we shall find it necessary, contrary to general belief, to consider neither land nor con- sumers' goods as capital. Land, obviously, is not a product of 100 ELEMENTARY ECONOMICS industry, though it is used for further production. Consumers' goods, on the other hand, are the product of industry not used for further production. Whether or not a good is a producers' or a consumers' good usually depends on the use to which it is to be put at the particular moment. Wheat flour, for example, in the possession of a baker is a producers' good ; in the flour bin at home it is a consumers' good. The fourth factor of production, we may say, is the enter- priser, or business man. His duty is to assemble the other factors and to direct their efforts. It is not, however, an in- dispensable one, for it would be easy to conceive an industrial society rather highly developed without men exercising the distinctive duties of an enterpriser. Yet we must not forget that society as it is now organized utilizes the services of such men ; also that if each man worked for himself and confined his own consumption exclusively to his own products, the efficiency of his production would depend in some measure on his ability to organize his own labor, his own land, and his own capital. For that reason we are justified in calling the skill of enterprisers a factor of production. 23. Division of Labor Varieties of division of labor. — In the early life of a people and on the frontiers of older nations, every man must necessa- rily be a jack-of-all-trades. He must clear his land, build his fences, construct his cabin and sheds, make his own furniture, tan the leather for his shoes, and perform many other similar tasks, all of which are necessary to his very existence. As population increases, each one gives more and more attention to the trade or profession he is best prepared to follow. Some become carpenters ; some, farmers ; some, blacksmiths ; and some, tanners. The carpenter, for example, spends his whole time engaged in his trade, and he is able to perform all the opera- DIVISION OF LABOR, LARGE-SCALE PRODUCTION 101 tions which are necessary in erecting a building. He does the finishing work as well as erect the frame. Moreover, he makes doors, glazes windows, and builds furniture. Likewise the farmer, the blacksmith, and the tanner, each performs all the Population of the United States in Municipalities having over 30,000 Inhabitants, in those having from 8,000 to 30,000, and outside such Municipalities : 1790-1912. V///^/////// /////.WZV. 30 40 50 60 70 80 90 100 ^yj^ y/////y/////A/////yy/////x/////M/A 'x^ ://////)(////////////:v7777/ zzzzz:^ ffJ(//Y///////////.V7777>VZ///A{/////)(A ^J(//>/////A V7Z^ //////y/////y 'y7Z\ W////////AV//A y//////////////7?7m 1790 ^ mm CITIES WITH 30.000 on MORE POPULATION )^^^^ CITIES with 8,000 TO 30.000 POPULATION Y/////\ population outside such cities operations necessary to carry his product from the raw material to the finished state. This stage of industrial development characterized American life and industry for two centuries; and we may call it simple division of labor. The next step in the development of division of labor con- sisted in dividing the operations of a single trade among in- 102 ELEMENTARY ECONOMICS dividuals or groups. Instead of the carpenter, we have work- men for the rougher work, others for finishing, others for door and cabinet work, and still others who specialize in glazing. This stage we call the complex division of labor, and we may observe its operation all about us in every craft and profession. Carpenters alone no longer build our houses. To assist them we employ masons, plasterers, plumbers, and electricians. Pro- fessional people likewise specialize in narrow fields. Some physicians give their whole time to particular ailments ; lawyers become highly trained in particular kinds of work ; while teachers confine their attention to as few subjects as possible. Perhaps the best example in the development of the division of labor is found in the manufacture of shoes. Under pioneer conditions a workman tanned the leather and from it made shoes for himself and family. Later he gave his whole time to making shoes, disposing of the surplus to his neighbors. At the present time the making of shoes is confined almost entirely to factories, where scores of men perform as many different opera- tions in making a single shoe. The encroachment of the complex division of labor on crafts and trades has had a curious effect. It has, as it were, robbed the craftsman of his skill. Shoemakers no longer make shoes, neither do watchmakers make watches, while a tailor shop is often nothing more than a place for repairing, cleaning, and pressing clothing. Human qualities necessary for effective division of labor. — The more complex forms of division of labor have developed with, and depended on, a corresponding development of the spirit of cooperation and mutual helpfulness among individuals. In any highly developed industry, the making of shoes, for example, the efficiency and progress of one worker depend on every other worker being in his place at the proper time and performing exactly the operation which he is expected to per- DIVISION OF LABOR, LARGE-SCALE PRODUCTION 103 form. The failure of one workman properly to cooperate dis- organizes the whole series of operations and lessens the total output ; and such failure on the part of an individual or of in- dividuals leads not toward a higher stage of division of labor, but rather in the opposit«e direction. We may properly inquire, then, what are the chief character- istics which individuals ought to possess in order to bring division of labor to its highest point of development. They are four in number: (1) honesty, (2) obedience, (3) steadiness, (4) fairness. Honesty is the very heart of successful division of labor. Workers, in order to be highly efficient, must believe in their associates as well as in themselves. Each one must have the assurance that his fellow workers are performing their appointed tasks honestly and with a common purpose. Among dishonest men such an assurance would be impossible. Workers must also be obedient in following plans of operation; for complex division of labor, and even the simpler kinds, provide for those who plan as well as for those who execute. Workers engaged in specialized tasks must be steady as well as honest and obedient. Nothing disturbs industry more than the failure of workers to be on hand at the appointed time, or, if on hand, to be incapacitated by vicious habits. To take an extreme example, suppose the engineer of a shoe factory should fail to be in his accustomed place when the moment arrived for starting the machinery. Obviously, little or no work could be done until he was found or his place was filled. There are men who possess all these qual- ities in some degree, but who, nevertheless, retard the develop- ment of division of labor simply because they are so filled with prejudice, and so set in their ways, as to make them domineering, and hence unpopular among their associates. In other words, they are mentally unfair. Thus, workers in any line where division of labor is developed must cooperate not only indus- 104 ELEMENTARY ECONOMICS Per Cent of Total Population of the United States in Munici- palities HAVING OVER 30,000 INHABITANTS, IN THOSE HAVING FROM 8,000 TO 30,000 Inhabitants, and outside such Munici- palities : 1790-1912. PER CENT 30 40 50 60 70 80 90 100 10 20 {yyyyy yyyyy yyyyyy yyyyy yyyyy yyyyy. yyyyy yyyyy) yyyyyy yyyyy/ yyyyy yyyyy ?s^ yyyyyy yyyyy} yyyyy/^/ yyyyy yyyyyy yyyyy wbA '^yyy yyyyyy yyyyy/ yyyyy/ yyyyy yyyyy/ yyyyy I^H vyi yyyyy yyyyyy^ yyyyy/ yyyyyy yyyyy yyyyy yyyyy WK^ >r//// yyyyy yyyyyA yyyyy yyyyyy^ yyyyy yyyyy yyyyy W££a yy/yy/. yyyyy yyyyyy yyyyy yyyyy yyyyy yyyyy yyyyy Vi^.^ yyyyy^ yyyyy yyyyy/ yyyyyy yyyyy yyyyyy yyyyy yyyyy ^//// yyyyy/ yyyyyy yyyyy yyyyy/ yyyyy yyyyy/ yyyyy yyyyy '//////, yyyyy yyyyyy yyyyyy yyyyy/ yyyyy yyyyy/ yyyyy yyyy y////A yyyyy. yyyyy/. yyyyyy yyyyy yyyyy yyyyyy yyyyy yyyyy ^df/// y///// vyyyy} yyyyy/ yyyyyy yyyyy yyyyyy yyyyyy yyyyy yyyyy W//A y////} yyyyyy yyyyy/ yyyyyy yyyyy yyyyyy yyyyyy yyyyy yyyyyy wy//A yyyyy/ yyyyyy yyyyy yyyyyy yyyyy yyyyyy yyyyyy yyyyy yyyyy/ TJ////^ yyyyy/ yyyyy/ yyyyy yyyyy/, yyyyy} yyyyyy yyyyyy yyyyy yyyyy 1912 1911 1910 1900 1890 1880 1870 I860 1850 1840 1830 1820 1810 1800 I790_ IHH^E'^ CENT IN CITIES WITH 30,000 OR MORE POPULATION [222 PER CENT IN CITIES WITH 8,000 TO 30,000 POPULATION \/////A 'P^^ CENT OUTSIDE SUCH CITIES trially, but also socially, each giving and taking in a spirit of conciliation and compromise. Economic and social advantages of division of labor. — Obviously, the first economic advantage of division of labor is an increased production. The early shoemaker, by confining his attention to the making of shoes, increased his skill, with the result that his product was greater than it had formerly been when he was compelled to tan his own leather. Likewise, the workers in a shoe factory become highly proficient in the few simple operations which they perform, and though their in- DIVISION OF LABOR, LARGE-SCALE PRODUCTION 105 creased output may not be so evident as it was in the former case, it exists nevertheless. Division of labor has still another economic advantage. The few simple operations that char- acterize complex division of labor are easily learned, and for that reason no long period of training or apprenticeship is necessary, as was formerly the case. Consequently there is a saving of time both by the employee, who quickly becomes a skilled operative, and by the employer, who finds it unnecessary to spend any great amount of time in training his workmen. The chief economic advanta'ge of division of labor, to repeat, is increased output, which is accomplished to a great extent through specialization, and through a saving of time formerly necessary to acquire skill. Socially, there are advantages to be derived from complex division of labor. The same qualities that make workers indus- trially efficient and teach them to cooperate also develop the spirit of social service, and do much to rob the individual of his selfishness. Men who work together all day are easily organized into unions and social clubs. Their close contact in industry gives them a common interest and assists in creating a social solidarity. Division of labor produces yet another social advantage. With increased production it is no longer necessary for workers to labor twelve or fourteen hours a day. Moreover, the workers themselves through organization have become stronger, and better able to secure their demands. These two forces have combined to shorten the labor day, and correspondingly to increase the daily periods of leisure. The result is that workers in specialized lines have more time for recreation, for social intercourse, and for self-education. Disadvantages of complex division of labor. — Not all of the results that arise from highly developed division of labor are advantageous, either to the individual or to society. The monotonous repetition of simple operations tends to stunt the intellect, and to destroy the power of initiative. Moreover, 106 ELEMENTARY ECONOMICS it discourages ambition, since it narrows the horizon of the worker and appears to offer him httle or no opportunity to improve his industrial position. In short, complex division of labor tends to rob the individual of intellect, initiative, and ambition, all of which are essential to the best interests of society. In the professions, however, similar specialization appears to be less deadening, if it is deadening at all. 24. Territorial Division of Labor Principle of the territorial division of labor. — Quite as im- portant as the division of labor among individuals and among groups where each performs a highly specialized piece of work, is the division of labor among localities and regions. This we may call territorial division of labor; and its development has depended in large measure on improvements in transportation, particularly railway transportation, and on the use of money as a medium of exchange. In medieval England and during our own colonial period each section or region was well-nigh self- sufficing ; that is, it produced practically all the goods consumed by its inhabitants. Similar conditions existed on the western frontier during the greater part of the nineteenth century. Territorial division of labor, as has been noted, waited for its development on improved methods of transportation and on a money economy ; yet the underlying causes for its existence are as old as time itself. Soil, climate, water power, mineral deposits, and a variety of other natural resources create differ- ences among the various sections of a large country like the United States and among the smaller countries of Western Europe. As a result, the people of one section can best afford to spend their energies in raising wheat, of another in growing grapes, of another in herding sheep, of another in building ships, and of another in manufacturing iron or cloth. Each section, assisted by nature and by an increased skill and knowledge due DIVISION OF LABOR, LARGE-SCALE PRODUCTION 107 Proportion of Population 10 Years of Age and over, in Each State, Engaged in Each General Division of Occupation : 1910. MissrssiPPi SOUTH CAROLINA ARKANSAS ALABAMA NORTH CAROLINA GEORGIA NORTH DAKOTA TEXAS OKLAHOMA SOUTH DAKOTA NEW HEXICO TENNESSEE KENTUCKY LOUISIANA NEBRASKA VIRGINIA IDAHO KANSAS FLORIDA IOWA WEST VIRGINIA MISSOURI VERMONT MINNESOTA WISCONSIN WrOMINQ INDIANA MONTANA MICHIGAN OREGON UTAH DELAWARE MAINE ARIZONA COLORADO WASHINGTON OHIO MARYLAND CALIFORNIA ILLINOIS NEVADA NEW HAMPSHIRE PENNSYLVANIA CONNECTICUT NEW YORK NEW JERSEY RHODE ISLAND MASSACHUSETTS OIST OF COLUMBIA \///A AGRICULTURE, FORESVRY. AND ANIMAL HUSBANORV HB EXTRACTION OF MINERAI^ ^^MANUFACTURING AND MECHANICAL INDUSTRIES ITfl TRANSPORTATION ^ffl TRADl I I PUBLIC SERVICE (NOT ELSEWHERE CLASSIFIED) E23 PROFESSIONAL SERVICe ^^ CLERICAL OCCUPATIONS 229 DOMESTIC Alto PERSONAL 8EBVICE 108 ELEMENTARY ECONOMICS to specialization, produces commodities of a greater value than it could produce were it compelled to engage in other and less productive industries. Hence, it produces a surplus, which it exchanges for the surpluses of other sections. Territorial division of labor in the United States. — In no other country has territorial division of labor developed more rapidly and to a greater extent than in the United States. Here we have a diversity of natural resources, which are utilized to advantage by a people naturally apt and trained above the average. Nowhere else are there, on such a large scale, more fertile farm lands, more productive mines, and more accessible water power. For that reason the United States has become a great manufacturing nation, without losing its position as the leader in agricultural production. The particular reasons for the superiority of one section over another in any line of industry are fairly easy to under- stand. In New England, fertile land is scarce, an adequate fuel supply is relatively close at hand, and the population is dense. There we find manufactures. A similar condition exists in New York, Pennsylvania, and New Jersey. The great Mississippi Valley, which is the largest area of fertile land in the world, furnishes foodstuffs in the form of corn, wheat, cattle, and swine. Here also are to be found many manufacturing establishments, for the city population is large and the mineral supply is available and plentiful. The southern and southwestern sections produce cotton ; the Pacific Coast, fruit, lumber, and grain; the Rocky Mountain regions, minerals and lumber. 25. Large-scale Production Advantages of large-scale production. — One of the most common phenomena to be observed in business at the present time is large-scale production. Almost every line of industry DIVISION OF LABOR, LARGE-SCALE PRODUCTION 109 has felt its influence. Rapidly our factories have been en- larged ; and our railway lines lengthened and consolidated into great systems. Even in retailing, the advantages of large scale production have been demonstrated. Agriculture alone seems to stand unaffected, with the result that the average size of farms in the United States is less than it was a half century ago. The adaptation of the principle of large-scale production to American industry has created several distinct and highly important problems. Obviously, the first result is an increased output, and the distribution of this increase among the various factors of production (labor, including the enterpriser, land, and capital) creates problems both social and economic. Large-scale production causes the concentration of workers, and this concentration raises problems of housing, of government, and of social development. Furthermore, large-scale production permits of a decreased unit-cost production, with the result that small industries are driven out of business, while the large ones tend to become monopolies. Such a development has actually taken place in the United States, where many lines of production have fallen into the hands of the so-called trusts. We have seen how large-scale production increases the output at a decreased cost, and we may now properly inquire why such is the case. The factors that contribute to the efficiency of large-scale production are five in number. (1) Division of labor, which always accompanies large-scale production, permits the use of varied talents and aptitudes, whereby each worker can con- fine his attention and efforts to the particular operation in which he is the most proficient. (2) The latest and most improved machinery can be utilized, something which is usually impossible in small-scale production. In the Chicago plant of the Inter- national Harvester Company is a machine costing several no ELEMENTARY ECONOMICS thousand dollars which performs a simple operation on wagon and other tongues at a saving over old methods of a few cents each. Obviously, such a saving, which mounts high in the aggregate, is possible only when the volume of output is enor- mous. (3) Large-scale production also permits of economies in buying raw materials and in selling finished products. It is a well-known fact that large purchasers can buy at a cheaper price than small ones ; and equally as well known that large producers are able to economize in the matter of advertising, and of getting their products in the hands of retailers through traveling salesmen. (4) Large-scale industries are better able to utilize their by-products. In the slaughtering industry, for example, a large plant can make use of hair, blood, and other by-products which the local butcher allows to go to waste. (5) The large-scale producer can better afford to carry on expensive experiments with the idea of improving his product and of lessening unit cost. So well recognized is this advantage that such large concerns as the United States Steel Corporation maintain extensive laboratories and employ a great many trained experimenters. Restrictions on large-scale production. — There are several restrictions on large-scale production, one or two of which we may profitably examine at this point. First of all, any indus- try is likely to grow so large as to become unwieldy. Such an industry is no longer the " child " of the one who developed it. It is now impersonal. Consequently, its administration and management is divided among hired superintendents : each ambitious to develop his own department ; each more or less selfish in his attitude toward the whole industry ; and none with the keen interest of the owners of smaller plants. When a unit of industry reaches this stage in the development of large-scale production, it is likely to be less efficient than smaller ones in the same line of business. Such industries resemble in many DIVISION OF LABOR, LARGE-SCALE PRODUCTION 111 respects the overgrown trees of the forest, towering above their fellows in height, but rotten at the heart and exposed to every passing storm. EXERCISES AND PROBLEMS A 1. Why is land the most fundamental factor of production? 2. Why is capital less fundamental than either land or labor ? 3. Distinguish between capital and land ; capital and consumers' goods. 4. Does capital yield a product apart from the employment of labor ? Explain. 5. What are the advantages of division of labor? 6. Suggest ways of lessening the disadvantages arising from the division of labor. 7. What factors may limit the division of labor in any industry? 8. What is the relation between the corporative form of organi- zation and division of labor ? 9. Why is division of labor in agriculture not practiced to any great extent ? 10. How does territorial division of labor increase the efficiency of production ? 11. What is the present tendency in the United States as to terri- torial division of labor ? 12. Point out the relation between division of labor and large-scale production ; between the corporative form of organization and large- scale production. 13. Are there any advantages in large-scale production in agri- culture ? Explain. 14. What are the limits to large-scale production? 15. What are the present tendencies as to large-scale production in manufactures ? B 1. Make a list of consumers' goods. a. Explain why each is a consumers' good. h. Can any of them be producers' goods? c. What is the essential difference between consumers' goods and producers' goods? 112 ELEMENTARY ECONOMICS 2. From your own experience or observation describe the division of labor carried on in some shop or factory. 3. Call to mind persons who produce all the goods they consume ; who produce a portion of the goods they consume ; who produce none of the goods they consume. Which is the largest group ? Why ? 4. Make a list of common schoolroom objects, such as desk, black- board, book, crayon, ink, eraser, and note the importance of territorial division of labor. 5. Mention several industries in the same line. a. In which is division of labor best developed ? b. Show how there is room for greater development. c. In which is division of labor least developed ? d. Account for this lack of development. e. Which of the two has the greater capital ? /. Which is the more enterprising? g. Suggest methods of improvement. 1. A well-known retail merchant once said that the cornerstone of any business success is honesty. a. What did he mean by the expression "honesty"? b. Is an employee thoroughly honest who : i. Shirks his duties? ii. Keeps one eye on the clock? * iii. Places his employer's interests second to his own? c. What is your opinion of the axiom, "Honesty is the best p'oliey"? 2. It is believed by many people that each section of the country would be greatly benefited by becoming self-sufficing. a. If such were the case, would there be more or less goods produced ? b. How would such a condition affect wealth ? welfare ? c. How do the railroads regard self-sufficiency? 3. Comment on the following statements : a. "Division of labor is the unconscious cooperation of the members of society." b. "Producers' goods ripen into consumers' goods." c. "Large-scale production in any industry is limited only by the amount of capital which that industry can control." DIVISION OF LABOR, LARGE-SCALE PRODUCTION 113 SUPPLEMENTARY READING Bullock, Introduction to the Study of Economics, 3d ed., pages 149- 156, 176-184. Ely, Outlines of Economics, 3d ed., pages 19-21, 124-129. Fisher, Elementary Principles of Economics, pages 193, 450, 451. Johnson, Introduction to Economics, pages 110-120. Seager, Principles of Economics, pages 153-169. Seligman, Principles of Economics, 5th ed., pages 290-296. Taussig, Principles of Economics, 2d ed.. Vol. I, pages 30-66. CHAPTER IX LAND (NATURAL RESOURCES) 26. Land as a Productive Factor Nature and definition of land. — '- We have noticed already that land, which is a short and expressive term for natural resources, is one of the factors of production ; and that the other two chief factors, labor and capital, are useless without its cooperation. Now we may properly turn our attention to a more detailed examination of the part which land plays in the production of economic goods. Land is the basis of all production, the source of all economic wealth. From it, directly or indirectly, come all of the raw materials on which the whole process of production rests. Labor and capital take the raw materials of nature, and then create, as we have seen, utilities of form, place, time, or posses- sion, but farther than that they cannot go. Land as such labors without reward, and its products are free to him who will come and take them ; who under conditions of modern society is the landowner. Of the three chief factors in production, land alone is incapable of being appreciably increased in amount : for all practical purposes the surface of the earth is fixed in area, and its productive quahties are fairly well known. At least they are predetermined, and merely wait tobeutihzed by labor and capital. To get a clearer understanding of the term ''land," let us di- vide it into its numerous subdivisions. There is the large area of farm land from which the world gets its food supply and a great deal of its material for clothing ; the forests provide lumber and 114 LAND (NATURAL RESOURCES) 115 fuel ; city lots furnish sites for dwellings, stores, warehouses, and factories ; from the mines come fuel, iron, and precious metals, and from the quarries, stone for building and other purposes ; Relative Proportion of Improved and Unimproved Land Area in Farms to the Total Land Area of the United States : 1860, 1890, 1910. waterfalls generate power ; while waterways, harbors, and rail- road lands facihtate the transfer of goods from the producer to the consumer. All these are but different phases of the same factor — namely, land, or natural resources. Varying costs in production. — From what has been said it will readily be understood that, inasmuch as nature is stingy and has seen fit not to distribute her bounties everywhere ahke, the productivity of land varies from one piece to another. That this statement is true, can be verified on every hand. One plot of ground produces more wheat than another of the same size on which an equal amount of labor and capital has been expended. Similarly, one building lot yields more utilities than another ; and one mine is more cheaply worked than another. In the first case, the most important factor, though by no means the only one, is fertility ; in the second it is location ; and in the third it is depth of shaft and thickness of vein. But in any of the three cases nature has contributed in varying degrees of effectiveness, thereby causing differences in the costs of production. 116 ELEMENTARY ECONOMICS Our more general experiences in varying costs of production are with agriculture. One farmer cultivates soil especially adapted to corn-growing. Another farmer, on land less fertile, labors just as hard and employs an equal amount of capital. Yet he gets smaller returns. Still another farmer, on the poorest land, which we shall, in anticipation, call no-rent land, grows exactly enough corn to repay him for his employment of Copyriyht Underwood & Underwood, \ . Y . A Modern Method op Harvesting Corn. labor and capital. Obviously, the first farmer enjoys a relatively large return over and above his costs of production ; the second one, a fair return ; while the farmer on the no-rent land gets no such return. Thus, other factors in fixing the costs of growing corn, such as location, skill in farming, improvement in the arts, remaining the same, the unequal contribution of natural re- sources in the form of fertility, climate, and rainfall causes a corresponding difference in costs of production to corn-growers. LAND (NATURAL RESOURCES) 117 Scarcely less important in causing varying costs of pro- duction in growing corn, or any other agricultural crop, is location. Our farmer who cultivates the best land might lose the advantage coming to him from the use of the most fertile soil, if his farm were located in some region remote from trans- portation facilities ; that is, his gain from fertile soil might be offset by his loss through costly transportation. For that very reason farm lands situated near markets or at least near good transportation lines, rail or water, ordinarily command higher prices and higher rents than would be the case if less advantageously located. Concrete examples of varying costs of production in agri- culture due to the unequal distribution of the gifts of nature or to differences in costs of transportation are easily found in the United States. New England farmers, as a class, have less fertile soil than Iowa farmers. Hence, their cost of pro- ducing a bushel of corn is higher than it is in Iowa. Also in Iowa two pieces of land of the same fertility may show differ- ences in unit-cost of production owing to the superior location of one or the other in respect to transportation. In the use of any other form of land — city lots, mines, waterfalls — similar differences arise. Two merchants' of equal ability, with stocks of goods exactly alike, will carry on their respective businesses at different costs of production if the two pieces of land which they utilize are not similarly situated as to the passing crowds. Likev/ise, the owners of mines find differences in costs of production owing to the depth of the ores, and the location of the mines. Everywhere in the use of land these differences appear, causing differences in costs of production. Because of the important place which land holds in production we can well afford to spend the time necessary to make a hurried survey of the natural resources of our own country. 118 ELEMENTARY ECONOMICS 27. Natural Resources of the United States Agricultural lands. — The most outstanding feature of American industry is the abundance of fertile farm lands. Upon no other country has nature lavished this gift so freely, and no other people have appropriated this gift to better advantage. Here we have a partial explanation of the prosperity of our people and a partial cause of our disregard for thrift. Continental United States embraces an area of approximately three million square miles, or two billion acres. Of this great area practically one-half is under cultivation. The rest is utilized for other industrial purposes, such as in city sites, in forests, and in reservations, or is allowed to remain unappro- priated as are the desert lands in the Southwest. The wide expanse of the country north and south accounts in large part for the diversity of crops which we are able to produce. From the North and Northwest comes wheat ; from the central Mississippi Valley, corn and oats ; from the upper South, to- bacco ; from the Gulf regions, cotton, rice, and sugar ; from California and Florida, subtropical fruits; while the production of hay, vegetables, small fruits, live stock, poultry, milk, and cheese is carried on in all sections of the country. Thus, the variety of the agl'icultural products of our country is as great as that of all Western Europe with its numerous political units and its relatively large population. In other words, the United States as a single nation possesses agricultural possibilities possessed by no European country. Forests and mines. — The United States is rich also in forests, despite the prodigal waste of timber that has gone on for more than a century. Oak, pine, cypress, and other kinds of trees are found in abundance, which accounts for the common saying that " America is a land of wooden houses." Every year the forests of the country yield billions of feet of lumber, and LAND (NATURAL RESOURCES) 119 120 ELEMENTARY ECONOMICS enormous quantities of wood pulp, fuel, mine props, and numerous other products of commerce. As might be supposed, our forests are in danger of depletion. The national govern- ment, however, as well as a number of the states, have under- taken seriously within the past few years to prevent forest waste and to see that planting of forest trees is not neglected. Our mines are also rich, numerous, and widely distributed. The California gold fields were for many years after 1848 the El Dorado of the whole world. This industry is still important, though it has been robbed of much of its romance and glamour by the more prosy methods of capitalistic production. Soft coal is found in abundance in many widely separated regions, while hard-coal mining is confined to eastern Pennsylvania. Our deposits of iron ore, which seem to be almost inexliaustible, are also found in many localities. Silver, copper, zinc, and lead add materially to our mineral resources, while petroleum, from which gasoline, oils, and other products of commerce are made, mounts annually in value to hundreds of millions of dollars. Water power and the fisheries. — The third group of natural resources which we will notice in this connection comprises water power and the fisheries. For many years after steam began to be successfully applied to drive machinery, the water- falls of our country remained unimportant sources of natural power. The discovery of electrical energy and of methods to apply it to machinery and to transmit it great distances, once more called attention to the desirability of utilizing waterfalls as a source of mechanical power. The successful attempt to harness Niagara Falls has been followed with similar successes in other sections, until it now appears that it is only a question of time until every waterfall in the country will be the seat of electrical generating plants. In recounting the wealth of our natural resources we are likely to overlook the fisheries, which are the basis of the LAND (NATURAL RESOURCES) 121 122 ELEMENTARY ECONOMICS prosperity of many localities. The sea fishing of all three coasts is a profitable industry, giving employment to thousands of men and boys and furnishing one of our most important supplies of food. On the Great Lakes, and along the rivers also, fishing is important. Fortunately for the fishing industry, the national government and many of the states have enacted laws designed to prevent waste and depletion. To that end, restrictions are placed as to the time and methods of catching fish ; and the stocks of fish are replenished periodically from public hatcheries. 28. The Law of Diminishing Returns Statement of the law. — The most important economic law under the head of production is known as the " Law of Diminish- ing Returns." This law applies alike to land, to labor, and to capital. Stated in terms of land in the simplest possible manner, the law is : As additional units of labor and capital are applied to the utilization of a given piece of land, the increase in the product gained from the land will for a time he greater than the increase in the number of units of labor and capital expended; after which the increase in the product will decline relative to the increase in the number of units of labor and capital. Application of the law. — The operation of the law of diminish- ing returns is best observed in agriculture. Obviously, the prod- uct to be gained from a plot of land by one man unaided by machinery of any sort would be relatively small. He could, as the primitive American Indian did before him, scratch the ground with a sharpened stick and cultivate his crops with a shell. Given a strong hoe, it is likely that he could materially increase the quantity of his crop. Thus, step by step with the aid of horses, improved machinery, drain tile, fertihzer, and laborers our farmer would find it possible for a time to increase the product of his land faster than his increase in the application LAND (NATURAL RESOURCES) 123 of labor and capital. He would find also that eventually the product arising from the addition of a unit of labor and capital was less than the product arising from the application of the preceding unit. Then he would have reached the point of diminishing returns. Further applications of labor and capital would show a constant decrease in product attributable to the successive units of labor and capital employed. Presently the point of greatest efficiency would be reached, which we may say is the point where labor and capital can be applied to the very best advantage on this particular piece of land. It will aid in understanding this important law if we resort to a graphic illustration. Suppose a farmer has a unit of labor and capital which he applies to a given piece of land with the result that he gets a product of 8, represented in Fig. 7 by the letter a. Suppose further that the application of another unit brings an additional product of 13 (6) ; of another, 16 (c) ; of another, 18 (d) ; and of another, 17 (e). Clearly, the fifth unit of labor and capital produces less than does the fourth unit. Hence, the point of diminishing returns is between these two units, at E. Additional units of labor and capital may be applied, however, before the point of greatest efficiency is reached. According to our assumption, the fifth unit of labor and capital will yield a product of 17 (e), whiph is greater than can be had on new land similar to the piece of land which we have under consideration, for the product (17) exceeds the average product of the preceding units [ — — ~ — — = 13f )• Also, our farmer will find it advantageous to apply a sixth unit of labor and capital, which, we have assumed, will yield a product of 15 (/), for this is greater than the average yield of the five units already applied. The total product of the six units is 87 (8 + 13 + 16 + 18 + 17 + 15), or an average of 14^ (87 -j- 6). // similar new land is available he cannot 124 ELEMENTARY ECONOMICS afford to apply a seventh unit of labor and capital which yields anything less than 14i. He will not apply the seventh unit, which yields a product of but 13 (g). The point of greatest efficiency, then, is between units 6 and 7, designated in Fig. 7 as G.. But the point of diminishing returns and the point of greatest efficiency may coincide. Suppose the fifth and sixth units of labor and capital yield a product of 13 and 11 y Fig. 7. instead of 17 and 15. In that case the application of the fifth unit would be accompanied by a decline in product relative not only to the fourth unit but also to the average yield of the four already applied. Intensive and extensive margins of cultivation. — We may now notice in an elementary way the notions associated with intensive and extensive margins of land cultivation. When our farmer has reached the point of greatest efficiency (G in LAND (NATURAL RESOURCES) 125 Fig. 7), he has, provided the price for his product justifies further expenditures, two possible courses before him : he may apply additional units of labor and capital on the piece of land on which he has already expended 6 units ; or he may apply these additional units to another piece of land. What is likely to be his action? If there is more land similar in every way to the piece he is already cultivating — which is unlikely — he will take up new land. If, on the other hand, the only land available is inferior to the piece which he is already cultivating, he will farm that piece more intensively ; just how much more intensively will depend on the relative inferiority of the avail- able land compared to the piece already under cultivation. The problems connected with the law of diminishing returns, and with intensive and extensive margins of cultivation, have a practical significance in agriculture. If it were not for the operation of the law of diminishing returns, all the wheat which the world needs could be grown on a relatively small area — on a city lot, even in a common flowerpot. Every farmer knows that it is not profitable beyond a certain point in culti- vation to hire more laborers, to buy more machinery, or to lay more tile ; and the higher the wage level, the higher the prices of machinery and materials, and the greater the abun- dance of good land, the quicker he decides to cease adding capital and labor. Here is the explanation of the extensive character of American agriculture. American travelers in European countries, returning home enthusiastic over the intensive methods of cultivation they find there, often criticize the farmers here for what appear to them to be careless methods of agriculture. The fact is that the farmer himself has a fairly good idea of the location of the point of diminishing returns and the point of greatest efficiency, even though he may never have heard of these terms. In other words, he has found by experience and observation that intensive agriculture is not as 126 ELEMENTARY ECONOMICS profitable in the United States as in older countries, largely because of the high wage level and the abundance of un- occupied lands. Value of Different Kinds of Farm Property in the United States: 1910. o B 10 HU MDREOS OF MIL LIONS OF DOLLARS J ^ 35 40 ILLINOIS y///y// '///.{//■' y//M;-y/M '^-y^-^ ^:V .| |, YA^Y^^A^^ ^1 IOWA V/y>'/A Tzziia^m TEXAS ,, ; 'tK ''/m ■BB NEBRASKA r::xAJ lijm M MISSOURI f.f^yA 1 I 1 KANSAS - / :"".: ZYAA OHIO yyYjvx^i INDIANA ■-■-/' ■ iw* ^A-m CALIFORNIA • "■ ' fYZJi.- ■ MINNESOTA ^7/? :■■ NEW YORK Ti VW^ YA WISCONSIN ' r^ Y/A-^ PENNSYLVANIA // V/A ¥'m SOUTH DAKOTA fi //< V/.M ■ NORTH DAKOTA __ ? OKLAHOMA Yi KENTUCKY WASHINGTON '/M fe%%y LANO VIRGINIA Vi n TENNESSEE Vi ■ iS2ffia IWl-EMENTS AND MACHINERY GEORGIA Vi ■ NORTH CAROLINA YA 1 ^^H LrVE STOCK OREGON ffl « COLORADO MISSISSIPPI ARKANSAS sa SOUTH CAROLINA '/m m 1 ALABAMA b MONTANA i WEST VIRGINIA f IDAHO \ i LOUISIANA ' t^ 1 MARYLAND V 1 NEW JERSEY T/i MASSACHUSETTS VA MAINE r/i WYOMING NEW MEXICO CONNECTICUT FLORIDA NEW HAMPSHIRE ARIZONA DELAWARE NEVADA .BMODE ISLAND 3 lA 1 1 ] LAND (NATURAL RESOURCES) 127 Application of the law to other kinds of land. — The law of diminishing returns also operates in the use of other forms of land, such as mines and building sites. In mining, as well as in agriculture, there is a point of diminishing returns. Likewise, there are intensive and extensive margins of operation. Every mine owner knows that successive additions of miners and machinery will for a time increase the output of ore at an ever- increasing rate of speed. He knows also that a point will be reached eventually where this rate begins to decline. Owners of building sites, like the owners of farms and mines, face the problem of determining just how much labor and capital they should apply to their land. Obviously, one would apply more on a piece of land in lower New York City than on an equal-sized piece of land in an Iowa county-seat town. But how much more ? Shall the building have one floor, or shall it be a skyscraper? The piece of land will support one as easily as the other. Moreover, we may say, speaking roughly, that the same foundation and the same roof will suffice whatever the height of the building. Here, as it was in the case of agri- cultural land, the guide is the relation of the value of the labor and capital expended to the value of the product. The addition of a second floor to a store building in small towns, and a third or fourth in moderate-sized cities, usually increases the rate of returns to the land. There will come a point, how- ever, when the return from another floor will show a decline, which indicates that the point of diminishing returns was reached with the addition of the preceding floor. It will readily be seen that the application of the law of diminishing returns to building sites is intensely practical not only in the matter of stores and shops, but also in the matter of residences. All of us have seen costly houses on cheap lots; and, conversely, cheap houses occupying costly sites. In the first case the use of the land was intensive ; in the second, exten- 128 ELEMENTARY ECONOMICS sive. The importance of these truths will become more evident when we take up the question of rent. EXERCISES AND PROBLEMS A 1. Define "land." 2. How does land differ from natural resources ? 3. What are the chief factors in determining the productivity of farm land? 4. Does the improvement of rural roads increase the productivity of farm lands through which they extend? Discuss. 5. Why are some store sites more desirable than others? 6. Why is such a large portion of the United States unimproved ? 7. Why do farmers resort to the rotation of crops? 8. Why are store buildings usually taller in cities than in towns or villages ? 9. Is there any relation between the value of a residence site and the value of its improvement ? Explain. 10. Why would it not be profitable for every farmer to own and operate a farm tractor? 11. How many clerks should a merchant employ? 12. How large should his stock of goods be ? 13. Are there any limits to the size of the building he can profit- ably use? Explain. 14. What considerations might cause him to change sites? the size of his stock of goods? the number of employees? B 1 . Mention the most important natural resources in your community. 2. What efforts are being made in your community to conserve natural resources? 3. Locate on a map the more important regions devoted to the production of wheat, corn, cotton, tobacco, rice, sugar cane, coal, petroleum, and precious metals. 4. What kinds of crops are best fitted for intensive farming? for extensive farming? Give five examples of each, preferably from your own neighborhood. 5. Discuss the productiveness of various store "sites," and try to determine why differences exist. LAND (NATURAL RESOURCES) 129 6. Locate the point of diminishing returns under conditions assumed in the erection of an office building as follows : Cost of site . . . $10,000 Total net annual rent Nothing Cost of first floor . 8,000 Total net annual rent $1,400 Cost of second floor 5,000 Total net annual rent 1,900 Cost of third floor . 4,000 Total net annual rent 2,350 Cost of fourth floor 4,000 Total net annual rent 2,700 Cost of roof . . . 1,000 Total net annual rent 2,700 7. Draw a diagram illustrating the law of diminishing returns in some industry with which you are familiar. C 1. American farmers are constantly being criticized because they do not produce as much per acre as English farmers. a. Is this criticism just? 6. If so, why do not American farmers operate more intensively ? c. Are there limits to intensive farming? Explain. 2. "The opening of the Erie Canal affected both intensive and extensive agriculture in the United States." a. How was the average size of farms affected ? h. In what ways was the New England farmer affected? c. What was the effect on farming methods in Ohio ? d. Did the kinds of crops grown undergo any changes ? Explain. 3. A coal operator was requested by a government official during the summer of 1917 to state how much it cost to mine a ton of bituminous coal. His answer was: "Show me the mine." Why could he not answer more satisfactorily ? 4. "Iowa and Central IlHnois are the heart of the best corn- producing region in the world." Comment. SUPPLEMENTARY READING Bullock, Introduction to the Study of Economics, 3d ed., pages 170-173. Ely, Outlines of Economics, 3d ed., pages 388-395. Fetter, Economics, Vol. I, pages 433-438. Johnson, Introduction to Economics, pages 91-105. Seager, Principles of Economics, pages 122-131. Seligman, Principles of Economics, 5th ed., pages 211-214, 302-306. Taussig, Principles of Economics, 2d ed., Vol. I, pages 185, 186 ; Vol. II, pages 59-62. . CHAPTER X CAPITAL AS A FACTOR IN PRODUCTION 29. Source of Capital The surplus above subsistence. — According to our definition capital is the product of past industry used to further production. Just when and how the first capital appeared it is impossible to say, difficult even to imagine. Primitive man working with his hands alone must have found it difficult to secure anything over and above bare subsistence ; for even under the wildest condition we can hardly imagine that food, clothing, and shelter could ordinarily be procured in adequate amounts without labor. At some point in his development, however, we know that he began to create capital. Perhaps it was a bow and arrow he made, or a canoe, or a snare for small game, or a fish net. But where did he find the time for creating this capital? Perhaps a storm brought to the shore a surplus supply of fish, or an accident placed in his hands an extra deer. In either case he would find it possible to abstain a few days from the labor of getting food to sustain life. It is just as likely, however, that our primitive man, feeling instinctively the long-run gain to be had from the use of capital in production, consciously decreased his volume of consumption, even going hungry. Thus, by spending a part of each day in fashioning a crude tool or weapon, instead of spending his whole time in hunting or fishing, he was able eventually to create capital. We, his descendants, must do the same thing today if capital is to be increased or even conserved, and the first step to that end is to be able to curb desires and appetite. 130 CAPITAL AS A FACTOR IN PRODUCTION 131 Saving. — Merely to curb desires and appetite in one direction is not enough if we permit them to run rife in other directions. Our primitive man when he discovered the surplus fish, might very well have refrained entirely from labor while they lasted, spending his time in sleep or in sight-seeing. We can even imagine his skimping himself in the matter of meat in order to find time to gather berries or nuts for food. Clearly, in neither case would he have created any capital. Nor should we under similar circumstances. A curtailment of expenditures in one direction may or may not contribute to an increase of capital. We must not, if we are to assist in the creation of capital, permit economy in the use of some goods to be entirely nullified by ex- travagances in the use of other goods. Consequently, the second step toward the creation of capital is that income must exceed outgo. Investing. — The surplus of income over outgo must be not only saved but also invested. If, after completing the canoe, our primitive man had hidden it away in some cave, obviously it would not have been capital ; for one of the characteristics of capital is its use to further production. Likewise, the hoard- ings of a miser do not increase capital. In fact they tend to decrease it. To make savings effective, therefore, in the crea- tion of capital, the saver must invest them directly in his own business, or in stocks or bonds, or indirectly through such in- stitutions as banks and building and loan associations. The source of capital, we are now prepared to say, lies three steps from the capital itself. First, the income must be above the line of bare subsistence ; second, income must exceed outgo ; third, the surplus must be invested. The significance of each of these steps becomes apparent when we view society as a whole. Everywhere in this country there are families with incomes that do not permit of consump- tion above the line of subsistence. Consequently, they are 132 ELEMENTARY ECONOMICS unable even to take the first step toward the creation of capital, much less to go the whole journey. Then there are millions of families and individuals who have something left over after providing necessaries, but who have never learned to save. They could, if their imagination and will power were strong enough, assist in the creation of capital. Since they do not, their influence in this respect is little if any greater than their less fortunate neighbors. Fortunately for the progress of society, there are other millions who take the second step toward the creation of capital by spending less than they earn — by saving. Most of these, experience and observation teach us, do not hoard their savings, but place them where they can be utilized by productive industry. They, and they alone, are responsible, under the present organization of society, for the creation and accumulation of capital. 30. Nature of Capitalistic Production Advantages of indirect production. — Production without the aid of capital, which in this connection we will call direct production, is primitive in its very nature. The early pioneer, in Iowa let us suppose, quenched his thirst for the first few weeks by lying prone to drink from a natural spring. Obviously, under these conditions, he found it necessary to visit the spring each time he felt the need of a drink. This was direct pro- duction in its simplest form. Suppose, to continue the illus- tration, he spent an hour fashioning some sort of vessel from bark or clay that would contain enough water for the day, and that thereby he saved ten of the twenty minutes which he had formerly consumed daily in walking to and from the spring. Suppose further that by the expenditure of one day's labor he contrived a system of pipes made from wild cane which would carry a continuous flow of water to his cabin door, and which would relieve him of any further labor in getting water from the CAPITAL AS A FACTOR IN PRODUCTION 133 WOOLEN GOODS spring. Each step shows the advantage of indirect production. In the first, the hour's labor was made good in six days ; in the second, in a few months at most. So it is throughout all the productive processes. The time spent in fashioning tools and machines ordinarily yields an amount of goods in excess of the amount which would have been produced had it been Percentage of Total Value of Prod- ,. V . 1 ,• ucTS for Leading Industries: 1909. spent m direct production. It is necessary to qualify our conclusions with the word " ordinarily," for it is easily conceivable that there are limits to the ad- vantages of indirect pro- duction. If our Iowa pioneer had spent days in embellishing his water pipe with shells and beads, there is no reason to believe that it would have served its purpose any better. Furthermore, whether or not the in- direct method of produc- tion of any particular good holds an advantage over more direct methods, de- pends in part on the avail- ability of labor. In the oriental countries, where labor is plentiful and cheap, it is often more advantageous in trans- porting merchandise to employ men than automobile trucks. The place of capital in modern industry. — Since the in- direct, or capitalistic, method of production is ordinarily more AUTOMOBILES 134 ELEMENTARY ECONOMICS advantageous than the direct method, it characterizes, as we might expect, modern industry, with its enormous capital, its highly developed division of labor, and its complicated tools and machinery. Few business men would care to attempt to carry on production of any kind by direct methods. One of their chief concerns is to control sufficient capital for their business. Even farming, which we are still likely to regard as being carried on more or less directly, has felt the need of more and more capital to be expended for fertilizers, machinery, and buildings. Indirect production has had its highest development in manu- factures. In another connection we have seen how, under conditions of excessively large production, complicated and costly machinery has gradually displaced many of the simpler direct processes. Such displacements do not occur by accident, and would not occur at all if capitalistic production in these particular cases were not more efficient than direct methods. After all, the final test is efficiency and profitableness; for the producer, seeking his own economic advantages, will employ those methods which appear to him to be the best. For that reason, capital has come to dominate modern industry ; and we may expect it to enjoy an increasing dominance until the limits of indirect productive methods are reached. 31. Different Kinds of Capital Fixed and circulating capital. — Capital may be classified in a variety of ways, two of which concern us here : fixed and circulating, in which time is the important element; free and specialized, in which the use element is the chief factor. It is a well-known fact, which can easily be verified by observation, that some forms of capital — that is, certain kinds of capital goods — are consumed more quickly than other forms. A piece of coal, for example, can be used but once. In other words, the only way to consume coal is to destroy it at a single CAPITAL AS A FACTOR IN PRODUCTION 135 operation. At the other extreme are capital goods which can be used almost an infinite number of times before they are con- sumed. A common carpenter's handsaw has been known to survive fifty years' continual use. Some machines, too, last for years, successfully withstanding the wear and tear that comes from daily operation. To the coal we apply the term "circulating capital"; to the handsaw or machine we apply the term "fixed capital." It must be kept in mind, however, that both terms are relative, for the highest form of circulat- ing capital is fixed for at least one operation, while no capital is so perfectly fixed as to last forever. The replacement fund. — The length of time and the number of operations that any piece of capital good lasts are of prime importance relative to its replacement fund, which is the capital that must be accumulated to provide for wear and tear. Let us suppose that a factory equipped with ten machines consumes five tons of coal daily. At the close of the day the five tons of coal, having been consumed, will need to be entirely replaced. The machines, on the other hand, possessing a relatively high degree of fixity, are ready for the next day's work. Thus, day after day the coal supply is replenished, while the machines with only minor repairs may last for years. Each day the enterpriser finds it necessary to set aside a replacement fund large enough to buy five tons of coal, while the replacement fund necessary to cover the wear and tear of each machine may be but a few cents. If we should view the whole factory, we would find that every piece of equipment and bit of raw material con- sumed in making finished products are more or less fixed in their nature and more or less circulating, some being consumed with a single operation, some lasting for years, but all provided for in the replacement fund. It is well to remember in this connection that it is the replace- ment fund which permits the shifting of capital from one group 136 ELEMENTARY ECONOMICS of industries to another. We have already noticed that the American industrial revolution was characterized by a change from commerce to manufactures. Obviously, the owners of ships could not utilize such forms of capital goods as hulks, sails, masts, and anchors in the making of cloth. They did, however, have available replacement funds which they had accumulated in the form of money to replace the vessels as they became unseaworthy. Thus, the owner of an old ship that was almost worn out had a relatively large replacement fund, while at the other extreme was the owner whose vessel had not even yet made its maiden voyage. The enterpriser, therefore, has, or ought to have, a replacement fund at all times, its relative size depending, among other things, on the condition of his equipment — that is, as business men say, on the state of repairs. Free and specialized capital. — Here again, as in the case of fixed and circulating capital, we are compelled to deal with relative terms. No capital is entirely free, and only on rare occasions do we find capital so highly specialized as to be en- tirely worthless for any other use. Free capital may be defined as capital which serves a variety of uses ; specialized capital, as capital which serves but few uses. For purposes of illustration take two common farming implements. The plow is used in preparing the ground for all kinds of crops, while the hay rake is practically worthless in gathering any other crop. For the sake of convenience of expression we call one free capital, the other specialized capital. Sometimes, however, capital is said to be free when it can be used for entirely different purposes. Coal, for example, may be used to generate steam, or to heat a building, while it is improbable that a second use could be found for a nutmeg grater. There is a close relation between free and specialized capital on the one hand, and the rate of interest on the other. Free capital, as a general rule, earns a lower interest rate than does CAPITAL AS A FACTOR IN PRODUCTION 137 specialized capital, simply because the risk of losing the invest- ment is less. Suppose two men contemplate the expenditure of equal amounts of money in two buildings, one a store build- ing adaptable to almost any kind of merchandising, the other a moving-picture building with highly decorated interior, with a stage, and with an elevated floor. Plainly the risk involved, other things being equal, in getting tenants wotild be less in the case of the first building than in the case of the second. The first could be utilized in various ways ; the second, unless extensive alterations are made, is likely to prove useless for any purpose other than moving-pictures. Knowledge of these facts causes investors to demand a higher interest rate in one case than in the other, and in the long run they secure their demands. Gold is not a free capital good. — Because of its universal acceptability gold is often mistakenly spoken of as free capital. Such is not the case, however, in the sense in which we have just used the word " free." Aside from its utilization in jewelry and watch cases and in dentistry we seldom in our every- day experiences see gold used as a capital good ; compared with iron or copper the number of ways in which it can be utilized is small. For that reason it is specialized rather than free. It has, however, a high degree of exchangeability, since, as we have seen, it flows freely from hand to hand because it is univer- sally desired. Individual and social capital. — In our ordinary thinking we seldom go beyond the notion of individual capital — that is, capital possessed and directed by individuals. Society, also, has considerable capital which is of no small amount and im- portance. Factories and department stores install automatic sprinklers, which we agree at once is capital. Sprinklers lessen the fire hazard. So does the city fire department with its heavy investment in buildings, trucks, ladders, and other equip- 138 ELEMENTARY ECONOMICS ment. Both serve the same purpose ; both represent capital investment, one by individuals, the other by society. In extend- ing this notion we find, for example, that goverrmient buildings with their furnishings and equipment parallel individual capital investments designed to furnish the same or similar services, and as such they are capital. EXERCISES AND PROBLEMS A 1. What was the origin, of capital? 2. Name the three steps necessary to create capital. 3. Are any individuals or groups unable to take these steps? Expiain. 4. Which is the more useful member of society, a miser or a spendthrift ? 5. Why is capitalistic production said to be roundabout or indirect? 6. What are the advantages of indirect production over direct production? 7. How does the replacement fund give mobility to capital ? 8. Explain how a carpenter's hammer replaces itself. 9. What has become of the large amount of capital formerly used in the buggy and carriage industry? 10. Is any capital completely fixed? Explain. 11. Where should the line be drawn between fixed and circulating capital? between free and specialized capital? 12. Why should specialized capital yield a larger income than free capital ? 13. Just why is gold a highly specialized form of capital? 14. Name some forms of social wealth. B 1. CaU to mind persons in your community who contribute to the supply of capital. a. Are all of them relatively well-to-do ? h. Which, if any, appear to sacrifice unduly in order to save? c. Which are normally thrifty? d. Have any adopted definite plans for saving? e. What advice has any of them to offer in the matter of saving? CAPITAL AS A FACTOR IN PRODUCTION 139 2. Imagine, if you can, a general return to direct methods of pro- duction. a. How would civilization be affected? h. Would the volume of production be greater or smaller? Explain. c. Would individuals and groups be more or less self-sufficing? Explain. d. Would people have more or less leisure time? Why? e. How would such a change affect public education ? /. Name some industries that would be likely to suffer the most. 3. Many tasks, such as digging ditches, cleaning streets, and carry- ing brick and mortar, are iisually performed by direct methods. a. Could capitalistic methods be employed? How? h. Why are they not usually employed? c. Under what conditions are they sometimes employed? d. Does there appear to be any relation between capitalistic methods and the law of diminishing returns? Explain. 4. Classify the capital in some industry with which you are familiar into free, specialized, fixed, and circulating. 5. Suppose a certain individual invests $10,000 in a store site and building ; also an equal amount in another site and building utilized by the state as an armory for a company of militia. Which should normally earn the larger return? Why? 6. Prepare a list of various forms of social capital. Show how each item in the Ust lessens the need for greater individual wealth. C 1. "The corporative form of industry has been a big factor in the saving and investing of capital." Explain with some detail how this is true. 2. Socialists usually claim that labor is the source of all wealth. a. Can wealth be created without labor? How? 6. Can capital create wealth without the assistance of labor? How? c. How would the destruction of all wealth affect the efficiency of labor? 3. "With the extension of capitalistic methods of production the proportion of fixed and specialized capital goods shows a tendency to increase." 140 ELEMENTARY ECONOMICS a. Is this statement true? h. Why is it true? c. Why, or why not, is this proportion likely to increase? d. Under what conditions might it decrease? SUPPLEMENTARY READING Bullock, Introduction to the Study of Economics, 3d ed., pages 131-141. Ely, Outlines of Economics, 3d ed., pages 119-122. Fisher, Elementary Principles of Economics, pages 37-59. Johnson, Introduction to Economics, pages 192-214. Seager, Principles of Economics, pages 140-152. Seligman, Principles of Economics, 5th ed., pages 313-328. Taussig, Principles of Economics, 2d ed.. Vol. I, pages 67-85. CHAPTER XI COMPETITION VERSUS MONOPOLY 32. Impetus of Competition The doctrine of laissez faire. — Business men and public officials for centuries held the view that business could best be conducted if minutely regulated by the government. To that end the various nations granted monopolies of all sorts, regulated the relation between masters and their workmen, and restricted the exportation of money and raw products to foreign lands. This was the period of mercantilism — that is, a period of state regulation of business. There were some leaders, however, who believed that state interference was more detrimental than helpful, and that better industrial results could be attained by permitting each individual to pursue his own economic advan- tage. The first widely-read expression of this new doctrine, the doctrine of laissez faire, was given to the world by Adam Smith, in 1776, in an epoch-making work entitled the Wealth of Nations. Since that time these two conflicting views have contested for supremacy in the minds of men. Mercantilism — state regulation of business — has stubbornly given way to its younger rival, though it still lingers in such form as the pro- tective tariff ; and it would not be at all surprising if it should regain its second youth. We may say, however, that business in general in the United States is characterized by the principle of laissez faire, or, to use a more common expression, competition. Here each business man is permitted, with a minimum of state 141 142 ELEMENTARY ECONOMICS Fac-simile Extract from Smith's Wealth of Nations. AK INQUIRY INTO THE NATURE AND CAUSES OP THE WEALTH OF NATIONS. BOOK I. CHAPTER XI. Of the Rent of Land. Rent, considered as the price paid for the use of land, is naturally the highest which the tenant can afford to pay in the actual circumstances of the land. In adjusting the terms of the lease, the landlord en- deavours to leave him no greater share of the pro- duce than what is sufficient to keep up the stock from which he furnishes the seed, pays the labour, and purchases and maintains the cattle, and other instruments of husbandry, together with the ordinary profits of farming stock in the neighbourhood. This is evidently the smallest share with which the tenant can content himself without being a loser, and the landlord seldom means to leave him any more. "Whatever part of the produce, or, what is the same thing, whatever part of its price, is over and above VOL. H. B COMPETITION VERSUS MONOPOLY 143 interference, to decide his own policy, to buy and sell to the best advantage, and to conduct his business as he thinks advisable. Here the state makes no effort to regulate his business activities so long as public welfare is not endangered. Under normal conditions it has no concern with the details of his business, with the source of his raw materials, with the volume of his output, or with the prices of his product. Consequently, any one in the United States can move about at his convenience, seek employment anywhere, and engage in almost any business for which he is equipped. Competition and improvement. — The chief economic argu- ment for competition is that it serves as the basis of business improvement and business development. Who has not heard the common saying, "Competition is the life of trade"? Spurred on by competitors the business man seeks better sources of raw materials, better methods in production, and better markets ; which in almost every case means higher quality and lower prices. Under the pressure of competition he substitutes new and better methods for old ones, and if he is to succeed, he must not only be alert to the improvements of his competitors, but also he must on his own initiative institute improvements of his own. The business world is literally alive with industrial improve- ment. Large manufacturers maintain expensive laboratories where their competitors' products as well as their own are carefully tested for excellence ; where experiments are carried on with the single purpose of improvement. Railroads, too, are alive to any change that will improve their service. Competing lines fight for supremacy in the matter of speed, of comfort, and of safety. They employ high-priced engineers to study the pull- ing power of engines, the effect of speed on rails and roadbed, and the advantages to be gained by straightening tracks and cutting down grades. They experiment with different kinds of 144 ELEMENTARY ECONOMICS fuel, and with different makes of engines and cars. Even among farmers competition leads to improvement in the quality of seed, in cultivation, in stock-raising, in harvesting, and in a variety of other ways. For most of us the best examples of the influence of competition on improvement are found in the retail trade. One grocer installs a large sanitary refrigerator, another replaces his old horse-driven delivery wagons with automobile trucks, while a third makes arrangements to permit his cus- tomers to wait on themselves as far as possible. At the bottom of each change is the desire to get more business. The first has an advantage in handling perishable goods, the second cuts the expense of delivery, while the third is able to reduce his number of clerks. In the end many other grocers, unwilling to be bested by competitors, adopt these innovations. Thus in its endless round industrial improvement goes on its way stim- ulated by the force of competition. Wastes of competition. — Competitive methods often show a loss, however, which society should, and will in time, eliminate. Spurred on by a desire to increase trade, competitors sometimes uselessly duplicate plants and equipments, with the result that society must pay more for their particular goods than would otherwise be the case. Delivery of milk in cities is a common example of this waste. Not infrequently as many as a half dozen milk drivers visit the same apartment house in the course of the early morning hours, the combined service being little greater than that which one driver could have rendered in the same time. Recent investigations of the conditions surrounding the delivery of milk in a large Middle Western city disclose the interesting fact that the cost of delivery from city milk stations to the homes is greater than the combined cost of producing the milk and shipping it to the city. We may see similar wastes in a duplication of small stores, each with its staff of clerks and its delivery system working but part time. COMPETITION VERSUS MONOPOLY 145 Society has already made much progress in the matter of waste prevention, by facing squarely the fact that some indus- tries by their very nature are monopolistic in character and not competitive. As a result few cities have duplicate water stations, electric lighting systems, or artificial gas plants. Usually also one street railway system suffices. Competition between telephone systems still persists in some localities. Obviously, the duplication of an electric lighting system would be a social waste, especially if some means other than competi- tion can be made an effective regulator of service and price. Such means have been found in positive legislation in which the benefits of competition are gained without the loss arising from duplication of plants, equipment, and labor force. 33. The Law of Monopoly Price Getting the largest net return. — The feeling prevails that a monopolist will always sell his goods at the highest price. On the contrary, he sells them at that price which brings him the largest net return, whether that price be high or low. He is concerned not only in price, but also in the number of units sold. In pursuing his economic advantage, therefore, he would set the price with due regard for demand ; for, as we have already learned, an increase in price lowers demand while a decrease causes demand to rise. The operation of the law of monopoly price is best observed in connection with goods which have an elastic demand ; and which are produced under conditions of decreasing costs — that is, under conditions in which the unit cost of production decreases as the number of units produced is increased. Assum- ing, for illustrative purposes, that the manufacturer of a certain brand of toilet soap is a monopolist, we can work out concretely his problem of fixing the price. 146 ELEMENTARY ECONOMICS No. OF Cakes Sold Cost per Cake Gross Cost Selling Price per Cake Gross Receipts Net Profits 20,000 20^ $ 4,000 80^ % 16,000 $12,000 50,000 18f5 9,000 50^ 25,000 16,000 100,000 15fi 15,000 40^ 40,000 25,000 300,000 14?; 42,000 2H 75,000 33,000 1,000,000 10^ 100,000 15?i 150,000 50,000 3,000,000 8^ 240,000 10^ 300,000 60,000 5,000,000 7i>l"-"mou. and jjartly by water when both are used, under a coiuinon control, niaii- ai;einent, or arrangement, for a continuous carriage or shipment, from one State or Territory of the United States, or the District of Cohim- bia, to any other ijtate or Territory of the United States, or the District of Cuhunbia, or from any place in the United States to an adjacent for- eign country, or from any place in the United States through a foreigu country to any other place in the United States, and also to the traus- ]iortation in like manner of property shi|)pedfroin any place in the United States to a foreign couutry and carried from such place to a portof traus- shipment, or shipped from a foreigu couutry to any place in the United States and carried to such place from a port of eutry either in the United States or an adjacent foreign country: Provided, hou-ever, That Proviso. the i)rovisious of this act shall not ai)ply to the transportation of pas- Not aiipli aMo seiigers or property, or to the receiving, delivering, storage, or hand- '". '■■""'c "'|''')>' ling of property, wholly within one State, aud not shipped to or from a """'" °"^' " •' ^• foreign country from or to any State or Territory as aforesaid. The term " railroad " as used iu this act shall include all bridges and "Railroad.'" feriies used or operated iu connection with any railroad, and also all "Tiausiioi ta- the road in use by any corporation operating a railroad, whether owned '^^ii„iti(,„ of. or operated under a contract, agreement, or lease; and the term "trans- portation" shall include all instrumentalities of shii)ment or carriage. All charges made for any service rendered or to be rendered in the Cliar-jcs ti. l/p transportation of i)asseiigers or i)roperty as aforesaid, or in connection rcasouabli.'. Jheiewith, or for the receiving, delivering, storage, or handling of such liroperty, shall be reasonable aud just ; aud every unjust an0)0)0)0)0)0>0)0)0)0)0) 45,000 / V \ \ 40,000 / / / V s. / / \ \ 35,000 / \ / \ / \ / s / \ Panic of 1907 / 1 N, / 30,000 "^ / / / / 25,000 / ^ V / \ Period of Business Expansion 1898-1907 1 1 1 1 1 1 1 1 1 45,000 40,000 35,000 30,000 25,000 this country, and not patented or described in any publication in this or any foreign country, before his invention or discovery GOVERNMENT AND PRODUCTION 185 thereof, and not in public use or on sale for more than two years prior to his application, unless the same is proved to have been abandoned, may upon payment of the fees required by law and other due proceedings had, obtain a patent therefor." The law further states that the inventor may have for a period of seven- teen years the exclusive right to manufacture and sell his invention. Infringement of a patent gives the inventor just cause for appealing to the courts for protection and redress. Copyright law. — In principle a copyright resembles a patent. Each is the basis of a temporary monopoly. The most common copyrighted productions are books. Songs, pictures, magazines, and even news items may also be copyrighted. As in the case of patents, infringement is punishable by law. A copyright runs for twenty-eight years, though the author or his direct heirs may get an extension of fourteen years. No large per cent of copyrights is ever extended, however, for the sale of a book is likely to cease within a few years after it is first issued. Books written in foreign countries may now be copyrighted in the United States, though for years this privilege was refused ; and this refusal accounts in large measure for the hostility of Charles Dickens and other English writers toward America. Trade-marks. — In registering a trade-mark the government grants to the owner its exclusive use in marking certain commod- ities. Whether or not it will ever possess any value depends entirely on the owner's ability to create for it good will in the minds of the buying public. If he succeeds, it becomes the basis of a profitable business. The monopohstic character of the trade-mark accounts in large measure for one of the most important tendencies in present-day marketing — the increase in the number of nationally advertised products. Without its protection producers could not afford to create a demand for particular brands, for they would have no assurance that un- scrupulous competitors would not flood the markets with a 186 ELEMENTARY ECONOMICS substitute bearing the same label, nor would consumers be able to choose the product of the original producer. Hence the trade-mark establishes a bond between the producer and the consumer, which the producer cannot afford to break by- lowering the standard of his product. Consequently, we may- say, trade-marks protect consumers to a large degree from imposition. Objections urged against the present patent law. — In spite of the obvious benefits that arise from granting monopolies to inventors, there are those who argue that better results could be obtained by withdrawing government protection from all such enterprises. This argument is based on the assumption (1) that genius does not need a financial stimulus ; (2) that the reward arising from this form of monopoly usually goes into the pockets of unscrupulous manufacturers who make a practice of overreaching inventors ; (3) that patents serve as the basis of objectionable industrial monopolies ; and (4) that patents are of- ten bought by owners of similar, but inferior, patents merely in order to suppress them. 43. Regulation of Industrial Monopolies The early trusts. — The years following the close of the Civil War saw in many lines a bitter struggle for business, which produced cutthroat competition and consequently a loss of profits. The natural result was combination. In 1879 the first trust, the Standard Oil Company, was organized under the guidance of John D. Rockefeller. The plan of organization provided that the owners of numerous small oil refineries located in Ohio, Pennsylvania, and New York should place their stocks in the hands of nine trustees in exchange for trust certificates. These trustees carried on all the business of the various in- terested refineries as if it were the business of one large con- cern. So successful was this plan that other groups of in- GOVERNMENT AND PRODUCTION 187 dustries took it up, notably the manufactures of whiskey and of sugar. Between 1890 and 1892 several of the state courts declared such combinations to be illegal and ordered them to dissolve. This was the end of the trusts proper, though the term has continued down to the present time to designate con- cerns supposed to possess monopolistic advantages. The trust movement. — The dissolved sugar trust imme- diately reorganized into one gigantic corporation under a New Jersey charter. The oil trust followed a different plan. Mr. Rockefeller and his associates, having secured control of the more important refineries that had composed the old monopoly, carried on the oil business down to 1899 very much as a single organization would have conducted it. In that year the re- fineries were merged into a single large corporation, the Standard Oil Company of New Jersey. Both reorganized concerns (the old oil and sugar trusts) succeeded so well as to cause other enterprisers to investigate the advantages of combining their respective lines. By 1898, it has been estimated by a good authority, eighty so-called trusts, with an aggregate capital- ization of $1,000,000,000, had been formed. During the next six years the movement went rapidly forward. At the begin- ning of the year 1904 the number of trusts exceeded 300, and their combined capital stock exceeded $5,000,000,000. By far the largest was the United States Steel Corporation, which boasted a capitalization in excess of $1,400,000,000. In time, as we might suspect, practically every productive industry in the country was combined. The effect on investments was important. Capitalists and bankers, even the most con- servative among them, came to feel that the risks involved in trust investments were negligible. Small investors caught the feeling. The result was a rush to buy stocks and bonds. The failure of the ship-building trust, however, awakened the in- vesting public to the realization that the risk attached to the 188 ELEMENTARY ECONOMICS purchase of stocks and bonds of industrial trusts was greater than they had anticipated. Popular feeling aroused against the trusts. — The rise and development of the trust movement was caused and accom- panied by a general rise in the prices of goods, which began about 1896. The public soon saw the rise in prices, and very naturally they attributed it to the trust movement. They were en- couraged in this belief by independent concerns which had felt the weight of the combinations, also by various groups of per- sons who sincerely believed that the movement was a menace to the best interests of American society. More influential than either of these was the designing politician who saw in the growing hostility of the people toward the trusts an opportunity to further his own interests. Accordingly, he and his kind went up and down the country preaching a crusade against what they delighted to call the " unholy alliance " of capital. It cannot be denied, however, that the trust development threatened the best interests of society, nor that the people needed to be aroused to their danger. And it is pleasant to record that the people when aroused went about the task, somewhat blunderingly perhaps, but in a spirit of justice, to purge the trusts of their evil features. Evil practices of the trusts. — The most outstanding ob- jection which the people had to trusts was based on their treat- ment of independent competitors. For years it was the common practice of the Standard Oil Company, as we have already seen, to secure lower freight rates than its competitors, thus placing them at a decided disadvantage in the matter of competing with the trust in the sale of oil products. Other combinations, notably the sugar trust, likewise secured discriminatory rates from the railroads. Second, the trusts in an effort to crush competition had a practice of lowering prices in competitive markets, and of recouping themselves by higher prices in the GOVERNMENT AND PRODUCTION 189 markets where they had no competition. Both these practices the people condemned on the ground of fair play. They de- manded that the trusts, while they might be entitled to the economies that arose from conducting business on a large scale, should not use unfair methods to crush their small rivals. Trust regulation. — The first attempt by the national govern- ment to curb the monopolistic powers of the trusts came even before the trust movement proper had got under way. The practices of the old Standard Oil Company operated by its nine trustees had created suspicion in the minds of the people. Soon this suspicion was changed to distrust. Then a demand arose for some sort of regulative legislation. The result was the Sherman Anti-Trust Law of 1890. This law declared illegal " every contract, combination in the form of trust or otherwise, or conspiracy, in restraint of trade or commerce among the several states, or with foreign nations." It also declared it to be unlawful for any person to " monopolize, or attempt to monop- olize, or combine or conspire with any other person or persons, to monopolize any part of the trade or commerce among the several states, or with foreign nations." The essential feature of the law was its prohibition of the restraint of trade. This law, as we have seen, was designed primarily to curb the illegal activities of the trusts. Yet during the first twenty years of its existence it failed signally to fill the want for which it had been designed. Suits were brought under the act; yet few juries were found that could distinguish between reasonable and unreasonable restraint of trade. Strangely enough, one of the suits successfully prosecuted was directed against a Connecticut labor union for restraining the trade of a firm of hatters. Finally in 1910 the government succeeded in having both the Standard Oil Company and the American Tobacco Company dissolved. The success of the government in these cases encouraged the Department of Justice to in- 190 ELEMENTARY ECONOMICS stitute other suits. Four years later a new act added strength to the original anti-trust law by making some of its provisions more definite. The Clayton Anti-Trust Law, enacted in 1914, exempted labor unions and farmers' cooperative associations from anti-trust prosecution. It declared illegal certain practices of one cor- poration owning stock in another corporation, and expressly forbade " unjustifiable discriminations in the prices charged to different persons." During the same year a federal trade commission was established with power to prevent discrimina- tions in commerce, to make reports, and to investigate, at the request of the attorney general, alleged violations of the anti- trust laws. Significance of government regulation. — The interference of the government in industry is a radical departure from the older notion that business should be free from all state regulation or oversight. Radical as it is, the change from laissez faire back toward mercantilism came in response to the demand of society that it be protected from its most powerful industrial members. Just what effect the various anti-trust laws and the court decisions based on them have had on production, it is impossible to say. And because of thig very uncertainty, caution and care must be exercised by the government in diverting enterprise from one channel to another. Moreover, government regulation and government interference, let us remember, are likely to be the first steps toward government ownership. 44. Regulation of Public Utilities Early experiences. — Our notice of the monopolistic char- acter of public utilities in discussing the nature of monopolies paves the way to an examination of the methods designed by the state to regulate them. Early in the history of the water, GOVERNMENT AND PRODUCTION 191 gas, and electric lighting industries the government exerted little control in the regulation of their rates and services. Much like the railroads, these industries undertook to conduct their business with little regard to the welfare of the people whom they served, and here again, as in the case of the railroads, the people found it necessary to impose regulations in order to protect their own interests, and, strange as it may sound, the interests of these industries. In many sections of the country the public was not easily aroused. To many the difference between a five- cent and a four-cent street-car fare was insignificant. Yet in the aggregate it mounts high. Likewise, an eleven-cent electric rate appeared to be little more than a ten-cent rate. The corporations themselves sensed the danger, but instead of correcting existing evils many of them tried to fortify their position by packing city councils with employees or friends of the management. As a result, the record of more than one American city is besmirched with every form of petty manip- ulation, with lobbying, and even with bribery. Fortunately, the good judgment of the people led them to see that they were the masters of the situation. The result was, and is, that con- ditions surrounding the services of public utilities corporations are much better than the most optimistic would have predicted a few years ago. Form of regulation. — In the matter of regulation each city may take one of two courses. It may by an ordinance, as is usually the case, set the maximum which a given system may charge for public service ; or it may own and operate the system, thus securing for the city treasury any excess which under the other plan would go into the pockets of individuals. Ownership, on the whole, has been confined to water service, though many of the smaller cities and towns operate their own lighting systems, and some even operate their own gas plants. In a few of the larger cities, the public has an interest in the local 192 ELEMENTARY ECONOMICS street-railway system. In Chicago, for example, the city shares in the profits of carrying passengers on the surface lines. Even those who have objected the most strenuously to the regulation of industrial corporations have expressed sym- pathy with the regulation of municipal service plants. This regulation, however, is beyond the discussion stage ; neverthe- less, as intelligent members of society we must give attention to the best methods of regulation. 45. Fixing Prices Nature of the problem. — This movement, toward what many call socialism, manifests itself almost exclusively in the reg- ulation of railroads, public utilities, and trusts. We have had little experience in fixing prices except when placed under the stress of war. Obviously, no one, not even the government, can anticipate with any degree of accuracy the demand for a given article. And just as obviously, no one can estimate the probable future supply of such a product as corn or wheat or cotton. Since neither the demand nor the supply can be determined in advance, the fixing of a proper price is a difficult task. Not long ago a government official went to the heart of the matter when he said that the wisdom of fixing a wheat price at a certain point could be determined only after the new harvest had begun to come on the market. If the price had been too high, a surplus of the old crop would remain unsold ; if too low, the old crop would have fallen short in supplying the demand. Allowing for other influences, there is much truth in the statement. Experiments. — Under the stress of the Great War the United States government undertook to set prices on numerous articles of everyday consumption. The price of wheat was set at a figure double the average price for a term of years preceding the outbreak of the war. Immediately the price of corn began to rise, partly on account of the high price of wheat. Then GOVERNMENT AND PRODUCTION 193 wheat-growers demanded a higher price for their product on the ground that they could make more money raising corn. Here we have the inevitable result of trying to fix an arbitrary price ; and undoubtedly the difficulty explains why modern society hesitates, except under the most extraordinary cir- cumstances, to say what a producer shall receive for his product. EXERCISES AND PROBLEMS 1. What are the chief features of the United States patent laws? 2. Point out the good and the bad phases of the patent system. 3. What is the value of a trade-mark to the producer? to the consumer? 4. How does a copyright differ from a patent ? 5. What is a trust? 6. Are all trusts monopolies? 7. Are all monopolies trusts? 8. Why did the trust movement develop so rapidly about 1900? 9. What caused popular opinion to be aroused against the trusts? 10. What were some of the objectionable practices of the trusts? 11. What was the Sherman Anti-Trust Act? 12. How did this law affect the trusts? 13. How has this law been strengthened? 14. What is the difference between reasonable restraint of trade and unreasonable restraint of trade? 15. Why were early public utility corporations given so many privileges ? 16. Just how at the present time are these corporations usually regulated ? 17. What experience has this country had in price-fixing? 18. Why is price-fixing likely at all times to be unsatisfactory? B 1. What steps would you take in securing a patent? 2. Make a short list of important inventions that have revolutionized American life and industry. Were these inventions patented ? Which 194 ELEMENTARY ECONOMICS of the patentees has been rewarded adequately for the labor and skill employed in perfecting his invention? 3. Mention twenty trade-marks with which you are familiar. a. Would you consider them as assets of the concerns which own them? Why? h. What similarities have you noticed in the trade-marks carried by the same kinds of goods? c. Why do business firms often retain the names of members who have died or withdrawn? 4. Just how widespread is the practice of securing copyrights? a. How can you determine whether or not a publication is copy- righted? h. Is this book copyrighted? What is the evidence? c. Make a list of ten books or other publications not copyrighted, d. Are copyrights owned by publishers or authors? 5. Name ten concerns which you would class as trusts. a. How many of the ten are manufactures? h. Which of these appear to be monopolies? c. Which, if any, have resorted to unfair competition? Explain. d. What is the general attitude of the people toward them? 6. Make a list of the public utility enterprises in your community. a. Which of these are publicly owned? h. Which are monopolies ? c. Why does society permit monopolies in these enterprises ? d. To what extent are these enterprises regulated by law? e. Is this regulation as effective as the regulation that would arise from competition? Explain. C 1. "Some people deny that men who have a genius for invention and discovery require any special inducement to follow their natural bent." a. Just how does a genius differ from other persons? h. Do all inventors have a genius for invention? c. Might genius be stimulated by a hope of reward ? 2. Why are goods sometimes advertised, ' ' Not made by a trust ' ' ? 3. During the early years of the trust movement the argument was frequently heard that the trust excelled all other forms of business organization in efficiency and economy. GOVERNMENT AND PRODUCTION 195 a. What is the basis of that argument? b. In what respects are trusts more efficient : i. In organization? ii. In buying? in selling? iii. In transportation? c. What is the relation between this increased efficiency and prices? 4. Because of increased costs of labor and material a street-railway president finds that a five-cent rate does not bring a fair return. How would he proceed to secure a six-cent rate? SUPPLEMENTARY READING Ely, Outlines of Economics, 3d ed., pages 195, 230-247. Fetter, Economics, Vol. II, pages 427-457. Johnson, Introduction to Economics, pages 137-150. Seager, Principles of Economics, pages 442-471. Seligman, Principles of Economics, 5th ed., pages 340-350. Taussig, Principles of Economics, 2d ed., Vol. II, pages 419-442. PART IV THE EXCHANGE OF ECONOMIC GOODS CHAPTER XV USE OF MONEY IN MAKING EXCHANGES 46. Characteristics of a Good Money The process of selection. — The universal use of certain commodities for money rests on social experience, and not, as many believe, on some fine-spun theory evolved by statesmen and the law courts, that in malnng exchanges one commodity ought to be preferred over another. Among the early Jewish patriarchs, cattle and sheep were regarded not only as wealth, but also as measures of wealth. Homer, the Greek poet, speaks of the wealth of the Greeks in terms of cattle. Our own Amer- ican Indians employed shells in making exchanges among themselves; some African tribes use cubes of salt as money;' while in the | interior of Russia tanned hides at one time cir- culated as a medium of exchange. Slowly, but obviously not in the same period of time, each independent society, employing the selective process in making its choice, has experimented with various commodities as money. Value characteristics of good money. — Clearly the chief characteristic which any commodity /must enjoy, if it is to become a medium of exchange, is use value; that is, society as a whole must value it highly enough to desire to possess it for its own worth and not because some individual or some government has said that it possesses value. Since it has value it will have acceptabihty — that is, it will be desired by the individual members of society. If the members of any social group prefer 199 200 ELEMENTARY ECONOMICS cattle, for example, to all other forms of wealth, then cattle, other things being equal, naturally become the medium of ex- '- change. Notice that the last statement in the preceding paragraph bears the qualification, " other things being equal." Cattle might have a wider acceptability than furs, and yet, on account^ of their small value compared to thei large bulk, be less desir- able as a money. Diamonds, on the other hand, might also be thQ most highly and the most widely desired commodity in existence without becoming a medium of exchange, simply because a diamond possesses too much value compared to its size. Also the value of the commodity which is to serve as money must be reasonably stable — that is, its value must noj/ vary too widely or too quickly. We may conclude, therefore, that the value characteristics of a good money are three in number : (1) value, (2) reasonably large value in small bulk, and (3) stability of value. Physical characteristics of a good money. — Scarcely less important are the "physical characteristics which a good money should possess. Five such characteristics may 1 li^roperly'^be examined at this point: (1) durability, (2) portability, (3) homogeneity, (4) divisibility, and (5) cognizability. Any commodity that is to serve well as money should possess durability to a high degree. Otherwise it would wear quickly in its passage from hand to hand, and even deteriorate while in the possession of its owner.] Consequently, perishable goods, such as cattle, furs, tobacco, and even wheat and corn, have never proved satisfactory as mediums of exchange. Clearly, durability is a great aid to stability of value, since the new supply of a durable commodity for a reasonably short period of time is likely to be\\small compared to the entire stock of that commodity already in the possession of society. If wheat, for example, were used as a medium of exchange, it is obvious that o: USE OF MONEY IN MAKING EXCHANGES 201 its value would fall greatly with the harvesting of each new crop and rise as each crop was gradually consumed. The second physical characteristic of a good money is port- ability. The commodity that serves as money must be moved from point to point, among the members of the society that uses it. Otherwise it is not money. This movement involves labor and expense. Hence, the commodity that combines greatest value in the smallest bulk, if we consider 'portability alone, is the most desirable as a medium of exchange. A good money must also be homogeneous — that is, the commodity from which it is made must be of the same quality wherever it is found. Obviously, cattle possess this char- acteristic to a very low degree, for scarcely any two of them are alike. Divisibility, which is closely related to homogeneity, simply means the capability of a commodity to be divided without destroying its value. Here again, cattle do not possess this characteristic. Neither do furs or diamonds. Either loses value by being divided. The total value of the parts of a split diamond never equals the value of the original stone. Any commodity that is to pass current as money must be capable of being easily recognized. Otherwise it could be counterfeited, which fact in itself would tend to dest-roy its value as a money by destroying its acceptability. Characteristics of gold. — Of all the commodities known to mankind gold possesses in the highest degree the characteristics of good money. Since the earliest time it has been desired for its own use as a commodity. Primitive man prized gold above all other metals. From it he made rings, chains, and other ornaments that appealed to his vanity. His descendants regard gold in much the same way. Gold is also scarce enough to make it highly valuable compared to its bulk, and yet it exists in large enough quantities to permit of its use in making exchanges. Finally, the value of gold is stable, though we must not get the 202 ELEMENTARY ECONOMICS mistaken idea, which some have, that it does not vary. The reason for its stabiUty is that the supply of the metal coming from the mines, in any year let us say, is extremely small compared with the total supply in the possession of society. Gold possesses also to a high degree the physical character- istics of a good money. It is made durable by combining with the fine metal a small part of alloy. Gold wears well in coins, though it is best preserved by molding it in the form of bars. Also since it combines a relatively high value with small bulk, gold may be easily carried about. The homogeneity of gold is well known to every student of chemistry, who learns early in his course that it is a chemical element. All fine gold, therefore, is exactly alike, whether it be mined in South Africa or in Alaska. Gold is also divisible. No change in its shape or form affects its value. Two one-ounce pieces of gold are worth exactly as much as one two-ounce piece. Melting, rolling, or pounding has no effect whatever on the value of fine gold. Fifth, gold is the most difficult of all the metals to counterfeit. Any one accustomed to handle gold money can detect a spurious gold coin at a glance. From the foregoing discussion of the qualities of a good money we can easily see why society has, by a long process of selection, chosen gold as a standard. It could not have done otherwise. Whether or not gold will continue down to the end of time as the money standard, no one can say. We are reasonably sure, however, that a change to some other commodity will come only when that commodity shows its superiority to gold. 47. Uses of Money As a medium of exchange. — The general desire for a com- modity, such as gold, stimulates its acceptability in unlimited amounts, since each individual knows that his neighbors will USE OF MONEY IN MAKING EXCHANGES 203 gladly accept it in exchange for their surplus commodities. Such a commodity, whatever it may be, we call money. As soon as a society reaches the money stage of economic development its exchanges are greatly facilitated. No longer is it necessary for an individual who desires, let us say, to exchange a deerskin for a hat, to go about among his friends seeking another in- dividual who has not only an extra hat but also a desire to possess a deerskin. Instead, he deals with two different in- dividuals, exchanging his deerskin for money, and carrying the money in his pocket until he finds some one who has a hat for sale. In one respect money is a universal mobilizer of goods — that is, it gives mobility to the exchange of goods. If we were deprived of its use, a large part of the energy now expended in producing goods would necessarily have to be expended in bringing together traders possessing mutual demands. As a standard of value. — Money serves also as a standard of value. It is a common denominator to which all other values may be reduced. We speak of wheat as being worth two dollars a bushel, meaning thereby that two dollars exchange for a bushel of wheat. Similarly we speak of corn being worth a dollar a bushel, oats fifty cents a bushel, and eggs twenty-five cents a dozen. Here we have but four facts to remember, the prices of the four commodities under consideration expressed in a money unit. Without the use of money the number of relative values possible to express among the four commodities would be as follows : One bushel of wheat = two bushels of corn = four bushels of oats = eight dozen eggs. One bushel of corn = two bushels of oats = four dozen eggs. One bushel of oats = two dozen eggs. 204 ELEMENTARY ECONOMICS Expressed in the form of a ratio the relative values to remember would be : Wheat : corn : : 2 : 1. Wheat : oats : :.4 : 1. Wheat : eggs : : 8 : 1. Corn : oats:: 2:1. Corn : eggs:: 4:1. Oats : eggs : : 2 : 1. Thus it is to be seen that there are six barter relations, whereas but four appear when money is used. As the number of commod- ities increases, the advantage of employing a money unit becomes more evident : ten different commodities, having a total of ten different values expressed in money, have forty-five relative values when expressed in terms of each other. One of the curious things about a money unit is that the unit itself does not necessarily have to exist. The money unit of the United States is the gold dollar (23.22 grains of fine gold), yet at the present time the government does not coin gold dollars. Furthermore, prices would not differ in the least from what they are, had no gold dollars ever been minted. Thus, the disappearance of every gold dollar in existence would affect not in the least the money unit of the United States. As a standard of deferred payments. — Since money serves so well as a medium of exchange and as a measure of value, it is but natural that credit transactions should be expressed in the same unit. An enterpriser, wishing, for example, to secure a new machine, borrows not a machine, but money with which he can purchase the machine. Nor does he expect a year hence to repay the loan with a machine. He borrows money and he repays money, both he and his creditor having every assur- ance that the entire transaction will be carried out in terms of the same unit. Another reason why money is usually preferred as a medium of credit transaction is because of its stable value. As we shall see in a later chapter, all money, including gold, fluctuates in value, yet this fluctuation is likely to be relatively small USE OF MONEY IN MAKING EXCHANGES 205 for a reasonable period of time. Both debtor and creditor, then, enjoy a reasonable protection when money is the medium by which debts are to be discharged. Suppose A borrows ten bushels of wheat from B. agreeing to return to him at the expira- tion of one year the ten bushels plus interest. A bumper crop of wheat, accompanied by a large decrease in price, would obviously give A an undue advantage in repaying his loan. Conversely, a short crop of wheat would give B a corresponding advantage. No such fluctuation, we may say with assurance, will occur in the value of gold. 48. Kinds of Government Money Gold. — The standard money unit of the United States is the gold dollar, weighing 25.8 grains and comprising nine parts of fine gold to one part of alloy. Other gold coins are double eagle ($20), eagle ($10), half-eagle ($5), and quarter-eagle ($2^). All other forms of our money are directly or indirectly con- vertible into gold. Any holder of gold bullion, nine-tenths fine, can exchange it at the mint or other proper government depository for an equal amount of gold coin without charge. Hence we speak of the free and unlimited coinage of gold, free in this case literally meaning gratuitous ; that is, a holder of bullion can present 258 grains of standard gold and receive in return a ten-dollar gold piece. Inasmuch as the standard coin is made of gold, it necessarily follows that the price of gold cannot vary as long as that standard is maintained. Thus, the miner, who carries standard gold bullion to the mint, finds by a simple calculation (480 -^ 25.8) that the price of his product is $18.60+ an ounce. This price has not varied in many years, and it cannot vary as long as the present law regarding the standard coin is in operation. By exchanging gold coins for an equal amount of gold bullion of the same fineness, the government maintains a parity between gold 206 ELEMENTARY ECONOMICS coin and gold bullion. In other words, the government adds no value whatever to gold bullion by converting it into coins. It merely changes the bullion into convenient forms for making exchanges, indicates each coin's weight by stating its value, and undertakes to prevent counterfeiting. Since neither the changing of bullion into coin nor the changing of coin into bullion has any effect on the value of gold, there is, as we might expect, a constant flow in both directions : mine owners and gold importers carry their bullion to the mints, while gold exporters change gold coins into gold bars. Thus, the government mints, on the one hand, and the melting pots of private in- dividuals, on the other, perform the valuable service of keeping gold coin and gold bullion equal in value. Silver, copper, and nickel. — The United States government mints also several different kinds of silver coins — dollars, half- dollars, quarter-dollars, and dimes. The silver dollar, which, as we shall presently see, was at one time a standard alongside the gold dollar, is composed of nine parts of fine silver to one part of alloy — that is, it is nine-tenths fine. It weighs 412.5 grains, of which 371.25 grains are fine silver. The silver dollar, like all gold coins, is an unlimited legal tender for all debts. This simply means that a debtor may, unless there is a contract to the contrary, discharge his debts in silver dollars. The other three silver coins have the same fineness as the silver dollar, but do not weigh as much in proportion as their exchange values indicate. Two half dollars do not weigh as much as one dollar ; neither do four quarters nor ten dimes. These subsidiary coins are legal tender up to ten dollars. The legal-tender quality of the nickel piece and the copper cent is limited to twenty-five cents. Representative money. — Closely akin to the standard gold dollar and to the one-time standard silver dollar are the two forms of representative money used in the United States. USE OF MONEY IN MAKING EXCHANGES 207 Copyright Underwood & Underwood, New York How Silver Dollaks are Stored in the United States Treasury. 208 ELEMENTARY ECONOMICS One, the gold certificate, is issued by the place of exactly the same amount of An Account op Resumption, from Con- temporary Newspaper. RESUMPTION. Peace from the Placid Potomac to the Warbling Wabasha com m ABUNDANCE EVERYWHERE, AND IN BUT UTILE DEUANS. More Gold Received at the New York Siib- Treasory Than Paid Out. Beports from Philadelphia, Chicago, St. Loois, and Many Othor Points. GENERAL FEELING OF CONFIDENCE FOR. A RETlVAIi OF BUSINESS. SPEECH OF HON. JAMES A. GARFIELD AT CHICAGO, ON HONEST MONEY. CINCINNATI. Resumption resumed yesterday, and nobody seemed hurt by it. There was about as much stir over it as aa though it was Lot. Theodore Cook remarked that it might as well have happened six months ago. The Merchants' National Bank didn't have a call for a dollar of gold. The Third National paid out a solitary twenty-dollar gold piece. There ■was no demand at the National Bank of Commerce. The First National paid out f 97 50 in the yellow coin. government to take the gold deposited in the treasury. Similarly, the second form, the silver certificate, repre- sents deposits of silver. The chief reason for' substituting the former for gold coin is to save the wear and deterio- ration which gold suf- fers in passing from hand to hand. The silver certificate, Avhile it also serves to save wear on silver coins, is issued largely because it is much more con- venient to handle than silver. The main point to notice in connection with gold and silver certificates is that hold- ers may exchange them at the United States treasury for gold or silver, as the case may be. In other words, representative money merely represents gold or silver which the gov- ermnent keeps in trust for its holders. USE OF MONEY IN MAKING EXCHANGES 209 Government credit money. — Somewhat different from rep- resentative money is the credit money of a government, which is backed not by an equal amount of gold or silver, but by a reserve fund plus government credit. The credit money of the United States government is United States notes, popularly referred to as greenbacks. These notes were first issued during the Civil War and are legal tender in unlimited amounts. For seventeen years their value in terms of gold fluctuated from forty cents to one hundred cents on the dollar. That is, they varied from a high point where they equaled gold in value to a low point where a dollar note was worth but forty cents in gold. Finally in 1879, after a four years' preparation, the government began to redeem these notes in gold, dollar for dollar. This is known in our financial history as the resumption of specie payments. Since that time they have circulated on a par with gold, simply because every one knows that he can exchange them for gold at the treasury. Since the government does not maintain a dollar in gold for every dollar of notes, the question may properly arise how the government is able to redeem them on presentation. The answer involves the whole basis of credit, which is confidence. The people, firmly believing in the integrity of the government, have confidence that it can redeem every note on demand. Consequently, no one presents notes for payment unless he has some special need for gold. They are in very much the same frame of mind as the bank depositor who, hearing that his bank was about to fail, demanded to withdraw his deposits. On being assured that the bank was solvent he merely remarked that if the bank had the money to pay him he did not want it ; if it did not, he wanted it at once. Three kinds of bank notes also circulate widely in the United States, but a detailed notice of them must be deferred to a later chapter. 210 ELEMENTARY ECONOMICS EXERCISES AND PROBLEMS A 1. Name various commodities that have served as money. 2. What must be the chief characteristics of a good money ? Why ? 3. What is meant by the expression, "large value in small bulk"? 4. Would diamonds serve well as a medium of exchange? Why, or why not ? 5. Name and explain the physical characteristics of a good money. 6. Discuss the characteristics of a good money as applied to gold. 7. Why is gold the most generally accepted of all money? 8. What are the uses of money? 9. What are the advantages of money exchange over barter ex- change ? 10. What is the standard coin of the United States? 11. Is the ten-dollar gold piece a standard coin? Explain. 12. Does the vahie of gold fluctuate? Explain. 13. Does the price of gold fluctuate? Explain. 14. Why is it not unlawful to melt gold coins? 15. Name the different silver coins in circulation. 16. Are any of these coins standard money? Explain. 17. Why is alloy used in the coinage of gold and silver? 18. Why are gold and silver certificates called "representative" money ? 19. Why are these certificates used in the place of coins? 20. What are "United States notes"? 21. Why are these notes usually referred to as "greenbacks"? 22. Why did the value of greenbacks fluctuate during the Civil War ? 23. Why has it not fluctuated since 1879? 24. Is the government prepared to redeem all greenbacks on demand? Why, or why not? 25. Why are relatively few greenbacks presented for redemption? B 1. Give instances of where you have used money as a medium of exchange ; as a measure of value ; as a basis of credit. 2. Make a collection of silver coins both new and worn. a. Weigh each of the dollars. i. What does the new dollar weigh ? ii. Compare it with the weight of the worn dollar. USE OF MONEY IN MAKING EXCHANGES 211 b. Weigh each of the other coins. i. How does the weight of the new half-dollar compare with the weight of the new dollar? the new quarter? the new dime? ii. Compare weights of new and worn fractional coins. c. Which coins show the greatest proportionate wear? 3. Get permission of some banker to examine gold coins, gold certificates, silver certificates, and greenbacks. a. Note various denominations of each. b. Are there denominations higher or lower than the ones examined ? c. What are the legal-tender qualities of each? C 1. Suppose the federal government should decide to make a bushel (56 pounds) of shelled corn the standard money unit : a. Would gold be robbed of its value ? Why, or why not ? b. What difficulties would be encountered : 1. In preventing wide fluctuations in value? ii. In standardizing the new money unit? iii. In transporting money ? iv. In storing money? c. How would the demand for representative money be affected ? d. How would the production of corn be affected? e. Would an Iowa corn farmer be richer or poorer as a result of the change? Why? 2. Suppose the federal government should decide to change the money standard, displacing the gold dollar of 25.8 grains (nine-tenths fine) by a gold "diller," of equal fineness, weighing 40 grains. a. How would the amount of gold money in circulation be affected ? b. How would the value of gold be affected? c. Would the price of gold be changed? How? d. What would be the effect on the prices of commodities ? e. How would gold mining be affected? 3. A well-known public man asserted a few years ago that anything would serve acceptably as a money if it bore the government fiat. a. Have governments been successful in creating an artificial currency ? 212 ELEMENTARY ECONOMICS i. What was "Continental paper money"? ii. Sketch briefly the history of the greenbacks, iii. What served as money in the Southern Confederacy? b. How much value does the government stamp add to gold coins ? c. What causes gold coins to circulate? d. What causes greenbacks to circulate? 4. "Representative paper money is not money at all; it merely represents money held by the government." a. Define "money." b. Does an exchange of a ten-dollar gold certificate for a ten-dollar gold coin change the amount of money in circulation? in the treasury? c. Suppose the government should spend the gold held to redeem gold certificates : i. Would they still be "gold certificates"? Explain, ii. Would they be money? Why, or why not? iii. How would their value be affected ? d. Suppose the government should declare gold certificates to be redeemable like greenbacks : i. Would they still be " gold certificates " ? Explain, ii. How would their value be affected? iii. How would the value of greenbacks be affected ? iv. WMat would be the effect on government credit ? SUPPLEMENTARY READING Bullock, Introduction to the Study of Economics, 3d ed., pages 224-269. Ely, Outlines of Economics, 3d ed., pages 248-281. Fisher, Elementary Principles of Economics, pages 144-164. Johnson, Introduction to Economics, pages 253-279. Seager, Princi-ples of Economics, pages 322-340. Seligman, Principles of Economics, 5th ed., pages 449-465. Taussig, Principles of Economics, 2d ed., Vol. I, pages 227-235. CHAPTER XVI MONETARY LAWS ILLUSTRATED FROM THE HISTORY OF THE UNITED STATES 49. Some Important Monetary Laws The bimetallic ratios. — Until a comparatively recent period bimetallism prevailed among the more advanced industrial nations — that is, they employed both gold and silver money standards. Each government authorized its mints to manu- facture the standard coin in either gold or silver, their relative weights depending on some previously determined ratio, which hereafter we shall call the mint ratio. Obviously, at the same time there was also a inarket ratio between these metals, just as there is always a market ratio between wheat and corn, which no government can effectively control. Thus, the govern- ment could fix one ratio but not the other. Accordingly, the two ratios were seldom the same. An influx of gold into any country tended to cause the value of that metal, as compared with silver, to fall, while an outflow of gold tended to cause its value to rise. In the first case gold was said to be overvalued ; in the latter, undervalued. Both terms, as used in discussions on bimetallism, create unnecessary confusion, which any one of us, by exercising a little caution, can avoid. Both terms apply to the value set by the mint. If an oversupply of gold causes, as we have seen, the value of that metal to decline in the markets in terms of silver, then at the mint, where the ratio remains constant, it is obviously overvalued. Similarly, an undersupply of gold causes it to be undervalued at the mint. 213 214 ELEMENTARY ECONOMICS To give concreteness to our subject let us assume that a government fixes the mint ratio at 15 to 1, which means that the standard silver coin shall weigh exactly fifteen times as much as the standard gold coin, the two coins having the same fineness and the same legal-tender value. If in the market of that country an ounce of gold will buy twenty ounces of silver, World Production of Silver : 1865-1915 (In Millions of Ounces) . o 10 o in o in o in o in t^ N m CO (j> 0) o 00 CO (S CO CO CO 0) 225 / T 150 75 /^ ^ 7^ ^ \\y s/ V r^ V then it is clear that gold is undervalued at the mint ; and that silver is overvalued. Conversely, if an ounce of gold exchanges in the market for less than fifteen ounces of silver, fourteen say, then silver is said to be undervalued and gold overvalued. The inability of any government to change its mint ratio to corre- spond with the daily shifting market ratio accounts in large measure for the difficulties encountered in trying to maintain a bimetallic standard, and for its abandonment, as practically all of the leading countries have done. MONETARY LAWS 215 Gresham's law, — Under a system of bimetallism the coins made from the undervalued metal tend to go out of circulation. The reason for this is not difficult to understand, since the under- valuation of a metal means that it has higher value in the market than at the mint. Payments will be made preferably with the coins of the overvalued metal ; with the result that the coins of the other metal will be used only as a last resort. Thus, when coins of two standard metals circulate side by side, the coins which are worth less as metal than as money will tend to drive out of circulation the coins which are worth more as metal than as money. The same tendency occurs when similar standard coins are circulating, if some of them are worn more then others; also when metal money and paper money cir- culate, if the paper money is depreciated. We are now pre- pared to state what is generally known as Gresham's law, named after one of the advisers of Queen Elizabeth : When two kinds of money circulate concurrently, the poorer tends to drive the better out of circulation. An American writer puts it forcefully when he says that good money is too proud to circulate alongside poor money. Principle of elasticity of money. — A third important mone- tary law involves the relation of the supply of money to the fluctuations of the demand made on this supply. In every modern business community there is more or less of a seasonal demand for money in some form. Particularly is this true in agricultural sections at harvest time. Then farmers hire additional laborers who must be paid, and incur other expenses incidental to harvesting. In a large country such as the United States this seasonal demand mounts into hundreds of millions of dollars. Clearly, business operations cannot be adjusted so as to have on hand this enormous sum of money to meet the extra demands of a few months at most. And it need not be so adjusted if some provision is made, such as we now have in our 216 ELEMENTARY ECONOMICS Federal Reserve Banking Law, for increasing the amount of money to meet an additional demand and decreasing it again when this demand has passed by. A monetary system which permits of this expansion and contraction is said to be elastic. From our description of elastic money we readily see that credit money alone, either in the form of bank notes or of government notes, serves the purpose. No reasonable scheme can be had which would permit metallic money to stretch and contract with the fluctuation of business needs. Mine pro- duction could not be speeded up sufficiently to meet an in- creased demand ; and if such were possible we can think of no plan for taking the added amount out of circulation when there was no longer need for it. Quantity theory of money. — Whatever the permanent supply of money may be, it will adapt itself to the social needs for money. A given quantity of money, say 10a;, effects the exchanges of a country. If this quantity were increased to 12a;, we know, speaking generally, that the new amount (12a:) will be used in effecting the same kinds and number of exchanges as 10a; had formerly effected. Thus, in each exchange twenty per cent more money will be used than was the case before the increase — that is, goods in every case will command more money when the quantity is 12.T than when the quantity was 10a;. Measured in terms of goods, the value of money has declined. We may now state the quantity theory of money : Other things being equal, the value of the nioneij unit varies inversely with the supply of money. 50. Monetary History of the United States Notes of the first and second United States Banks. — During the greater portion of the first half century following the organization of the national government in 1789, the notes issued by the two United States Banks (first, 1791-1811; MONETARY LAWS 217 second, 1816-1836) supplied the most important part of the country's circulating medium. Each bank kept an adequate reserve of coin with which to redeem its notes. Consequently, the people accepted them at their face value. Numerous state banks also issued notes, which usually had scarcely more than a local circulation in the neighborhood of the issuing bank. Government coinage. — Very soon after the organization of the first United States Bank, the government provided a World Production of Gold: 1850-1915 (In Millions of Dollars) . Q U) in lo CO o o (0 ID ID S O (D in o CO in 00 00 o a m in 0) O O 0) in o 2 1910 1915 .as J i / || 1 II ^A / k jl A / aa q OH / V •0 rf , .9 > r S 2 o O \- ■a / I I ,% / s /^ V /. -^ \j t bimetallic coinage system (1792) in which the ratio was to be 15 to 1. For many years after its estabhshment the mmt coined comparatively little silver or gold : there were few mines in the country, foreign coins passed current, while the United States banks, as we have seen, provided a sound and uniform currencv. In 1834 the mint ratio was changed to 16 to 1. All 218 ELEMENTARY ECONOMICS the while the market ratio was in the neighborhood of 15|- to 1. Hence, the first coinage law (1792) undervalued gold ; the second (1834) undervalued silver. Neither law, despite the best efforts of the lawmakers, caused gold and silver to circulate side by side. The holder of either metal — coin or bullion — ■ followed his own economic advantage ; he paid out his over- valued coins and sold or exported his undervalued ones. Since the law of 1834 tended to drive silver out of circulation by under- valuing it, the fractional silver coins (half-dollar, quarter-dollar, and dime) disappeared. Consequently, in 1853 the weights of these coins were slightly reduced in order to make them worth more as money than as bullion. Since that time the weights of all our gold and silver coins have remained unchanged. The discovery of gold in California in 1848 gave an impetus to gold coinage. A little later the mints were turning out gold coins in excess of $25,000,000 annually. During this period an impetus was given to the use of gold and silver as money by the govern- ment itself, which refused to recharter the second United States Bank (1832), to accept state bank notes in payment for public land (1836), and to use state banks as public depositories (1846). Government paper money. — When the Civil War broke out, the circulating medium of the country comprised gold coins, fractional silver coins, copper coins, and state bank notes. Soon the state banks, as we shall see in the next chapter, were compelled to suspend specie payments — that is, they were no longer able to redeem their notes in gold or silver. At the same time the government itself also suspended specie payments. The result was a serious derangement of the monetary system. Congress then set about to remedy the situation. The secretary of the treasury was authorized (February, 1862) to issue $150,- 000,000 in United States notes (greenbacks). Four months later Congress authorized a second issue of the same amount. Subsequent issues brought the total amount up to $450,000,000 MONETARY LAWS 219 The government had no reserve of gold and silver with which to redeem these notes. Hence we call them irredeemable or inconvertible paper money. National bank notes. — The year following the issuance of the first greenbacks Congress passed the National Bank Act (1863), which provided for the establishment of banks with federal charters. These banks were required to invest in government bonds, which they could use as security for national bank notes. Two years later the government gave to the national banks a monopoly of bank-note issue by imposing a prohibitive tax on state bank notes. In reality the govern- ment's credit served as the basis of national bank notes as well as of greenbacks, for neither were redeemable at the time in specie. During the war and for a dozen years after its close, gold was kept out of circulation by the operation of Gresham's law. The only money the people in general saw during this period was greenbacks and bank notes. Gold was bought and sold just as was wheat or corn. Any one desiring gold for export could always find it for sale at the New York Stock Exchange in what was known as the " gold room." There, also, the importers of gold could find buyers. The heavy issues of greenbacks and bank notes caused prices to rise, since, as we have seen in the discussion of the quantity theory of money, the value of the dollar declined. Another objection to both greenbacks and bank notes was that they were in- elastic. The government could not regulate the amounts of either or both to meet the seasonal demands for money. In this respect they were little better, if any, than gold or silver coins. Resumption of specie payments. — Soon after the close of the war there arose an agitation to retire the greenbacks from circulation, and to return to a " hard money " basis. Many people objected. Finally the issue was compromised, with a 220 ELEMENTARY ECONOMICS moderate reduction of the amount in circulation. The next logical step was to devise some plan for redeeming them on demand, when presented at the treasury. After considerable debate and discussion both in and out of Congress, a law was enacted (1875) which provided that beginning with January 1, 1879, the government would pay specie for greenbacks. In anticipation of the demand that might be made on him, the secretary of the treasury began to accumulate a gold reserve, which, by the end of 1878, amounted to more than a hundred million dollars. As January 1, 1879, drew near, the premium on gold declined until it disappeared. Contrary to expectations the people did not rush to the treasury to exchange their greenbacks for gold. The mere fact that the gold was there sufficed. The silver question. — Two years prior to the passage of the resumption act, the government, in revising its coinage laws, omitted any mention of the standard silver dollar. In other words, the law demonetized silver. This legislation is usually referred to as the " crime of '73." At that time the market value of the 371.25 grains of fine silver necessary to coin a dollar was about $1,003 in gold. Hence no one was willing to carry silver bullion to the mint, for by so doing he would be compelled to exchange $1,003 for $1.00. It happened, however, that just about this time a great many rich silver mines were opened in the western part of the United States. Consequently, the value of silver fell until its market value was less than the old mint value — it fell to a point where it required more than 16 ounces of silver to buy one ounce of gold. Then the silver miners and their friends demanded that the government go back to a bime- tallic basis. This a majority in Congress was unwilling to do. The matter was finally compromised in 1878 with the enactment of the Bland-Allison Law, which provided that the secretary of the treasury should purchase each month from two to four MONETARY LAWS 221 million dollars' worth of silver, paying silver certificates for it. Silver production continued to increase. In 1890 another law, known as the Sherman Act, was passed. It required the secre- tary of the treasury to purchase four and one-half million ounces monthly, and to issue in payment treasury notes redeem- able in gold. This new strain was too much for the gold reserve, Market Value of the Silver Dollar in Terms of Gold : 1865-1918. 1855 1860 1865 1870 1875 1880 1885 1890 1895 1900 1905 1910 1915 1920 100* _____ 00 CO ^^ i < 1 at S s s \ ^ ! 1 i J3 ^ i o 1 1 1 1 1 1 If \ \ \ \ 1 < g 1 1 & \ \ 1 1 1 /I / 25* i *^<. 1 1 ' for holders of silver bullion after accepting the treasury notes were privileged to present them forthwith for redemption. The government was now at a point where it had to meet the silver question squarely and without flinching. In 1893, at the instigation of President Cleveland, Congress repealed the Sherman Act. This was the signal for the friends of bimet- allism to make silver more of a political issue than ever before. Three years later the Democrats, led by William J. Bryan, made 222 ELEMENTARY ECONOMICS free silver their paramount issue. They pledged themselves, if returned to power, to remonetize silver, making it equal to gold at a ratio of 16 to 1. The Republicans declared for a single gold standard. Each party was divided over the issue. The " Gold Democrats " nominated a ticket of their own, while many western Republicans supported Mr. Bryan. The Re- publicans carried the day, their candidate, William McKinley of Ohio, being elected president. Four years later (1900) the so-called gold-standard act was passed, which provided definitely that the monetary standard of the United States should be the gold dollar of 25.8 grains, nine-tenths fine. The experiences of the United States in its monetary legis- lation has been paralleled in every other modern nation. Every one of them has experienced the same difficulties, particularly in trying to maintain a bimetallic standard. England was the first to adopt the single gold standard (1816). Other European nations held back. Finally one by one they had to abandon their attempts to keep gold and silver at a fixed ratio, until now every country of any great importance is on a gold basis. Federal Reserve Bank notes. — The final settlement of the silver question went far to stabilize our monetary system, but it did not add elasticity to our money. Finally, under the stress of a panic (1907), the large banks of the country issued clearing-house certificates on their own credit backed by the commercial paper which they had in their vaults. It was at once seen that this pointed to the solution of the vexed problem of elasticity. Accordingly, Congress authorized a close study to be made of the monetary systems of Europe and America. The result was the Federal Reserve Bank Law of 1913, which provided that regional banks, twelve in number, can issue federal reserve notes to member banks in exchange for promissory notes given to them by their customers, and for other securities. The result is an elasticity in our currency. Now when a bank needs MONETARY LAWS 223 money to meet an extraordinary demand it can get it quickly from its regional bank. Further discussion of this system, however, must be deferred to the next chapter. Amount of Federal Reserve Notes in Circulation (In Billions of Dollars). 2% Jan., 191S July, 1915 o O 3 i 3 o >; i Federal Reserve Notes First Issue, November, 1914 Declaration of War, April, 1917 / Fourth Liberty Loan, October, 1918 Armistice Signed, November, 1918 / / / / __^ ^ ^ 2V4 iy2 Monetary stock of the United States. — As a result of the various monetary laws we have, exclusive of one-cent and five- cent pieces, ten different kinds of money, all based on the stand- ard gold dollar. Gold Coins. Gold Certificates. Silver Dollars. Silver Certificates. Fractional Silver Coins. Treasury Notes. United States Notes (greenbacks). Federal Reserve Notes. Federal Reserve Bank Notes. National Bank Notes. Gold certificates, as we have already seen, merely represent gold coin and may be exchanged for it at the treasury. The government is prepared also to exchange gold directly for silver dollars and fractional silver coins, and indirectly for 224 ELEMENTARY ECONOMICS silver certificates. The various notes too can be exchanged either directly or indirectly for gold. Thus we see that the holder of any form of American money can get gold for it, if he proceeds in the right manner. Because of this significant fact, Gresham's law is iroperative ; that is, there is no good and no poor money. EXERCISES AND PROBLEMS 1. Distinguish between the mint ratio and the market ratio. 2. Under what circumstances is gold undervalued? 3. Why is a system of bimetallism difficult to maintain? 4. What is meant by the expression "elasticity of the currency"? 5. Why was the mint ratio changed in 1834? 6. Which metal circulated between 1792 and 1834? after 1834? 7. What was the "crime of 73"? Who called it a "crime"? Why? 8. Why were silver dollars not being coined in 1872? 9. Who began the agitation to remonetize silver ? Why ? 10. Point out the essential differences between the Bland-Allison Act and the Sherman Silver Purchase Act. 11. Just how does the Federal Reserve Bank Law give elasticity to the currency? 12. Name the various kinds of money in circulation in the United States. 13. Why do all of them pass at their face value ? B 1. Enumerate the various kinds of metals used in making United States coins. a. Why are different metals used? b. Which of these metals does the government coin freely ? c. How does it get the other metals for coinage? d. Just exactly what does the expression ' ' monometallism ' ' mean ? 2. What procedure is necessary to exchange each of the various kinds of money for gold? MONETARY LAWS 225 3. Learn from some banker or newspaper the present market ratio of silver to gold. a. What changes have occurred in this ratio during the past few years ? 6. How did these changes affect the profits of the government in supplying fractional coins ? c. What would be the effect if the government should now return to bimetallism with a ratio of 16 to 1 ? C 1. During the free-sUver campaign of 1896 many believed that a change of the mint ratio to equal the market ratio, which was then about 32 to 1, would be desirable. a. What was the basis of this belief ? h. Would the adoption of the proposed change have solved the problems arising from bimetallism? Explain. 2. The story is told of a congressman who, when he heard a colleague state that the flow of gold from the United States was due to the action of Gresham's law, suggested that the law be repealed. Comment. 3. The operation of Gresham's law is closely associated with every- day business affairs. a. Of two dimes which is usually spent first, Canadian or United States ? h. Of two five-dollar gold pieces, one new and the other worn, which would be melted down for the purpose of making a ring? c. Would new or Avorn gold coins be shipped to England in pay- ment for goods ? d. Give definite reasons for each of the three answers. 4. How, if at all, would the value of money tend to be affected by : a. The opening of new gold mines? 6. An increase in the production of goods ? c. An increase in population ? d. An increase in the rapidity of the circulation of money ? e. A greater practice of thrift ? /. An increase in the volume of banking business? g. A change in the weight of the gold dollar? h. Increased efficiency in manufacturing ? 226 ELEMENTARY ECONOMICS SUPPLEMENTARY READING Bullock, Introduction to the Study of Economics, 3d ed., pages 294-314. Ely, Outlines of Economics, 3d ed., pages 248-269. Fetter, Economics, Vol. II, pages .56-60. Fisher, Elementary Principles of Economics, pages 223-232. Seager, Principles of Economics, pages 322-340. Seligman, Principles of Economics, 5th ed., pages 493-509. Taussig, Principles of Economics, 2d ed.. Vol. I, pages 265-289. CHAPTER XVII BANKING AND ITS HISTORY 51. Development of the Principle of Banking The medieval money-lenders. — Even in the Middle Ages, when industry was backward and most of the exchanges were carried on by barter, there were accumulations of capital in the form of gold and silver. Kings levied taxes and maintained treasuries ; and borrowed great sums with which to carry on war, to make crusades, or to provide dowries for their children. Merchants and traders, too, often needed more ready money than they themselves possessed. Consequently, there grew up a class of men, confined largely for religious reasons to the Jews and the Lombards, who, seeing the advantages of making loans, kept their wealth liquid — that is, in the form of gold and silver. Obviously, they were compelled to take meas- ures for protecting themselves against thieves. Soon, we may believe, their neighbors who had surplus funds of their own began to leave their money with these lenders for safe-keeping. Discovery of the balance. — In the course of time the money- lenders (bankers) made an important discovery. They found that their neighbors (depositors), possessing a variety of " money habits," left a portion of their combined deposits in safe-keeping all of the time ; that is, there was a balance, varying in amount from day to day, which the banker might use as if it were his own. With this knowledge in hand the banker em- ployed a portion of the balance in his own business or, as was 227 228 ELEMENTARY ECONOMICS more often the case, loaned it out to those who had need for money and who could give proper security. Here, it is be- lieved, is the origin of modern banking. In conducting his business in this manner the banker ran the risk of being unable to meet unexpected demands by his de- positors. To forestall such a calamity he had to be on his guard at two points. First, he made loans only for short periods of time and on good security. To use a modern banking term, he kept his funds liquid. Second, he kept a portion of the Bank Check. Ponton, itiasig., c-. ^ ^/ /^ / 191^ £o,2^^ pilgrim ^tate Panfe of Positon 62 balance as a reserve, the size of which depended on his experience as a banker and on the margin of risk which he cared to assume. Later, bankers developed a plan of issuing their own promises to pay (bank notes) to borrowers, undertaking to redeem them on demand. Here again they discovered that some of these notes would always be in circulation. Consequently, they kept on hand only enough gold or silver to redeem the notes as they were presented. Naturally the next step which the banker took was to grant business men the right to check on him, each securing the amount of his credit by giving the banker BANKING AND ITS HISTORY 229 security in the form of a promissory note. From this discussion it may be seen that the banking business is built on confidence, and that without it there would be neither balances nor note issues. The two chief functions of a bank, then, are (1) to receive deposits in the form of money or credit and in turn to lend money on credit, and (2) to issue notes. In this country no bank, strictly speaking, possesses the second function. Its business, therefore, is confined chiefly to the first function, though it may and does perform many minor ones. 52. Different Kinds of Banks Commercial banks. — The most common bank of all is the commercial bank, which may be a national bank, a state bank, or a private bank. It gets its name from the fact that it confines its business largely to business men, receiving their deposits and cashing their checks as they come in. Commercial bank loans are almost invariably for short periods of time, usually thirty, sixty, or ninety days. Hence its funds are liquid. Con- trary to the generally accepted notion among some classes of people, a commercial bank is anxious for its customers to borrow its funds for carrying on their business. Its profits depend almost entirely on its volume of loans, and its prosperity is intimately bound up with the prosperity of its customers. For these reasons the typical American banker encourages legitimate business expansion, and treats his borrowers with the greatest liberality consistent with safety. He is in fact more of a public official than most people think, for his business must be con- ducted with due regard for the well-being of society as well as for private gain. Savings banks. — A savings bank differs materially from a commercial bank. First of all, a true savings bank is a mutual affair conducted primarily for the benefit of its depositors, though in some sections of the country stock savings banks may 230 ELEMENTARY ECONOMICS be found. In states where there are no savings banks, that function is performed by the various commercial banks. Savings banks usually receive deposits of one dollar and upward on which they pay interest, do not pay out money on checks drawn against deposits, and may require a formal notice of several days before deposits can be withdrawn. Unlike com- mercial banks, savings banks usually contract loans for a year or more. This they are able to do for two reasons. First, they seldom have extraordinary demands made on them by depositors ; and second, their privilege to compel depositors to serve formal notice of withdrawal gives the opportunity to raise the required cash from the sale of mortgages, bonds, or other securities. Savings banks, by receiving small amounts and paying interest, encourage thrift; their aggregate deposits, exceeding five billion dollars, comprise an important source from which industry can draw capital. Trust companies and investment banks. — Many of the states charter trust companies, which perform in general the functions of commercial banking with some additional func- tions, such as executing trusts, and guaranteeing titles to land. Some of our largest banks are trust companies. A fourth type of bank, the investment bank, is usually a private institution, which concerns itself primarily in promoting the affairs of large industrial organizations. Such a bank is that of J. P. Morgan and Co. of New York. This bank has had a hand in organizing some of the largest industrial concerns in the country, notably the steel trust. It also takes an active interest in international banking, maintaining branch banks in the more important foreign financial centers. The Federal Reserve Banking Law, however, authorizes national banks to engage in foreign banking, and some of them, notably the National City Bank of New York, are rapidly de- veloping in this respect. BANKING AND ITS HISTORY 231 53. A Bank Statement Form of a bank statement. — Banks from time to time are called on for financial statements. Such a statement indicates clearly the condition of the bank making it. On one side are arranged the bank's resources ; on the other its liabilities. The totals must always he the same; that is, at all times a bank's resources exactly equal its liabihties. Since a bank as such is an inanimate and impersonal being it cannot own property or have debts in excess of its resources. This point usually proves to be a stumbUng block for students, which, however, can be removed with a little care. A great many items enter into a bank statement, but for our purpose we need only choose a few of the most important ones. Resources Loans and discounts Stocks and bonds . Real estate . . . Cash on hand . . Due from other banks Liabilities ,000 Capital $100,000 30,000 20,000 30,000 45,000 $725,000 Surplus .... Undivided profits Deposits . . . Due to other banks 40,000 10,000 550,000 25,000 $725,000 The statement explained. — Obviously the largest and most significant item among the resources of a commercial bank is loans and discounts. The difference between a loan and a discount is not important for our purpose in this connection. In one case the borrower receives the full amount of his prom- issory note, paying interest on his loan at its maturity; in the other, he has his note discounted, which means that he pays interest in advance, having it deducted from the amount shown on the face of his note. He may even offer for discount the notes of his debtors. This 'last transaction is known as re- discounting. A bank for one reason or another is likely, at any time, to possess stocks and bonds, though the smaller commercial 232 ELEMENTARY ECONOMICS banks prefer to confine their investments to loans and dis- counts. Real estate may include, not only the banking house and its site, but also other real estate items, such as a farm or a city lot. The meaning of cash on hand is obvious. Every commercial bank, in order to meet the daily demands of its depositors, must keep on hand a supply of money the amount of which is regulated by sound business practice as well as by law. Promissory Note. ^_Jj2/2ji^ Hansas Citp, ma^^^a^ y, /.Wf yy/ y^ Jfourtf) jg^ational Panfe of ikangag Citp. The last item among resources, which for all practical purposes, is a cash item, includes all money owed by other banks. Usually it may be had on demand. More difficult to understand are the items on the liability side of the statement. At first thought capital is likely to appear as a resource instead of a liability. It will be an aid to clearness if we remember that our statement represents the affairs of a bank and not the affairs of a banker. Since the bank owes its owners the amount of its capital stock, clearly, then, capital is a liability. Surplus and undivided profits are liabilities for exactly the same reason. The one is earnings set aside by BANKING AND ITS HISTORY 233 the directors to strengthen the capital ; the other, earnings which may eventually be either paid to stockholders in the form of dividends or placed in the surplus fund. Deposits possess two important aspects. First, a deposit may represent an actual deposit of money in a bank, which the depositor may withdraw on demand. Most people believe that a deposit may be made in no other way. In holding the belief, however, they are mistaken. Bank customers deposit not only money, but also the proceeds of their own promissory notes. A clothier, for example, fearing that he will not have enough money to meet the payments of his spring bills, may arrange with his bank to credit his account with the amount necessary to meet them as they come due, securing the bank with a promissory note. Thus, obviously, a deposit may be made without the use of money. Among bankers such a deposit is known as a created deposit ; and the checks drawn against it, as well as all other checks, are known as deposit currency. The last liability, due to other banks, shows the amount our bank owes to other banks. 54. Banking in the United States Periods of banking history. — Some attention has already been given to the banking history of the United States in so far as it relates to note issue — issuing of paper money. We may now properly examine with some detail the part these in- stitutions played in the industrial development of the country. As a mere matter of convenience, the banking history of the United States may be divided into four periods : (1) the United States banks (1791-1835) ; (2) state banking (1836-1863) ; (3) national and state banking (1863-1913), (4) Federal Reserve banking (1913-19 — ). The United States banks. — When the national government was organized in 1789 there were but four banks in the whole 234 ELEMENTARY ECONOMICS country. Alexander Hamilton, secretary of the treasury, and others recognized the need for a banking institution to assist the government in handling the public debt and in transmitting government funds from one section to another. Accordingly, in 1791 Congress and the President (Washington) chartered the first United States Bank, giving it, as far as the national government was able, a monopoly of banking for a period of twenty years. The capital stock was fixed at $10,000,000, of which the government was to own one-fifth. At the end of twenty years, when Congress refused to renew its charter, the bank went out of existence. During the next five years the banking business of the country was carried on by state banks — that is, banks operating under state authority. By 1816, however, it had become apparent that another United States Bank was necessary to provide a uniform and sound currency and to assist the government in handling the public debt created by the Second War with Eng- land (War of 1812). Accordingly, Congress and the President (Madison) chartered the second United States Bank. The life of the new institution was twenty years ; and its capital stock was $35,000,000, one-fifth of which was to be owned by the government. Besides issuing notes, the second United States Bank served as a depository for public and private funds, bought and sold domestic and foreign exchange, and made loans to business men. As yet the practice of using bank checks was confined to a relatively few. The bank, after getting a bad start, became prosperous and fulfilled the expectations of its supporters and friends. Unfortunately, it was drawn into politics about 1830. In 1832, Congress passed a bill re- chartering the bank, which President Jackson vetoed. The next year the government ceased to use the bank as a depository for public funds. At the expiration of its charter the second United States Bank became a state bank; and the second BANKING AND ITS HISTORY 235 experiment of the United States in creating a large central bank was at an end. State banking. — It must not be thought from what has been said that either of the two United States banks had enjoyed a monopoly. Numerous state banks competed with them, and opposed them at every point. This opposition, in fact, accounts in large measure for their do^vnfall. President Jackson's veto in 1832 caused many other state banks to be organized. During the next thirty years the banking business was characterized by over-expansion and uncertainty. Many banks issued notes with little regard for their redemption, and undertook financial enterprises out of all proportion to their resources. During this period, however, there was developed the idea of free banking. Hitherto it had been the practice for state legislatures to grant special banking charters, thus opening the door to favoritism and even graft. A free banking law, on the con- trary, permitted the establishment of a bank whenever a group of men who desired to do so could comply with a general banldng law. No doubt the result was an increase in the number of banks in the country. Yet bankers, as never before, felt the necessity of conducting their business on a high plane, since they were no longer protected by the difficulties which competitors would have in getting charters. Such was the banking situation when the Civil War opened. National and state banking. — The National Bank Law of 1863 did not abolish the state banks. It merely set up another system of banking alongside them. Since that time the two systems have grown and prospered; the chief difference be- tween them being, as we have seen, that national banks may issue notes secured by government bonds. The notion generally prevails that national banks are sounder and stronger than their state competitors. This, however, is the case only where, capital and business integrity being equal, state laws are more 236 ELEMENTARY ECONOMICS lax than federal laws. Fortunately, the states have become more strict in their requirements, until now many state banks are as rigidly supervised as are national banks. It is true that the largest commercial banks in the country operate under federal charters, yet some of the oldest and soundest banking in- stitutions in our largest cities are state banks. No account of banking since the Civil War would be complete without a notice of commercial private banking. In some of the states, banks, so far as the law is concerned, are as easily established as grocery stores or restaurants. In those states any man can become a banker by announcing that fact. To be sure, if he expects to do any business, he must secure a money safe and a set of books, and above and beyond all else he must possess the confidence of his neighbors and business associates. Such a bank often serves as good a purpose in a rural community as would a national or state bank. But in the cities, where even next-door neighbors are unacquainted, the private commercial bank . is usually undesirable. This statement is particularly true of unregulated private banks operated in foreign sections. There the people, being strangers to our methods of carrying on the banking business, look on a bank as a bank whatever may be the character of its organi- zation. They do not understand that national banks are carefully supervised by the federal government ; and state banks, by the state. Since private banks usually have no such supervision, customers doing business with them are ordinarily compelled to carry a heavier risk than would be necessary in dealing with a national or state bank. Federal Reserve banking system. — Profiting by an ex- perience of more than a half century, the federal government in 1913 provided for uniting the banking strength of the country without robbing the banking business of its competitive char- acteristics — that is, provision was made for centralizing bank- BANKING AND ITS HISTORY 237 ing without establishing a central bank. The bank law of that year — the Federal Reserve Bank Law — created a bank board to sit at Washington which should have general charge of the twelve regional reserve banks, one bank being situated in each of the twelve districts into which the United States is divided. It provided also a board for each of the regional banks, and required every national hank in the country to become a member bank of its regional bank. Furthermore, it permitted state hanks to become members, provided they carried on their business according to certain specified requirements laid down in the Reserve Law itself. We have seen already how this new law has favorably affected the elasticity of the currency. It is an improvement over preceding banking laws in other ways. First, it tends to keep the money of the country from collecting in the New York banks, as was formerly the case, by requiring each of the regional banks to maintain large reserves of gold. Second, it provides that member banks may, by complying with certain require- ments, borrow from their respective regional banks.. Third, it facilitates the collection of checks drawn on one bank and cashed by another, by providing that regional banks shall be clearing houses. Finally, but not the least important by any means, it reduces the reserves which national banks were formerly compelled to carry for the protection of depositors. From whatever angle we may regard the Federal Reserve Law and its operation, we must conclude that it is by far the best banking legislation the United States has yet enacted. 238 ELEMENTARY ECONOMICS EXERCISES AND PROBLEMS 1. Who were the Lombards? 2. Why did not the Christians ordinarily loan money ? 3. Why may a banker expect to have a balance in his hands ? 4. What is the difference between bank deposits and bank notes? 5. What are the essential differences between a commercial bank and a savings bank? 6. Why does a bank desire to loan its money? 7. What is the difference between a commercial bank and a trust company ? 8. What are the functions of an investment bank? 9. What is a " bank statement " ? 10. What is the difference between a loan and a discount? 11. Why is a bank's capital a liability? 12. Would the banker consider his investment a liability? Explain. 13. Define "bank deposit." 14. How does deposit currency differ from other kinds of currency? 15. How did the two United States banks differ from state banks? 16. Describe state banking between 1832 and 1863. 17. How did the National Bank Act affect banking in the United States? 18. In what respects did the Federal Reserve Banking Law improve banking ? 19. Just how, if at all, was this system instrumental in selling Liberty Loan bonds? 20. Locate the regional banks. 1. Make a list of the banks in your community. a. Which of these are : i. Commercial banks? ii. Savings banks? iii. National banks? iv. State banks? V. Private banks? BANKING AND ITS HISTORY 239 b. Which has the largest capital? the smallest capital? c. Which are members of the Federal Reserve Regional Bank? d. Which own bank buildings ? which rent ? 2. Get a bank statement from some banker or from a newspaper. a. Which kind of a bank is it (national, state, etc.)? b. Inquire of some banker about any items you don't understand. c. Divide the "cash on hand" by the "total deposits." i. What does the result show? ii. Do you consider this a safe margin? Why? d. Can you judge the age of the bank by its statement ? Explain. 3. Suppose you were one of ten persons to make equal deposits of money ($1000) in a bank, and that there are no other depositors. a. Will the banker be likely to loan any of this $10,000? Why? b. Is it correct to say that you have $1000 in this bank. Why? c. Would the other nine persons be justified in making the same statement ? d. Have the ten of you $10,000 in this bank? e. State exactly what each of the ten has. i. Is it money in the bank ? or ii. Is it the right to demand money of the bank? 4. Examine a bank check. a. How many names appear on the cheek? b. Notice that it is payable on demand. c. How many times and in what ways does the amount named in the check appear? d. What is the difference between a bank check payable to bearer and one payable to order ? e. Would a check be a legal claim if it were written on a sheet of paper twelve inches square? on the margin of a news- paper? on a cuff? C 1. Turn to any bank statement such as the one shown in this chapter, and determine how it would appear after each of the following trans- actions has been completed : a. A deposit of $10,000 in money. h. A 60-day note for $2000 is discounted at 6% and one-half of the proceeds is left on deposit. c. A check for $1000 is cashed. 240 ELEMENTARY ECONOMICS d. $3000 of the undivided profits are credited to stockholders. e. A note of $5000 is paid in cash. /. Bonds having a face value of $1000 are sold for $1050. 2. Explain why the following are liabilities : a. Deposits. b. Capital. c. Surplus. d. Undivided profits. SUPPLEMENTARY READING Bullock, Introduction to the Study of Economics, 3d ed., pages 279-288. Ely, Outline of Economics, 3d ed., pages 282-315. Fetter, Economics, Vol. II, pages 95-129. Johnson, Introduction to Economics, pages 280-302. Seager, Principles of Economics, pages 341-356. Seligman, Principles of Economics, 5th ed., pages 518-553. Taussig, Principles of Economics, 2d ed., Vol. 1, pages 331-399. CHAPTER XVIII DOMESTIC AND FOREIGN COMMERCE 55. Nature and Volume of the Trade of the United States Local trade. — Despite the elaborate territorial division of labor which this country enjoys, there still remains, in addition to retailing, a considerable volume of local trade. Most farmers have surpluses of eggs which they exchange for groceries, while many of them follow the practice of making a few extra pounds of butter each week for the local trade. Very often they buy and sell grain, hay, and foodstuffs among themselves, and even make barter exchanges. Likewise people in the towns and smaller cities have business relations differing somewhat from ordinary retailing. They exchange labor and even commodities. If we could include retailing under the head of local trade, it would, of its very nature, be the most important of all trade, since all goods except those exchanged directly are finally re- tailed. Inter-regional trade. — In a large country like the United States the value and importance of the trade and commerce among the various sections are very great. Each section specializes in a few products, thus creating surpluses which find their way into every other section. The best evidence of this movement is the enormous freight traffic of our railroads. Wherever we go we see trainload after trainload of goods moving in all directions : food eastward, manufactured goods westward, wheat southward, cotton northward. A hasty 241 242 ELEMENTARY ECONOMICS Foreign Trade of the United States (In Hundreds of Millions of Dollars) . 1860 1865 1870 1875 1880 1885 1890 1895 1900 1905 1910 1915 1916 1917 1 Exports T ^ "** "" — 1 , 35 1 / 1 1 Great War / / / / / • '* --- ' / ^ 1 / ^' / t t r 1 / 1 "] Favorable Balance of Trade [" > ^t < y --^ / '' ^, ■* y ^ ^ ^v / t** (Unfav >rable £ alancef y ^— ""* ^* — . '^*i ^•' |o I Trade ,, ^- .-• ' *•"« ..^ ^*^ b ''i^ >^ ;.^, , '^ "" ■^^i J> DOMESTIC AND FOREIGN COMMERCE 243 examination of the food and furnishings even of a modest home will show the significance of our inter-regional trade. Four everyday articles of food — sugar, salt, flour, and fruit — ■ may represent four widely separated regions of the country. Yet because they are so common we are likely to underestimate the complexity of an industrial organization that places them on our breakfast table every morning, and to overlook the methods by which every producer is paid for his product. Foreign trade. — Foreign trade is essentially no different from domestic trade. It rests on differences in climate, soil, capabilities of workers, and standards of living — that is, on territorial division of labor. Much of the domestic trade of our country resembles foreign trade in Europe, for the area east of the Mississippi River is approximately as large as all western Europe. Thus trade between New York and Florida is much like the trade between England and Spain. Mere distance, then, is not an important characteristic of foreign trade. As we shall see a little later, the chief difference between domestic and foreign trade is that the latter is always more or less hindered by national boundary lines, and by differences in languages, in customs, and in money units. Our chief interest at this point is not in the trade itself, but rather in the methods of settling accounts among individuals, among sections, and among nations. The getting of goods from the producer to the consumer is a matter of production ; the mechanism employed to make payments by the consumer to the producer is one of exchange. 56. Paying Teade Debts Payments in money. — Obviously the simplest method to be employed in paying trade debts is for the debtor to discharge his obligation with money. If, as is often the case, the debtor should hold obligations against his creditor, he can discharge 244 ELEMENTARY ECONOMICS his debt by paying the balarice in money. It is a common practice in many rural sections for a farmer to buy his suppHes on credit, selhng his surplus products at harvest time to the merchant from whom he had purchased supplies. The two accounts are compared at regular intervals and the balance. paid in money. Payments in bank checks. — A more common practice, in most urban communities at least, is for debtors to discharge their obligations with bank checks. In that case the local bank, supposing for simplicity there is but one, becomes a clearing house for the settlement of local accounts. As the checks come in, the bank's bookkeeper merely credits the amounts of the checks to the accounts of those who present them and charges the same amounts to the accounts of those who drew them. It often happens that during the same day the maker of a check will deposit, for credit, checks of other persons which have been paid to him by his debtors. We might extend this illustration until it should become extremely complex. Yet two facts essential to a proper understanding of paying trade debts would remain unaltered. (1) Many obligations are discharged in modern industrial society without the direct payment of money. (2) Ultimate trade balances must always be paid in money. Open accounts and trade acceptances. — Inter-regional trade debts are usually handled in a somewhat different manner. Sellers of goods (goods, wares, merchandise, or agricultural products, including live stock), such as manufacturers and jobbers, may have their accounts paid in one of three ways. They may, as has been the general practice in the United States since the Civil War, simply sell to their customers on open account, depending on each customer to discharge his obligation at the expiration of some specified period, as thirty, sixty, or ninety days. Under such circumstances the only DOMESTIC AND FOREIGN COMMERCE 245 evidences of indebtedness in the possession of the seller are the entries on his books, the correctness of which, if dispute should arise, it may be difficult to prove. The Federal Reserve banking system, however, provides for trade acceptances, which differ from open accounts. In addition to charging the buyer with the amount of his bill, the seller sends him a trade acceptance bearing certain specified promises previously agreed on, which the buyer formally accepts by signing it. The acceptance now possesses all the characteristics of a promissory note, which the holder (seller) may discount at his bank or at the Federal Reserve Bank. Trade acceptances are recognized by business men as being superior to open accounts. They relieve sellers from the necessity of carrying undue risk, in- crease the borrowing power of creditors, make commercial accounts more liquid, and compel buyers to meet their obligations at maturity. Domestic bills of exchange. — Some sellers resort to a third method to collect from their debtors — a domestic bill of ex- change. Let us suppose that a corn-buyer in Iowa has an order for a carload of corn from a cattle-feeder in Pennsylvania. As soon as he has loaded the car he gets from the railroad com- pany a bill of lading which specifies among other things the amount of corn in the car, the name of the consignor (shipper) and the name of the consignee . He then draws a draft (domestic bill of exchange) on the ^ consignee in which he orders him to pay at sight or at the end of some stipulated period, such as sixty days, the purchase price of the corn. Now the shipper is ready to visit his banker. He presents the draft and the bill of lading to the bank, which credits his account with the amount named in the draft. There are now three parties known in the transaction, the drawer (shipper of the corn), the drawee (buyer of the corn), and the payee (banker). The Iowa bank now sends the draft with attached bill of lading to some bank 246 ELEMENTARY ECONOMICS in the neighborhood of the drawee. This bank presents the draft to the drawee, who either pays the amount named in it, if it is a sight draft, or if it is a time draft, he accepts it by Domestic Bill of Exchange. ^ ^^^ Yy Jz^Ay J/^;/p. Q/r//^./^/ ^^y 3Y ul/^^TA^JAu^y. - / k Money Draft Machinery Fig. 3. Foreign bills of exchange. — Generally speaking, foreign bills of exchange resemble domestic bills of exchange. Foreign bills, however, have two features which domestic bills do not have. First, there is the necessity of converting one standard of money into terms of another standard — that is, a bill drawn in dollars payable in London, for example, must have its amount changed to pounds sterHng. Second, the length of time required and the expense involved in shipping gold from one country to another are usually greater than would be the case within a country. 57. The Balance of Trade Par of exchange and the gold points. — To simplify matters let us confine our attention in this discussion to trade between the United States and England. Let us also assume that all 248 ELEMENTARY ECONOMICS sales are made with the agreement that debts are to be paid in London in sterUng exchange. It is first necessary to determine the yar of exchange between these two countries. This, however, is a simple matter. It is done by dividing the weight of the fine gold in a dollar into the weight of the fine gold contained in an English pound. The result of the division is 4.866. Translated into terms of dollars the par of exchange is $4,866. A second preliminary notion is the gold points, called by some authorities the gold exporting points. Under normal conditions the expense involved — interest, insurance, and freight charges — in shipping S4,866 in gold from the United States to England is about two cents. Consequently, we say that the upper gold limit is $4,886 and the lower limit, $4,846. This two-cent margin above and below par is much less than it was a century ago ; and we may expect it to decline still- more in the future with a decline in the risks involved in trans- portation, with quicker transportation, and with a reduction in the normal interest rate. Fluctuations in the rate of exchange. — We are now pre- pared to examine the causes for fluctuations in the rates of exchange. Let us suppose that New York importers desire to buy a million dollars worth of sterling exchange with which to discharge their debts in England. Let us suppose also that exporters have sold to English merchants nine hundred thou- sand dollars worth of goods payable in London. Let us suppose further that there are no banks. The importers will seek for men who have debts owing to them in London, while the ex- porters will be on the lookout for men who are under obligation to pay debts in London. The former desire to buy credit, the latter to sell credit. Obviously, the importers could ship money to England with which to pay their debts, and the exporters could have the money owing to them in London shipped to DOMESTIC AND FOREIGN COMMERCE 249 New York. In either case there is an expense of two cents per sterling pound — that is, the highest price importers will pay for the right to draw money in London is $4.886 ; the lowest price which exporters will accept for the right is $4,846. If we follow out our assumption we can conclude that the ex- porters sold all their rights to draw money in London at or near the upper gold point, while the balance owed by the im- porters, one Hundred thousand dollars, was shipped. Banks serve to facilitate matters. An exporter, like our Iowa corn-shipper, sells his foreign bill of exchange to his bank, Foreign Bill of Exchange. FIRST ^ ^{WiJI^ J New rork,®^^^.m JeA / mL days after G>Zf^^^ of this FIRST of Exchange {Second Unpaid) pay to the order of Value received and charge the same to account of ^ LIVERPOOL IMPORTING COMPANY <^/T^.(p/0 o-(M«<»io a ai a> o o o o oo oooo— t: ——— — —— — oooflocooocooo still greater impetus to pro- duction. The heavy demands of the government, coupled with the withdrawal of milhons of men from industry, pushed prices still higher, which no doubt a return to normal conditions will lower. EXERCISES AND PROBLEMS A ■ 1. Why cannot the value of all commodities, gold included, rise or fall at the same time? 2. What is the relation between the price level and the value of an ounce of gold? 3. How does a change in the price level affect individual incomes ? public incomes ? 4. What is the relation of changing price level to social unrest ? 5. Why is it desirable to measure fluctuations in price level? 6. What is the principle underlying the use of index numbers ? 7. How are index numbers applied to business affairs? 8. Just how does the shifting of the price level affect industry? 9. Why should a crisis usually be found associated with high prices ? 10. What is meant by the expression "overproduction"? 11. What has been the experience of the United States in panics? 278 ELEMENTARY ECONOMICS B 1. Call to mind some experiences of your own in which the price level has appeared to change. 2. Learn from inquiry how a rise of the price level has affected some stationary income such as a pension or an annuity. a. Does the person receiving the income realize that it has declined in purchasing power? b. If so, what is his (or her) explanation of the decline? i. Is it based on changes in value of commodities? ii. Is it based on changes in the purchasing power of money? c. Which of the two explanations appears to be the more correct ? d. How, if at all, could the receiver of this stationary income protect himself (or herself) from a loss in its purchasing power ? e. What is the likelihood that changes in the purchasing power of stationary incomes will discourage savings and investments ? 3. Assume prices for eleven important commodities for two given years, say 1914 and 1919. a. Compare the price level for the two periods. b. How would the change in price level have affected an annuity of $800? c. How, if at all, would you expect this change to affect wages in general? wages of any particular group? d. How should wages be so adjusted as to place the wage-earner in 1919 on the same income level he had occupied in 1914? e. What change should be made in the weight of the gold dollar in order to give it the same purchasing power in 1919? 1. If, during a single night, the general price level should double, what would be the immediate effect and the long-run effect on the income of each of the following : a. Wheat-grower? b. Owner of a gold mine? c. Day laborer? d. Jewelry manufacturer? e. Civil War pensioner? /. High school student? FLUCTUATIONS OF THE PRICE LEVEL 279 2. Since the fluctuations of the price level tend to create social unrest, why does not the government set the prices of all commodities and fix labor incomes ? 3. Account for the fact that wages invariably react slowly to a rising price level. 4. Why does the government make little or no effort to prevent crises ? 5. Discuss the practicability of changing the weight of the gold doUar to correspond with changes in general price level. SUPPLEMENTARY READING Bullock, Introduction to the Study of Economics, 3d ed., pages 333-348. Ely, Outlines of Economics, 3d ed., pages 317-343. Fetter, Economics, Vol. II, pages 48-54. Fisher, Elementary Principles of Economics, pages 144-164. Seager, Principles of Economics, pages 375-382. Seligman, Principles of Economics, 5th ed., pages 456-473. Taussig, Principles of Economics, 2d ed., Vol. I, pages 290-309. PART V DISTRIBUTION OF THE SOCIAL INCOME CHAPTER XXI DISTRIBUTION OF WEALTH IN THE UNITED STATES 65. Differences in Wealth and Income Meaning of distribution, — Distribution, as we have already seen, means the sharing of the products of industry among the factors of production — land, labor, and capital. The shares that go to these factors are respectively, rent, wages, and in- terest. Usually two other portions are set aside. One is the profits of the enterpriser ; the other, the taxes of the govern- ment. Thus, in reality, we must account for five shares in distribution; and in doing so we must exercise supreme pre- caution, for no other phase of our economic life has called forth such bitter controversies or created so much social unrest. Distribution and free land. — We may say, with reasonable assurance, that the problem of distribution is a modern one. At least its importance, so far as the United States is concerned, is now many times greater than it was a century or even a half century ago. The explanation is not difficult. It is, like a great many other explanations of American developments, intimately associated with the opportunity each man had to settle on practically free land. As long as it was not only possible, but also fairly easy for each one to acquire a farm for himself, he who was dissatisfied with his share in distribution had a fair opportunity to go on the land where he would control all of the shares. Hence, little was heard of the poorly paid laborer, the bloated capitalist, or the rich landlord; for all labored; almost all were capitalists in the sense that they owned 283 284 ELEMENTARY ECONOMICS their tools, and all had a fair chance to get land. Laborers in those days felt little or no need of organizing to secure a larger share in the distribution of products. They saw very clearly in most cases the straight road that led from the employee to the employer class. Capitalists as such were few. Hence, the share in distribution that went to them was comparatively small. As the amount of free public land became less and less, the importance of distribution became greater and greater. The supply of free land not only declined, but also, what is more important, it receded westward, making itself unavailable to the workers and capitalists of the East. First the worker lost the opportunity to escape to the land, and next, owing to developments in production, he lost control of his tools. , Then he began to lean heavily on capital for support; and then capital began to play an increasingly important part in pro- duction. Here we find for the first time in the history of the United States sharp lines separating the factors of production, and hence, the shares in distribution. Present-day distribution. — Under more primitive conditions the typical, individual income, as we have just seen, was made up of several indistinct parts. For his labor he received wages ; for his land, rent ; for his capital, interest ; and for his business skill, profits. He had, at the best, but a hazy notion of the size of each share. The same situation still holds in agriculture. No farmer can estimate even with any degree of accuracy just what portion of his yearly income ought to be attributed to wages, to rent, to interest, or to business ability ; and no one else can do it for him ; for the four factors, being embodied in one person, are inseparable. In most other productive lines no such difficulty is encountered. There, we can usually deter- mine what portion of the product each factor gets, though the problem of how much each factor ought to get still remains un- solved. There, for example, the wages of the laborer approxi- DISTRIBUTION OF WEALTH 285 mates his total income. His returns in the form of rent or interest are likely to be comparatively small. Likewise, to a less degree, the income of the landowner (not farmer) is rent ; of the capitalist, interest ; and of the enterpriser, profits. Here we have the cause for distribution tending to become a class problem. Each group, having lost an interest in the shares of the other groups, strives to increase its own share at their expense. The result is mutual misunderstanding. Labor complains of the greediness of capital, while capital in turn complains of labor's unwarranted demands. Neither appre- ciates the part the landowner plays, while all three resent having to pay tribute to the enterpriser, whose duty it is to bring them together for productive labor. Distribution of income and wealth. — We may, with no regard to the source of the income of each class, also examine the dis- tribution of incomes and wealth among classes. Yet it would not be far wrong to say that the lower income groups are made up almost entirely of laborers, while the higher income groups comprise, for the most part, landowners, capitalists, and enter- prisers, and the so-called professional people. Professor King estimates incomes among American families as follows : Annual Income Percentage of Families Receiving Less than this Income Annual Income Percentage op Families Receiving Less than this Income $200 .07 $1500 90.31 300 1.04 1800 93.67 400 7.17 2000 94.86 500 16.70 2400 96.18 700 38.92 3000 97.42 1000 69.43 3600 98.10 1200 81.69 4000 98.39 An examination of this estimate — for it can be nothing more than an estimate — reveals many significant facts. First, the 286 ELEMENTARY ECONOMICS annual income of more than two-thirds of the famiHes is less than $1000 each, while less than one-tenth of the families each enjoy an income of $1500 or more. Second, the number of families having yearly incomes of as much as $3000 is relatively small (2.58%). To be more specific, a small tradesman or a skilled mechanic with an annual income of near a thousand dollars, even though a portion of it be derived from savings or land, belongs to the upper minority. Also higher-paid railroad em- ployees, such as train conductors and locomotive engineers, must be grouped among the highest one-twentieth. Another carefully prepared estimate (made in 1918) throws light on the number of families and individuals in each income group. Estimating the total number of incomes at 27,000,000 and the aggregate income of all groups at $38,000,000,000, the following conclusions were reached : Average Income Number op Families Per Cent of Total Income Per Cent op No. OP Incomes $ 850 (or less) . 7,275,000 12.3 26.9 1,000 . . . . 3,500,000 9.4 12.9 1,250 2,250,000 7.4 8.3 1,500 1,600,000 0.3 5.9 2,000 385,000 2.0 1.4 3,000 167,000 1.3 0.6 4,500 72,000 0.8 0.3 7,500 26,500 0.5 0.1 12,500 45,000 1.5 0.2 75,000 1,787 0.4 0.1- 1,000,000 100 0.3 0.1- 2,500,000 34 0.2 0.1- 5,000,000 (and over) 10 0.3 0.1- It is to be noticed in the above table that the number of annual incomes of $1000 or less (column 2) is relatively twice as great (column 4) as the share of the total income received by that group (column 3) ; also that as the average income rises it DISTRIBUTION OF WEALTH 287 enjoys an increasingly large proportion of the total income (com- pare columns 3 and 4). Expenditure of family incomes. — Quite as important as the differences in the sizes of incomes is the manner in which families of various groups expend their respective incomes. Some years ago the United States Commission of Labor made the following estimate : Object op Expenditure Food Rent Clothing . . . Fuel Lighting . . All other purposes Income Under $200 Per Cent 49.64 15.48 12.82 7.07 1.01 13.98 Income $300 AND Under $400 Per Cera 45.59 14.98 14.14 6.04 0.98 18.27 Income $500 AND Under $600 Per Cera 43.84 15.15 15.27 5.63 0.97 19.14 Income $700 and Under $800 Per Cera 38.89 15.60 16.33 4.42 0.88 23.88 Income $900 and Under $1000 Per Cera 34.34 14.96 16.84 4.00 0.74 29.12 Income $1200 AND Over Percent 28.63 12.59 15.71 2.57 0.45 40.05 Many other investigations of incomes have been made and all seem to point to the same general conclusion : 1. As the income of a family increases the relative amount spent for food decreases. 2. Approximately the same relative amount is spent for rent irrespective of size of income. 3. Increase in income is accompanied by an increase in the amount spent for education, recreation, amusement, etc. 66. Some Social Problems Arising from Distribution Class antagonism. — We can now see that the members of our modern industrial society may be grouped according to the shares of income — wages, rent, interest, and profit ; also according to total income irrespective of its source. In either case there is a cause for class antagonism, particularly on the 288 ELEMENTARY ECONOMICS part of those whose incomes are relatively low. Any self- respecting head of a family with an income of less than eight hundred dollai's — there are millions of them — is likely to regard such inequalities of income and wealth as appear in the preceding table as a rank social injustice ; while those having still lower incomes are tempted to hate an industrial system that permits such differences. They naturally take the position that no one family deserves or needs an income equal to the total income of a fairly large city composed of laborers. The most stolid of them know perfectly well that the interests of industrial society are not furthered by permitting one man or one set of men to appropriate for their own use hundreds of millions of dollars' worth of wealth. By a simple calculation they see single Americans controlling more property than the entire total taxable property in a city like Des Moines or Indian- apolis. They see the income of a small group of capitalists equal the total income of all the laborers of a city like Cleveland or Denver. What wonder, then, that there is social unrest and class antagonism ! Entirely different is the usual attitude taken by the mem- bers of the higher income groups toward their less fortunate brethren. They, on their part, are satisfied with existing conditions ; and in this self-satisfaction lie the dangers that always mark class antagonism. Too often they explain misery and poverty by saying that it is the result of indolence, intemperance, or vice ; failing to see, however, that intemper- ance, for example, is a result as well as a cause of poverty. Fortunately, serious-minded men and women are attacking the problem of inequality in a business-like manner. Instead of scattering alms among the poorly paid, as did the sultans of Arabian Nights fame, they are teaching men and women how to help themselves, not only by increasing their incomes, but also by spending them to better advantage. Few expect or DISTRIBUTION OF WEALTH 289 even desire to see property holdings or incomes made equal. Few object to the comforts and luxuries of the rich. Few dream of an industrial millennium in which no distinguishing marks shall separate one group from another. Many, however, are determined that the dirty tenement must go, that the sub- merged tenth must be made self-supporting, that free and universal education must become a reality, and that every one must have a fair chance to develop himself industrially. If this spirit of service and helpfulness ever pervades the upper income groups, which it must if American society and democ- racy are not to be endangered, we may expect, not necessarily a leveling of incomes, but certainly a more equitable distribution. Industrial inefficiency. — Either extreme in the matter of income tends to make its possessors industrially inefficient. It is trite to say that a man whose income is insufficient to nourish his body properly is an inefficient worker. Since millions of men and even whole families have such an income, it follows that great numbers of workers in this country are inefficient. Employers contend that they cannot pay more wages until efficiency is increased ; but efficiency cannot be increased without an increase in wages. Here clearly is the place for society to do what no employer feels justified in doing and what few inefficient workers can do for themselves. Already, as we have seen, individuals and private associations are working in this direction. But this is not the work of one or two or of a hundred. Society alone can reap the reward of a widespread elevation of industrial efficiency. Society, therefore, ought to bear the expense of elevating it. Again, too high an income also tends to industrial inefficiency. Nothing has yet been found that can take the place of the desire for comfort and moderate luxury as a stimulus to economic activities. A high salary, for example, is a fair indication of efficiency, but not, by any means, a cause of efficiency. 290 ELEMENTARY ECONOMICS Proportion of all Homes Owned Free, Owned Encumbered, and Rented, by States: 1910. MAINE N.H. Si PA. f MICH. 9 WIS. h- S. CA 5 NtOR ^ J ALA. ;" MISS. : OKLA. ' TEX. MB;/x/yyx/>y'x/>''X/'x,vy'X/'x/y/>v> m:yvv>vvx.v'x/'./-x/y:/v-x//yy>vxx :i-\r^>yj'yj '^yyryyyi/yyyi/yyA V- !vti^^xjfv^yy^ywy'>!AftCT ^ZrBaia2EL'BZt^2ZL SfflB/yy/x/x/yxx/x/'/x^Z^^Z^ Ytf^^ -r ww^^^i^y^Jr^yJiiii wyy^wyiA »icx^^^xxy/x/yx/x/x/y>yx/>vy/: Wimmr/vjryyyyxj'^/z/zzz/zyz. ^^^inzzaazaizaizajaA QZ""'** No account of the causes of in- dustrial inefficiency would be complete without some no- tice of the effects of indolence, intem- perance, and vice. It seems to be a law of human nature that all work is more or less irk- some. Fortu- nately, a majority of people possess enough will power to overcome indo- lence. There are those, however, who prefer privation and even hunger to manual or mental labor. Their great- est need is ambi- tion. The drinking of alcoholic liquors also destroys effici- ency. Scientists are agreed that no one can be at his best with the least trace of alcohol in his sys- tem. Managers of DISTRIBUTION OF WEALTH 291 large industrial plants are unanimous in their testimony that the drinking habit among employees is the chief source of their inability to get a maximum production. Fortunately, this source of inefficiency, owing largely to the stand taken by employers, is rapidly disappearing. Vice, which likes to associate itself with alcohol, also destroys industrial efficiency. Gambling, loafing in billiard rooms, and sexual abuses unfit one for economic activity. Midway between these sources of inefficiency and the ineffi- ciency itself, is illness. First comes indolence, intemperance, or vice ; next, bodily or mental illness, and then, industrial in- efficiency. The indolent man is usually ill or easily made so when there is a prospect of work. Intemperance leads to all sorts of ills. So also does vice. There are those unfortunates, however, that must not be blamed for their physical or mental shortcomings. Some are born incapacitated for work, some are the victims of greed or accident, some are undernourished in spite of their best efforts and intentions. These deserve first consideration at the hands of society. 67. Proposed Solutions Voluntary. — We have already noticed the attempts of in- dividuals and associations to equalize distribution by carrying charity and education to those who need help. We may now examine briefly some ambitious attempts to secure for various classes, particularly for workers, a larger share of the social income by securing for them a portion of the shares that usually go to other factors of production. Cooperation in retailing, particularly in foodstuffs, has had some success in this country, though to a much less extent than in England. The chief aim of cooperative enterprises is to eliminate the enterpriser, and thus to divide the profits which would ordinarily go to him among the members of the enterprise. 292 ELEMENTARY ECONOMICS Even among the higher income groups, attempts are often made by individuals associated together to increase their incomes in the same way. Cooperative dairying, cooperative grain-buying, and mutual fire insurance organizations are examples. Compulsory. — Society has through taxation already done something in the way of equalizing distribution. The poorest child in New York has as many privileges in the city parks as has the largest taxpayer. Nor are distinctions made in the matter of schools, of police protection, of fire protection, of sanitary regulations, or of garbage collection. Such public activities as these, which are supported by public taxation, relieve the lower income groups of a heavy burden, thereby securing for them indirectly a larger portion of the social income than they would otherwise get. Still another method of lessen- ing inequalities in distribution by taxation is shown by the inheritance, excess-profit, and income taxes. In each case, those who have much are compelled by force of law to give, indi- rectly to be sure, to those who have little. The socialists, about whom we shall have more to say farther on, propose that the state itself assume all the functions of the capitalist and the enterpriser, thereby securing for the workers the entire amount of interest and profits that now goes to these two classes. For that reason socialism is a distributive problem. It is significant to note in this connection that many of the enterprises recently undertaken by the government, such as the construction of irrigation dams and ditches, are, despite the opposition that has developed against anything socialistic;, advocated by socialists. EXERCISES AND PROBLEMS A 1. Define "distribution." 2. Why are profits and taxes shares in distribution? 3. What is the intimate i-elation between free land and distribution ? DISTRIBUTION OF WEALTH 293 4. What shares in distribution went to the pioneer farmer ? 5. Why is it said that free land receded westward ? 6. Just how did the laborer lose control of his tools ? 7. What during the past century has caused the Lines separating the shares in distribution to become more distinct? 8. Why is there such a great inequality in wealth ? 9. Suggest some method for removing this inequality. 10. What is the relation between income and industrial efficiency? 11. Name and evaluate the causes of inefficiency. 12. Why is society interested in the efficiency of the individual? 13. Just how does taxation tend to equalize wealth and income? B 1. List the names of the heads of families in your block. a. Estimate the income of each family. b. Are there any noticeable variations among these incomes? c. Which families belong to the higher income groups ? the lower income groups ? d. How does the average family income compare with the average family income of your community? e. How does your own family income compare with the average family income of your block? 2. Estimate roughly the incomes of the families represented in your class. With this estimate as a basis, what are your conclusions as to the diffusion of education among the masses ? 3. Interview persons in different income groups. a. Do you find any spirit of class antagonism ? Analyze. b. What reasons do you find advanced to explain inequalities ? c. Inquire about solutions of the problem. d. Formulate your own conclusions in the matter. 4. From observation and inquiry determine as accurately as possible how business men regard the following : a. Drinking of intoxicating liquors. b. Irregular hours. c. Habits that destroy mental or physical strength. d. Expensive tastes. e. Idleness and loafing. 5. Suppose you were asked to devise a scheme for equalizing incomes through taxation. 294 ELEMENTARY ECONOMICS a. What public enterprises would you create or enlarge ? b. How would you regard the extension of public education? c. Would you favor siipplying free bread or free meat? Why, or why not ? i. How does c differ from b? ii. Which would meet the greater opposition? d. Would you exempt all except the very rich from paying taxes ? Why? C 1. "Poverty is an individual matter. No man need be poor in a country like the United States, where industry constantly cries for laborers." Comment on the above statement. 2. Many well-to-do men argue that it is little or no concern of theirs if individuals refuse to be temperate and thrifty. a. Is this a correct attitude? b. Under what circumstances is society to blame for intemper- ance? c. Would the well-to-do be profited financially by an increase in temperance or thrift ? Explain. d. Should "the strong bear the burdens of the weak" ? 3. What is the relation of each of the following to attempts to dis- tribute wealth and income more equally through ta.xation : a. Free public education? b. City parks? c. City milk inspection? d. Public highways? e. Pure-food laws? /. Free band concerts? g. Public recreation grounds ? SUPPLEMENTARY READING Bullock, Introduction to the Study of Economics, 3d ed., pages 411-423. Ely, Outlines of Economics, 3d ed., pages 384—406. Fetter, Economics, Vol. II, pages 470-490. Fisher, Elementary Principles of Economics, pages 476-486. Seager, Principles of Economics, pages 170-197. CHAPTER XXII RETURN TO LABOR (WAGES) 68. NONCOMPETING GrOUPS OF WORKERS Existence of these groups. — Practically every one engaged in economic activities may be said to be a worker, and as such to receive wages in some form. Employees are not thd only ones who earn wages. A portion of the income which goes to enter- prisers of all sorts — farmers, merchants, independent mechanics, and professional men — is wages. These workers may be divided into rather distinct groups, and each group in turn divided into an indeterminate number of subgroups. At the top are captains of industry, manufacturers, merchants, pro- fessional men, clerks, and public officials. This group is distinguished from the other group by its relatively high income level. Among economists it bears various titles, such as " soft- handed," " kid-glove," and '' white-collar." This group may be divided, according to income, into two subgroups : captains of industry and a few highly paid professional men comprise one ; in the other subgroup are found the rank and file of professional men, clerks, and all others whose labor is not characterized by hard manual work. The second group, the " hard-handers," enjoys less income as a group, though in this respect, its higher paid members stand ahead of the lower members in the first group ; that is, the two groups overlap in the matter of income. In this lower group may be distinguished three subgroups : (1) highly paid manual laborers, such as railroad engineers, expert machinists, and glass blowers ; (2) the rank and file of skilled 295 296 ELEMENTARY ECONOMICS laborers ; (3) unskilled laborers. The first of these three sub- groups comprises the aristocracy of the manual laborers. Its members enjoy a much higher income level than do millions of professional men, farmers, merchants, clerks, and public officials. In fact, those i,n subgroup number two, and even some in the third, rank higher in the matter of income than the poorest paid workers among the soft-handed group. The question may properly be asked why workers do not promptly overcrowd the higher-paid positions, thereby tending to equalize the incomes of all, irrespective of the nature of their employment. An adequate answer involves many consider- ations. First, only those of superior ability can possibly reach the higher levels among the " soft-handers." Second, a ma- jority of workers are unable or unwilling to undergo the long preparation necessary to attain the positions held by the pro- fessional groups. Third, many persons are not physically fit to perform the labor required of such workers as engineers. Fourth, the opportunity of advancement is greater in the " soft- handed " group.. Fifth, many persons prefer minor " positions " which do not bring them into contact with the dirt and grime of industry to a higher-paid "job" which, in their minds, is dirty and degrading. We say that these groups are noncompeting because the members of one group do not compete against the members of another group. The members of each group, however, compete among themselves. This they do both directly and indirectly. Ordinarily, the purchasing power which the typical consumer has to distribute among the members of any one of these groups is fixed within rough limits. What goes to one member must be withheld from another. Money spent for dental work might have been used to pay an architect for drawing a house plan. Indirect competition is also important. Physicians, to be sure, cannot step into the law courts as attorneys, but their children RETURN TO LABOR (WAGES) 297 can easily become lawyers. Likewise, the children of lawyers may take up ;the practice of medicine. In either case the tendency is, if not to stay in the same profession, to remain in the same noncompeting group, which, in the long run has the same effect. Movement among the groups. — Certain forces tend to accel- erate the movement of individuals from one group to another, while other forces tend to retard such movement. We like to boast of the opportunities which every boy has in this country to follow his bent in choosing a trade or profession. Un- doubtedly there are good grounds for this boast. Examples of individuals rising from poverty to affluence are not wanting. Here a great captain of industry began life as an office boy ; there a noted physician sprang from the ranks of the illiterate. Less noticeable, because they are less extreme, are the millions of cases of individuals moving from the ranks of unskilled labor to the subgroup above, from farm laborer to farm tenant to farm-owner, from the poorer paid professions to the higher paid ones. Thus there is a constant movement upward. There is also a movement downward, much less in volume and extent than the one upward, and not nearly so important. It is a filtering process largely caused by poor health, misfortune, indolence, lack of ambition, and intemperance. These movements among industrial groups meet more obstacles than a great many people suspect. The son of an unskilled laborer, other things being equal, has a poorer chance to become a physician, than has the son of a lawyer or a mer- chant. He lacks, first, a proper home environment ; second, an ambition to attain a relatively high industrial position; and, third, the means of getting the necessary preparation which members of the upper groups must have. An examination of the industrial groups of any community will bear out this statement. Suppose we study the family histories of a group 298 ELEMENTARY ECONOMICS Average Number of Wage-Earners by Industries : 1909. HUNDRCOS or THOUSANDS T1MBE.R ,.i.::;.,;:"::;:,i';,::::':,'::r'„::::'::.::i:: ■^D MACHINE-SHOP xz: COTTOM QOODS CARS AND GENERAL SHOP CONSTRUCTION. AND REPAIRS SITING AND PUBLISHING :.:i ' , , c l?ON ANO STEEL, STEEL WORKS, AND WOLLmfl MILLS MEN'S CLOTH BOOTS AND SHOES ' WOOLEN, WORSTED, AND FELT GOOD9 WOMEN'S CUOTHlNGi HOSIERY AND KNIT GOODS FURNITURE DSI SILK AND Silk goods SLAUGHTERING AND MEAT PACKINO ELECTRICAL MACHINERY PAPER AND wood PULP AUTOMOBIUCS COPPER, TIN. AND SHtET IROM CARRIAGES AND WAGONS GARBLE AND STONE WORH CANNING AND PRESERVING - LIQUORS. MALT AGRICULTURAL IMPLEMENTS CONFECTIONERY car's, steam RAILROAD //br'Ass ano bronze RETURN TO LABOR (WAGES) 299 ni carpenter's apprentices. Some are almost sure to come from the ranks of unskilled labor, while the rest belong to the skilled mechanics group. Only occasionally should we find among them the son of a lawyer, doc,tor, merchant, or teacher. Suppose further that we should question the students of medical colleges concerning the industrial status of their parents. A few, but only a few, might answer that their respective fathers were carpenters, or plumbers, or electricians, or even unskilled laborers. Most of them, however, would say that their respec- tive fathers were professional or business men, such as lawyers, dentists, teachers, merchants, and farmers. Education and income. — If, as we have said, the students of a professional school or college belong to the upper income groups, the question naturally arises. What is the relation be- tween public education and income f One of the reasons usually given for expending large sums of money on public education is that it helps to equalize industrial opportunity — that is, public education tends to start all alike in the industrial race. Just how far is this reasoning valid ? It is a well-known fact that an educated person, other things being equal, is more efficient than one uneducated ; also that increased efficiency leads to higher incomes. It is equally well known that education beyond the grades, certainly beyond the high school, requires an outlay of money which only a relatively few families can afford to make ; and these families, let us not forget, already belong to the higher income groups. Hence, education is not only a cause, but also a result of relatively high incomes. If we should question the existence of this close mutual relationship, we have but to turn for corroborative evidence to the income schedules which appear in the preceding chapter. There we find a large majority of families getting less than a thousand dollars a year each, while millions of them are com- pelled to subsist on half the amount. Families with such in- 300 ELEMENTARY ECONOMICS comes find it increasingly difficult to keep the children in school as they advance from one grade to another. By the time they reach high school age but few of them remain. One after an- other of those who enter high school withdraw to go into in- dustry, so that bj^ the time the senior year is reached the number left is greatly reduced. The next educational step they find the most difficult of all. So difficult is it that few have the courage to undertake it, for " going " to college or a technical school for a long period of years is not to be faced lightly even by those who have financial backing. Under such conditions it is not difficult to understand why the higher income groups have a virtual monopoly of higher education ; and why, as a result, education depends on income quite as much as income depends on education. Our notion of the ease with which individuals are able to pass from lower to higher income groups is often based on a mis- understanding of the nature of these groups. We point to the fact that a certain successful business man began life as a newsboy, which may or may not be significant in this con- nection ; for not all newsboys by any means belong to the ranks of unskilled labor or even of skilled labor. So it is with boys that sweep out offices, run errands, clerk in stores on Saturdays, or spend their summers on the farm. It is repeatedly pointed out that the farm and the small town serve as excellent sources from which successful city business men are recruited. There is no denying that this has been the case ; yet, true as the statement is, it should not carry the implication that these boys were drawn from the lowest income groups. It would be nearer correct to say that a majority of them, despite their success, never leave the group in which they were born ; for, from the standpoint of education, there is practically no differ- ence between a family income of two or three thousand dollars a year and one a hundred times as great. RETURN TO LABOR (WAGES) 301 Per Cent Attending School in the Total Population and in Certain Classes 6 to 20 Yeabs of Age : 1909-1910. too eo eo 70 60 7 e 9 10 II 12 13 14 IB 16 17 18 19 20 40 20 10 • X ne \ / "^"^ y^< ^^^;^ / \J\\ 'I'l r <€> \ p\ \ 1 A ( / \ 7 i / \ \\ ' / \ \ \ i \ 1 \\ / \ ^ \\ \\ / \ '\ V ^ A / \ \\ \ \ ^V\^ ' \ \ \ k '\ \ \ \ .. \' ^•^ 100 90 80 60 60 o 40 30 20 10 8 iO II 12 13 14 15 16 17 18 19 20 ACE 302 ELEMENTARY ECONOMICS Choosing among income groups. — Obviously, the boys belonging to the higher income groups have an advantage over those of lower groups in the matter of choosing their life's work, and hence, roughly speaking, the size of their wage income. To simplify the problem let us assume that a normal boy about to be graduated from high school is trying to decide whether he will enter business with the view in mind of becoming an enter- priser, of studying for one of the professions, or of learning a trade. What shall be the determining factor in the decision? First of all, he must decide to his own satisfaction the definition of success. If to have command over capital and labor, and to enjoy a relatively high income is the goal, then the answer must be business. If, on the other hand, his goal is a moderate income combined with leisure and a certain kind of content- ment, he ought to choose a profession or a trade. In making the choice, however, certain well-known facts concerning the probability of success should be taken into account. Business is much like a lottery with its few capital prizes and many blanks. For every successful business man in a large way there is a multitude composed of mediocre ones and failures. . Every large city has a throng of struggUng shopkeepers to set over against its relatively few merchant princes. The boy, there- fore, that would enter business must be prepared to assume the risks which it necessarily entails. In the professions and trades, however, the situation is different. There no huge money prizes and but few blanks exist. Any one with ability enough to complete a high school course can look with a reasonable degree of assurance toward making a comfortable living and a fair financial success as a lawyer, doctor, teacher, engineer, architect, or skilled mechanic. Beyond this a few can go, reaching the financial level occupied by high-salaried officials of railroad or insurance companies ; but none can hope to amass the wealth of a Rockefeller or a Carnegie. Now and then we find a pro- RETURN TO LABOR (WAGES) 303 fessional man who has by his own skill and talent accumulated a million dollars, but this is not a capital prize in an industrial society which includes in its membership thousands of million- aires. 69. Efficiency and Wages Conditions affecting efficiency. — Differences in efficiency of workers may be easily observed on every hand. Sometimes these differences exist in the workers themselves. Two men working side by side at similar tasks often produce unequally. One is alert and nimble ; the other, sluggish and awkward. One takes pride in his work, the other grumbles at his lot and watches the clock. Each is the creature of birth, training, and habit. Industrial efficiency varies also from place to place among workers of equal ability. One manufacturing plant, for example, provides recreation grounds, rest rooms, lighted workshops, and sanitary surroundings. Here workers, other conditions being the same, can produce more than can an equal number in a plant less well equipped. Differences among peoples also play an im- portant part in efficiency. A Chinese coolie is no match for an American laborer. One is listless, uneducated, and small of stature ; the other, directly opposite in every detail. In China it is a common sight to see four or five men lifting a load which one man in this country could lift with ease. Wages and industrial efficiency. — Since there are such great differences in degrees of efficiency, the question naturally arises : What is the relation of efficiency to wages ? In the case of the two workers side by side, the more efficient one, if they were doing piece work, would get the higher wage. If, as is often the case, the two men had previously agreed to work for the same wage, then no difference would exist, the wages of either being not greater than the contribution of the less efficient to the product. Differences in wages may or may not occur when similar work is 304 ELEMENTARY ECONOMICS «» Copyright Underwood & Underwood, New York A Group of School Children Being Fed at Public Expense. RETURN TO LABOR (WAGES) 305 being carried on in different plants. Clearly, the workers in the better equipped plant will turn out a larger product than those in the poorer plant ; yet if the difference is absorbed in paying for athletic fields, rest rooms, and other devices for securing efficiency, the employer has no more to distribute among his employees than does the owner of the poorer plant. We may say, however, with assurance, that physical conditions which contribute to efficiency usually earn more than their cost. When we compare the efficiency of one nation with that of another we are sure to find the most efficient group getting the largest wage. Coolie labor, which we have noticed as being inefficient, is poorly paid. A Chinese unskilled laborer can be employed for a few cents a day, and even at that he is highly paid, for his efficiency is extremely low. The relation between wages and industrial efficiency is mutual. Stupidity and awkwardness may result, as we noticed in the preceding chapter, from low wages. An underfed work- man is in no shape to do his best. He is listless and he soon grows weary with his task. It is an easy matter to say to him that the way to secure an increased wage is to increase his efficiency. It is an entirely different matter, however, to per- suade him to make additional efforts without providing him with sufficient food, clothing, and shelter to make the efforts possible. Fortunately, enterprisers like Henry Ford have had the courage to try the experiment of increasing efficiency by increasing wages ; and we are told by unbiased observers that these experiments, particularly the one at the Ford plants, have succeeded. Here may be the solution of one of the most per- plexing problems in American industrial life. Women in industry. — One of the pressing industrial ques- tions of the present generation is the relation of the efficiency of woman labor to wages ; and this question has been accen- tuated by conditions growing out of the Great War. The slogan 306 ELEMENTARY ECONOMICS of organized labor has been " equal wages for equal work," meaning thereby that no distinction should be made between men and women in paying wages for similar work. For a variety of reasons the scale of wages for women has generally been lower than that for men, even when the two groups were doing the same work. Often, however, work appears to be the same when it is not. The mere fact that a man and a woman fill similar industrial positions is no conclusive test of their relative efficiency. One, for example, may need less super- vision, or is a more steady worker, or has greater ambition to succeed. Such factors as these are important and must be taken into account in any thoroughgoing discussion of the relation of woman labor to wages. We can do nothing more in this connection than to point out the problems. 70. Methods of Wage Payment Time and piece wages. — The most common method em- ployed to remunerate labor is to pay according to time or to the labor done. Obviously, time wages are based on piece wages for a group if not for the individual. The same industry often employs both methods. Farmers usually pay their regular help by the month, but employ men to gather corn by the bushel. About coal mines also the wages of some employees depend on output ; of others, on time. Organized labor gen- erally opposes piece wages on the ground that the most efficient workers are paid but a fair wage, while those less efficient are underpaid. For this position it is criticized by those who argue that a time wage takes from the highly efficient and gives to the inefficient. Yet as labor leaders say, the interests of the few who might possibly profit from a system of piece wages must give way to the larger interests of the whole group. Piece wages in some industries are impossible. What scheme could be devised for paying house carpenters according to their RETURN TO LABOR (WAGES) 307 output? Ordinarily, the product of one cannot be separated from the products of others on the same job. Likewise the store clerk, while he may get a commission on his sales, must be paid time wages for his time spent in trying to sell goods, and in doing various other duties about the store. We may say, there- fore, that piece wages can be best paid in those industries where each worker's product is distinguishable from the products of his fellow workers. Profit-sharing. — Numerous schemes have been devised by employers to increase output by giving the employees an interest "»a Counesy of Postum Cereal Co., Battle Creek, Michigan Model Workman's Cottage. This is but one of many homes which a large manufacturing plant in the United States helped its employees to build. in the product. One of these, profit-sharing, because of its importance, deserves passing notice. This plan in general provides that at stated intervals each employee shall receive, in 308 ELEMENTARY ECONOMICS addition to the wages which he has drawn regularly each week or each month, a share of the profits of the business. Usually no provision is made for the employee sharing in any loss. Numerous concerns in the United States have tried out this plan with varying success. Some have condemned it after trial, others have praised its effect on their business. Its highest development has taken place abroad. In Paris, for example, a company of house painters instituted the plan years ago with the result that in time the employees themselves owned the business. Organized labor has generally opposed profit-sharing on the ground that an employer can pay bonuses at stated periods only by withholding from his employees what is rightfully theirs in the form of regular wages. EXERCISES AND PROBLEMS A 1 . What is the difference between wages, and wages of management ? 2. On what ground may workers be divided into hard-handed and soft-handed groups ? 3. Why are railroad men often referred to as the "aristocracy of the hard-handed group" ? 4. What is meant by the expression " noncompeting groups"? 5. Just how do doctors and lawyers compete? plumbers and electricians ? 6. What is the relation between education and income ? 7. What are the exact facts about the movement of persons from one income group to another? 8. What should be one of the guides in selecting a profession or a trade ? 9. What is the relation between efficiency and wages? 10. How does the working environment affect efficiency? 11. Why is the cheapest labor often the highest paid? 12. Why do business men usually refuse to pay inefficient employees more than they earn, trusting thereby to increase their efficiency ? 13. Should men and women receive the same wages for the same work? Discuss. RETURN TO LABOR (WAGES) 309 14. Wliat is the difference between piece wages and time wages ? 15. Which is the more fundamental? 16. Why does organized labor generally oppose the piece-wage system ? 17. Define "profit-sharing." 18. What does profit-sharing attempt? B 1. Determine by inquiry the occupation or profession of the father of each lawyer and doctor in your community. a. How many were lawyers, doctors, or business men (including farmers) ? b. How many were unskilled laborers ? c. Explain any marked differences that appear between the occupations of the fathers of the younger men on your list and the fathers of the older ones. d. Formulate conclusions on your investigation as to competition between members of the same noneompeting group. 2. Let each student in the economics class state the profession or occupation he expects to pursue. a. How many expect to compete directly with their respective fathers ? h. How many expect to enter other lines in the same non- eompeting group? c. How many expect to cross over into a group not occupied by their respective fathers? d. What does this examination show regarding the ease with which lines between noneompeting groups can be crossed? 3. Make a list of several natives of your community who have made exceptional success in business. a. How did their respective fathers rank in the community as to income? as to wealth? b. What were their educational opportunities? c. Considering differences in time and circumstance, can they offer their children better educational opportunities than ohey themselves enjoyed? 4. Call to mind boys engaged in selling newspapers, in sweeping out offices, or in similar occupations. a. From what income groups do these boys come ? 310 ELEMENTARY ECONOMICS h. How many are the sons of well-to-do parents? c. How many attend high school? d. How does society in general regard this kind of work by boys? e. How do the boys themselves regard it ? C 1. The statement is often made that many college graduates may be found in the bread lines of our cities. a. What effect on the popular mind has the discovery of one college graduate begging for food ? h. Does such a discovery make an interesting news item ? Why ? c. What is the probability of magnifying such a discovery? d. What is the probability of such a beggar pretending to be a college graduate? e. How, therefore, should the statement be regarded ? 2. "It can easily be proved from history that a majority of the successful men of the United States were reared on farms and attended country schools." o. Until recent times, where else could an American youth be reared ? b. Where else, except in the country school, could the previous generation get an education? c. What is likely to be the trend in coming generations? 3. Discuss the need of profit-sharing in American business affairs, its probable success, and the results that may be expected. SUPPLEMENTARY READING Bullock, Introduction to the Study of Economics, 3d ed., pages 446-460. Ely, Outlines of Economics, 3d ed., pages 427-443. Fetter, Economics, Vol. I, pages 211-231. Fisher, Elementary Principles of Economics, pages 433-463. Johnson, Introduction to Economics, pages 151-172. Seager, Principles of Economics, pages 244-261. Seligman, Principles of Economics, 5th ed., pages 411-428. Taussig, Principles of Econom,ics, 2d ed., Vol. II, pages 147-157. CHAPTER XXIII THE LABOR PROBLEM 71. Rise of Organized Labor Rise and growth of the trade union. — The forces which have combined during the past generation to cause employees to or- ganize were of sHght importance prior to the Civil War, and even for several years after its close. Then the number of laborers in any one establishment was relatively small ; and the oppor- tunity to hold conventions, poor. Besides, the abundance of public land provided an escape for those who worked for wages. Accordingly, only a few small unions were organized prior to 1860, and these practically disappeared during the four years' conflict that followed. The return, in 1865, of more than a million soldiers to the ranks of industry, the rapid disappearance of desirable and accessible public lands, and the steady increase in the size of manufacturing plants, soon began to create a feeling, particularly in the eastern states, that laboring men ought to organize for mutual protection and advancement. About this time there were held several labor conferences which declared (1) for an eight-hour day, (2) for restriction on immi- gration, (3) for reduction of the tariff, (4) for a relatively small standing army, (5) for early payment of the national debt, and (6) for the granting of public land only to actual settlers. Gradually each trade or craft organized, until at the present time practically all skilled trades have their unions. Knights of Labor. — The unions which we have just noticed are organized according to trades ; that is, the carpenters, the 311 312 ELEMENTARY ECONOMICS plumbers, the bricklayers, and othe'rs, have each their own organization. In 1869, however, a Philadelphia tailor, U. S. Stevens, projected an entirely different kind of organization, known as the Knights of Labor, in which trade distinctions should not appear. Membership at first was restricted to garment workers, but later it was thrown open to all except bankers, lawyers, professional gamblers, and employees in the manufacture or sale of intoxicating liquors. Membership in a trade union was no bar to becoming a "Knight." Thus, the two types of organization grew side by side without organic connections. The aims of the Knights of Labor were to secure better conditions for its members through participation in politics rather than by the strike or boycott. The slogan of the organization was, "An injury to one is the concern of all." Thousands of " lodges " scattered throughout the country were the local units. These were closely supervised by the national officers. Thus, the organization was highly centralized — that is, the local lodges had little autonomy. In other words, authority came from the top. American Federation of Labor. — Membership of the Knights of Labor reached its highest point (about five hundred thousand) in 1886. Already it was feeling the oppositional influence of the American Federation of Labor, which had been organized in 1881. A little later the older organization began to decline in influence ; at the present time its place in labor affairs is un- important. The two organizations are unlike in several respects. The Federation favors the strike and boycott as weapons for fighting the battles of labor. Moreover, as its name suggests, it is a federation of trade unions, each governed by its own laws and managed by its own officers. Individual members of the trade unions and even the local organizations have little direct connection with the Federation. Besides the national organization there are state federations and city federations. THE LABOR PROBLEM 313 Practically all of the leading trade unions of this country be- long to the Federation, the most notable exception being the railroad brotherhoods. Since its inception, the American Fed- eration of Labor has been instrumental in improving conditions of labor and in raising wages. Industrial "Workers of the "World. — A sharp distinction must be made between a trade union and an industrial union. One includes only workers in a particular trade. The other, and in this respect it resembles roughly the Knights of Labor, includes all workers of an industry such as mining or building. Such a union is the Industrial Workers of the World (I. W. W.), which contends that the interests of labor are too closely knit together to permit its members to be divided among numerous trade unions. Hence, the two types of unions are opposed to each other. The officers of the American Federation of Labor during the past few years have repeatedly criticized both the aims and the acts of the L W. W., and warned members of trade unions not to affiliate themselves with that organization. The I. W. W. in its battles with employers has used a new weapon known as sabotage, which may be defined as a " strike on the job " — that is, a strike without quitting work. This is accomplished by disabling machinery or spoiling the product. In either case the employer soon knows that he is being fought by an unseen foe, for seldom is the guilty individual ever caught. Conse- quently, he must do one of two things : comply with the demands of his men or get a new labor force. 72. Aims and Methods of Organized Labor Bargaining power of the worker. — The more zealous advo- cates of the laissez-faire doctrine in business have insisted that the wage any worker should receive ought to be determined by a bargaining process between the worker and his employer. Less than a century ago this method prevailed in all industries, and it 314 ELEMENTARY ECONOMICS still persists in fixing the wages of farm laborers, rural school- teachers, and store clerks. Obviously, the worker is not on a level with his employer in the matter of bargaining. A factory owner who employs one hundred hands can usually get along very well if one of the hundred should quit work ; also the hiring of a hundred-and-first man is of no great consequence to him. In either case his net income would ordinarily be affected but slightly. The hundred-and-first man, however, has no such choice. He must find an employer. He is likely to offer his services eagerly, while the employer may meet his advances with indifference. Hence, under such circumstances, the employer, if he bargains with each of his workers separately, has a decided advantage over them. This significant fact laborers, clearly recognized long before their organization into unions. It is not surprising then that the chief aim of organized labor is to unite workers for the purpose of bargaining as one man. This is known as collective bargaining. Under these conditions the employer can no longer regard the hiring of laborers with in- difference ; for now instead of dealing with each individual separately, he finds it necessary to deal with the whole force as one man. Their refusal to work threatens his profits. This group, therefore, can bargain on an equality with the employer. Specific demands of organized labor. — Speaking generally, the demands of organized labor may be grouped under three heads : (1) higher wages, (2) shorter working day, (3) better working conditions. Since there must be some relation be- tween the productivity of labor and the size of its wage, the question naturally arises : From what fund shall an increase in wages be paid? It may come from what the employer has formerly enjoyed as profits, from consumers in the form of higher prices, or from the laborers themselves — provided an increase in wages increases efficiency. Usually, we may safely assume, the increase comes from the first or second fund, probably a THE LABOR PROBLEM 315 portion from each of them. The shortening of the work day, however, appears to have been generally offset by an increased efficiency ; that is, a man turns out as much product in ten hours as in twelve hours, owing to his ability to increase his hourly exertion during the shorter day. Likewise, in many occupations an eight-hour day is as good as a ten-hour day, and in some kinds of labor a working day of seven or even six hours may be employed to advantage. The relation of improved surroundings to output is not so easily determined. Those in a good position to judge, however, claim that in many cases, perhaps in most, employers are compensated in the long run for their expenditures in this direction. Open and closed shops. — Less important, largely because it is less widespread, is the demand of organized labor for the closed shop. The closed shop is one in which only union laborers are employed, while in an open shop membership in a union is not required. Obviously, organized labor prefers the former kind of shop, but often circumstances are such as to force it to permit its members to work alongside what union men call " scabs." Occasionally, employers will not hire union men under any circumstance. Thus in reality there are three kinds of shops : open, closed, and nonunion. Closely related to the question of open and closed shops is the question of open and closed unions. Some unions are closed ; that is, the difficulty of gaining admission, because of the long apprenticeship required or because of the high entrance fee charged, is so great as to give its members a virtual monopoly of their trade. Others are said to be open. Almost any one can on the payment of a nominal fee become a member. Many authorities believe that here lies the solution of the problem of organized labor, since the ends of both employer and employee, they contend, would be gained by making all shops closed and all unions open. 316 ELEMENTARY ECONOMICS Methods employed to force the demands of labor. — The chief weapon employed by organized labor to get higher wages, shorter working hours, and better surroundings has been,' and is now, the strike. To strike means to quit work in a body. No other method has been found to be so effective, since the employer as well as his striking employees feels the evil effects of idleness. Usually strikers have the moral support of the general public, which may be secured and retained by advancing moderate demands and by abstaining from violence. Often in spite of the exercise of due care, individual strikers, and even groups, breaking away from restraint, hurt the cause by com- mitting acts of lawlessness. Especially is this likely to happen when the employer attempts to continue his business operation by employing nonunion laborers, known in union circles as " scabs." Sometimes these nonunion men are bona fide workers; sometimes they are strike-breakers, who follow the dangerous calling of filling temporarily the place of men on a strike, irrespective of the nature of the work. They run great risks and are paid high wages. When unemployed they usually loaf in low-class saloons, ready at a moment's notice to assist in breaking a strike if the employer is willing to pay their price. The claim is frequently made that the loss of wages caused by strikes is greater than the increases gained by the strikers that win. This claim, while it has some foundation, is exaggerated. From the best available data on strikes and their cost, we are justified in concluding that the per capita annual cost of strikes in this country during the past generation, if spread over all employees, is small ; also that if the cost be confined to organized labor it is npt prohibitive or even excessive. To say that strikers have lost a billion dollars in wages since 1880, is esti- mating the cost in one way ; to say that the per capita annual cost to all employees is one dollar, is estimating it in another way. The leading authority on English labor history asserts THE LABOR PROBLEM 317 318 ELEMENTARY ECONOMICS that the annual strike loss sustained by English employees is not greater than the loss caused by an extra half-holiday each year ; that is, that the loss sustained by each English laborer is equal to a half day's wages. Dissatisfied employees may also resort to the boycott, which simply means that they, assisted by their friends and sympathizers, refuse to buy goods of the employers against whom they have a grievance. Public opinion and the strike. — Both employers and labor leaders recognize the importance of securing the moral support of the general jDublic, for the side which secures it almost always wins. The public, however, usually has little concern in a strike unless it is directly affected. The machinists on a well- known railroad went on a strike a few years ago and remained out for several years. Few people gave it any attention. Even those residing in the same city where the shops of the road were located scarcely noticed it. While the strike of the machinists was dragging itself out, the street-car men of the same city quit work because their demands for higher wages had been refused. Within an hour the whole city was aroused. Meetings of prominent citizens were called. Committees were appointed to try to arbitrate the differences between the car company and its striking employees. Even the mayor brought the influence of his office to bear on the struggle. Within twenty-four hours the matter was settled, the strikers getting the wage increases which they. had demanded. We may ask why the people took such an active interest in one strike and practically none what- ever in the other. One compelled them to walk to their work ; the other, as far as they could see, did not concern them. In one, the people sympathized with the strikers ; in the other, their sympathies were not enlisted. Employers' weapons. — It would be a mistake to suppose that the employer is defenseless against his striking employees First, there are various employers' associations, such as the THE LABOR PROBLEM 319 American Manufacturers Association, organized among other purposes for mutual protection against the demands of labor. Second, an employer may, if his property is threatened with injury, call on the courts for protection. If the court acts favorably, the presiding judge issues an injunction against the striking employees, which in the past has proved to be an effective weapon against labor. Violation of an injunction is contempt of court, punishable by fine or imprisonment or both at the discretion of the judge issuing the decree. Conse- quently, organized labor regards the injunction as dangerous to the best interests of the workers, and urges at every oppor- tunity the passage of laws that will take such broad powers out of the hands of judges. Finally, the employer has the support and protection of the state, which guarantees to each one the right to carry on his business as he sees fit, as long as he keeps within reasonable bounds. 73. Methods of Settling Labor Disputes Conciliation. — A variety of methods for settling labor dis- putes has grown up in this country. One of these is known as conciliation. Usually neither party to a labor dispute can see the merits of the other's claims. Oftentimes a third party, either an individual or some government agency, can, by talking with the strikers and then with the employer, remove many of the differences separating them. In other words, the conciliator merely tries to bring the two disputing parties to a mutual understanding of the issues involved. Conciliation implies persuasion, not force. It means investigation, not award. Voluntary arbitration. — As soon as the employer and his striking employees are agreed to try to settle their differences peacefully they are ready for arbitration. The usual practice in this country has been for each side to select an equal number of arbitrators, the arbitrators themselves selecting another so as 320 ELEMENTARY ECONOMICS to avoid the possibility of a tie vote. Each side then presents its case. The strikers explain their grievances, and submit as much proof as possible in an effort to prove that the employer ought to remove their cause. If the question of wages is the cause of the strike, the men are likely to argue not only that they are entitled to a raise because business conditions will Copyright Underwood & Underwood, New York An Arbitration Board. permit it, but also that their present wage is inadequate to support their families properly. The usual contention of the employer is that any increase in wages will ruin his business. The arbitrators soon learn, if indeed they do not know already, that the claim of each party is likely to be greater than its expectation. This is but natural since arbitration means com- promise. It is their business then to sift all the evidence offered and even to make investigations of their own. Finally, they THE LABOR PROBLEM 321 render a decision, which ordinarily both sides accept in good faith. Occasionally, however, one or the other party to the agreement, becoming dissatisfied with the award, finds a pretext for undoing all that the arbitrators have done. Compulsory arbitration. — In some countries, particularly New Zealand and Australia, arbitration of labor disputes is a government matter. There the state steps in when troubles arise, and compels the employer and his employees to submit their differences for settlement to the proper public officials. Under these conditions strikes seldom occur. Nothing so strict has been attempted in the United States. Here both employer and employees are inclined to resent any interference on the part of the government in what they call their '' private affairs." Some of the states have adopted partial measures by providing permanent arbitration boards to serve if mutually agreeable to both the employer and his striking workmen. No board, however, has power to compel either party to the dispute to submit its differences. In other words, it can usually do little more than passively look on unless called in by both sides. Whether or not we shall ever go as far as New Zealand or Australia has gone in the matter of compelling the arbitration of labor troubles is a mooted question. Just now the employers regard this extremity much more favorably than do employees ; and naturally so, for the last few years has seen a remarkable growth in the strength and solidarity of organized labor. 74. Labor Legislation Need for labor legislation. — Up until a century ago prac- tically all labor legislation favored the employing classes. The evils growing out of the English industrial revolution, however, forced Parliament to give attention to legislating for employees, particularly for women and children. Gradually there grew up in England a system of labor laws that had for their end the 322 ELEMENTARY ECONOMICS regulation of hours and conditions of work. Women, for example, were forbidden to work in mines, while the employ- ment of children under a certain age was prohibited. The influence of organized labor in that country, aided by a com- mendable spirit among the governing classes, has done much during the past century to make English labor laws the best in the world. It was not until much later that the lawmakers of this country took up seriously the question of labor legislation. Massachusetts was the first state to make a thorough investiga- tion of labor conditions, upon which some excellent laws were later based. Other states followed the lead of Massachusetts until now all of them have done something in the way of regulating conditions of labor within their riespective juris- dictions. Here, as in England, chief attention has been given to women and children. Neither of these classes is as competent as men to protect its own interests. Neither is as physically strong. Neither is organized so well. Moreover, the well- being of the next generation depends on the strength and vigor of the women and children of this generation. Obstacles to labor legislation in the United States. — Legis- lation for the protection of workers in this country has encoun- tered several obstacles, three of which deserve notice in this connection. First, the typical American has always strongly in- sisted on the right to pursue his own economic course without the interference of government agencies. Even when he found himself at a disadvantage, he was enough of a fighter to want to stand on his own feet. Second, the great number of lawmaking bodies in this country (Congress and forty-eight state legis- latures) makes uniform legislation impossible. Consequently, each state legislature hesitates to enact any labor law that might drive industry into some other state. A state law, for example, which would set the age limit of children permitted to work in cotton factories at a higher point than some neighbor- THE LABOR PROBLEM 323 ing state had set it, would run the risk of losing some of its cotton factories. Third, the courts of this country, both state and federal, have declared many labor laws to be null on the ground that they were contrary to the Constitution of the United States or to the constitution of the state to which they applied. As a result, the will of the people has been thwarted, unconsciously to be sure, by constitutions drawn before the need for labor legislation had arisen. Character of labor legislation in the United States. — In spite of these obstacles, the national government and the various states have enacted a great many labor laws. In many of the states women and children are fairly well protected, not only against unscrupulous employers, but also, strange as it may seem at first, against themselves. In passing on these laws, however, the courts have often been compelled to shut their eyes to the Constitution of the United States, which guarantees the right of every citizen to make contracts. In the case of men they have not been so lenient. In fact, except in the most extreme cases, or where the public interest was directly in- volved, the courts have usually declared those laws to be un- constitutional which restrict the rights of adult males to enter into whatever labor contracts they please. Yet it seems safe to say that the trend of the times is toward restrictive labor legislation for men, for it is practically impossible to'separate the welfare of the individual from the welfare of society. Hence we have laws abolishing the manufacture of certain kinds of matches ; others regulating hours of labor in deep mines ; and still others, restricting the number of hours railroad crews may work. 75. Foreign Immigration Immigration and labor. — Immigration, since it affects wages and. standards of living, is essentially one of the aspects of the labor problem. Since the organization of our government in 324 ELEMENTARY ECONOMICS 1789 approximately thirty million foreigners have come to the United States. Practically every adult member of this vast army became a wage-earner as soon as he arrived, competing directly or indirectly with the wage-earners who were already here. Until a generation ago most of the immigrants came from northwestern Europe, chiefly from Great Britain, Ireland, Ger- many, and the Scandinavian countries. Just as this flow of human life to the new world slackened, another from southern Foreign Immigration into the United States : 1890-1918. and central Europe began, and continued with increasing volume until the outbreak of the Great War. This we call the " newer immigration." Its chief source was southern Italy, Greece, Austria-Hungary, and Russia. Economic aspects of the newer immigration. — The newer immigration, as contrasted with the older one, has several important characteristics. First, its members are unskilled, without funds, and highly illiterate. Consequently, they have for the most part congregated in the cities and about coal mines. THE LABOR PROBLEM 325 They have filled the lowest industrial positions, and often worked for wages much below what a native worker would have accepted. Ig- norant of the laws and customs of the country they have suffered at the hands of unscrupu- lous employers and "bosses," being com- pelled to work long hours under revolt- ing conditions. Be- cause of these facts, organized labor looks unfavorably on un- restricted foreign immigration. Labor leaders see in it a weapon which may in time be turned against them by the employer. They see also, they say, the hopelessness of the task of trying to instill in the mind of the typical immi- grant from southern Color or Race, Nativity, and Parentage, BY States : 1910. T~x : I NATrve WHITE- NATIVE PARENTAGE ^-^^d^ FOREIGN-BORN WWTE 1 NATIVE WHITE -FOREIGN OR MIXED PARENTAGE ^^B NEGRO AND ALL OTHEtt 326 ELEMENTARY ECONOMICS Europe the importance of organization. This type of immi- gration, however, is somewhat of an asset which we must not overlook. It does the " dirty " work which Americans have come to regard with disfavor. It furnishes, without expense of rearing, a vast labor force. And finally it provides an annual market for hundreds of millions of dollars' worth of products turned out by native American workmen. Social aspects of the newer immigration. — Much of the opposition to the newer immigration would not exist, we may say with assurance, if it were possible, as it was with the older immigration, for the native stock to absorb it. The English, Irish, or German immigrant of the earlier period was much like the people he found here. All sprang from the same general stock. All had similar pohtical ideals. The typical Italian immigrant, on the other hand, cannot adjust himself so easily. To the average American he is a stranger, inferior in every way — industrially, socially, morally. He finds the door closed to him and his family. He remains Italian. What is worse, his children remain more or less Italian. In short, the American melting pot seems to have lost its heat. As a result he keeps with his own kind, clings to his own customs, manners, and language, and never really becomes a part of the broad current of American life. Because of his isolation, organized labor too often regards him as undesirable. As it is with the Italian immigrant so it is with practically all the immigrants from the other countries of southern and central Europe. EXERCISES AND PROBLEMS A 1. What three forces operated before the Civil War to prevent the organization of labor? 2. How did the war itself affect these forces ? THE LABOR PROBLEM 327 3. In what essential respects do the Knights of Labor differ from labor unions ? from the American Federation of Labor ? 4. Distinguish between a trade union and a labor union. 5. Why are the Industrial Workers of the World objectionable as an organization? 6. Why is "sabotage" such an effective weapon against the employer ? 7. Just why is the employee at a disadvantage in bargaining ? 8. How does collective bargaining remove this disadvantage? 9. Explain how a laborer can do more work in eight hours than in ten hours. 10. What are the three specific demands of organized labor? 11. How effective is the force of public opinion in settling strikes? 12. Why is the employment of strike-breakers so objectionable both to organized labor and to the public generally? 13. What is the essential difference between conciliation and arbi- tration? 14. How does voluntary arbitration differ from compulsory arbi- tration ? 15. What obstacles have hindered labor legislation in the United States? 16. Why have the courts distinguished between men and women in passing on the constitutionality of labor laws ? 17. Why in general does organized labor favor restrictions on foreign immigration ? 18. What is the chief cause of the general objection to the newer immigration ? B 1. Consult with an official of a local union. a. Get his viewpoint on the labor situation in general. h. Inquire about specific rules of work enforced by his union. c. Discuss with him the attitude of organized labor towards socialism. d. Ask him about any strike experiences he may have had. 2. Call to mind any industrial strike that may have been carried on in your community. a. Was the public vitally interested in the strike? &. Were strike-breakers imported? 328 ELEMENTARY ECONOMICS c. Did the strikers picket the plant in which they had formerly been employed? d. Which party to the strike was the more eager to arbitrate? e. Did the state make any effort to settle the strike? /. What was the outcome of the strike? 3. From a census report or from some other reliable source get statistics on the number of persons in your community who are foreign- born or who are native-born of foreign parentage. a. Which nationality shows the greatest strength ? b. Is the parentage of "foreigners" in your community above or below that of the United States ? your own state ? c. How many children of foreign-born parents attend your school ? 4. Ask each student in the class to state the nationality of his father, mother, both grandfathers, and both grandmothers. a. How many are "Americans"? b. Are any pure English, Irish, German, or Scotch? c. How many are descended from two or more of the four stocks ? d. Formulate conclusions as to the mixtures of these old stocks. 1. One of the cardinal policies of trade unionism is that all of the members of any union should, within narrow limits, receive the same wage. a. Does such a policy hinder the more skilled workers? How? b. How do labor leaders justify this policy? c. What determines the wage for such a group? d. Why should not the wage for the same kind of work, plumbing say, be the same for the whole United States? 2. Organized labor is often criticized on the ground that it opposes the introduction of new machinery and new processes. a. Is there likely to be any basis for this criticism? b. Would organized labor be justified in taking such a position? Explain. c. How would such a policy affect production? the wages of organized labor? the wages of unorganized labor? d. What would be your position in the matter if you were an employer? a member of a trade union? THE LABOR PROBLEM 329 3. Many of the wisest labor laws enacted by Congress and the state legislatures have been declared unconstitutional by the various courts. a. What is meant by the expression "unconstitutionality"? b. Where did the courts get this power? c. What procedure is necessary to make such laws constitutional ? 4. "America is a great melting pot in which the peoples of Europe are transformed into Americans." a. Explain what is meant by "melting pot." b. How effective is the melting process just now? c. What experiences caused this expression to be coined? d. Should it be modified in any respect? Just how? SUPPLEMENTARY READING Bullock, Introduction to the Study of Economics, 3d ed., pages 468-493. Ely, Outlines of Economics, 3d ed., pages 444-491. Fetter, Economics, Vol. II, pages 281-332. Johnson, Introduction to Economics, pages 173-191. Seager, Principles of Economics, pages 536-579. Seligman, Principles of Economics, 5th ed., pages 429-447. Taussig, Principles of Economics, 2d ed.. Vol. II, pages 261-302. CHAPTER XXIV RETURN TO LAND (RENT) 76. Nature and Source of Agricultural Rent Contract and economic rent. — The word " rent " is used in our everyday speech in a variety of ways. We speak of renting an automobile, or a team of horses, or even a dress suit or a pocket camera. Usually in such cases, the term " hire " would be more applicable ; for it adds to clearness to restrict the use of rent to land, or at most to land and its improvements. Even then we may have two kinds of rent, contract (commercial) and eco- nomic. Contract rent is a mere matter of agreement between two parties, and it may or may not be equal in amount to economic rent. If I agree to pay Mr. X $100 a year for the use of his ten acres of land, the $100 is contract rent irrespective of the lo- cation or fertility of the ten acres. The principle developed in the discussion of market price applies in the matter of con- tract rent. The landowner, like the seller of goods, has a minimum rental value in his mind, while the prospective renter has a maximum value ; each bases his estimate on what he believes is the economic rent of the piece of land under con- sideration. As a result contract rent tends, in actual practice, to approximate economic rent. Source of agricultural economic rent. — Economic rent, un- like contract rent, cannot be determined by bargaining. Nor is it necessary that a piece of land be rented to a tenant in order that its economic rent may appear. The owner of a farm re- 330 RETURN TO LAND (RENT) 331 ceives economic rent just as truly when he himself operates it as when he permits a tenant to operate it. The simplest approach to an understanding of economic rent is made by examining an ideal situation in which only a few persons are concerned. Let us assume, therefore, that ten families take up their residence on an isolated island composed, let us say first, of several different kinds of soil. Let us assume also that one of the families engages in wheat-farming on the land best adapted to wheat, while the other nine engage in fishing, manufacturing, or commerce, or even in some other kind of farming. Obviously, the wheat farmer can raise wheat cheaper than any other one — say 80 cents a bushel — for he has the best wheat land. As the number of people on the island increases, more wheat will be necessary and consequently more wheat land will need to be brought under cultivation. Neces- sarily the farmers that take up wheat-raising must resort to a poorer grade of wheat land than the first farmer possesses. But they will not grow Wheat even on free land unless the price of wheat is high enough to return to them interest on their capital and wages for their labor. We may expect under the increased demand for wheat that the price will rise, say to $L00 a bushel. Under these new conditions the first wheat farmer, without having his expenses increased, will enjoy the increased price of 20 cents a bushel. If his land produces 40 bushels per acre it yields him an economic rent of $8 (40 times 20 cents) per acre. As population continues to increase, the extra de- mand for wheat forces its price upward. Farmers will then resort to the cultivation of poorer wheat lands, with the result that our first wheat farmer, also all the others except the one on the poorest piece of wheat land, will get an additional in- come which we call economic rent. We may say, therefore, that one of the sources of economic rent is the differences that exist in the fertility of soil. 332 ELEMENTARY ECONOMICS We might have assumed that all of the land on our islands was of the same fertility. Suppose that nine of the ten families settle in a village, while the tenth family takes up the nearest piece of land for wheat-farming. Here again an increase in population will increase the demand for wheat with a corre- sponding increase in price. Consequently, other families will take up land for the purpose of growing wheat. This land, according to our assumption, is as well adapted to wheat-raising as the first farmer's land, but not so well located in reference to the village market. The second farmer, therefore, will be compeHed to undergo transportation expenses from which the first wheat farmer is free. Since the price of wheat is uniform in the village market, the first farmer will enjoy an advantage over the second farmer. Here is a second source of economic rent. A complete explanation of the sources of economic rent is beyond the scope of this book. We may say, however, that economic rent arises from differences ; in agriculture it arises chiefly from differences due to fertility and location. No-rent land. — We may assume, to continue our island illus- tration, that the ten families compete among themselves for the one fertile piece of wheat land to the point where the family which secures it merely gets return for the labor and capital employed in its cultivation. Under these circumstances this land, though it was the most fertile or the best located piece on the island, is no-rent land ; that is, it yields no rent either to its owner or to its cultivator. In Fig. 9 we see graphically the effect of increasing demands for wheat in our island settlement. When the settlement was first made the price of wheat was OL per bushel while the cost of raising it (interest and wages) was the same ; that is, it was produced on no-rent land. Just as soon, however, as an increased demand for wheat compelled the utilization of a poorer piece of land (poorer either in fertility or in location) for wheat-growing, the price per bushel was neces- RETURN TO LAND (RENT) 333 sarily raised. Otherwise, no one could afford to raise wheat on a poorer piece of land, for the cultivator of the best piece was merely getting a normal return on his capital and labor. The rise in price per bushel gave the wheat-grower on the best piece of land a surplus over his outlay in the form of wages and in- terest. This surplus we call economic rent. Its size is de- termined by the difference between his capital and labor costs y and the capital and labor costs of the second cultivator, who utilizes no-rent land. Let us suppose, further, that an increase in population causes five other pieces of land to be utilized at varying costs in the way of interest and wages (represented by the sohd vertical hues A, B, C, D, and E). Clearly, the price per bushel would have to be fixed at not less than E. Then the surplus per bushel (economic rent) going to our first farm 334 ELEMENTARY ECONOMICS would be LQ ; to the next best piece, G (MQ) ; to the third, H (NQ) ; to the fourth, I (OQ) ; and to the fifth, J (PQ). Usually we think of differences in yield per acre rather than differences in the capital and labor costs per bushel. Let us suppose that five cultivators, each using exactly the same amount of labor and capital on equal-sized pieces of land, pro- duce the following numbers of bushels per acre : 40, 32, 30, 25, and 20. Since the fifth man will not farm without getting a return for his interest and wages, we may conclude that twenty bushels of wheat per acre equals in value the outlay of each farmer. Hence the economic rent of the five pieces, measured in bushels, is 20 (40-20), 12 (32-20), 10 (30-20), 5 (25-20), andO (20-20). 77. Urban Rents Different kinds of urban sites. — We are now prepared to extend to urban rents, with some modification, the principles we have just learned. Obviously, fertility is not a factor in determining the selection of an urban site. Hence, location alone will claim our attention in this discussion. Urban sites might be divided into an infinitely large number of groups, but for our purpose two will suffice : residence sites and business sites. It is a matter of common knowledge that some store sites more than others are desired by merchants. Usually the determining factor in retailing is the size of the crowds that pass certain points during the day. A department-store owner has the option of utilizing a site near a busy down-town corner, or he may locate his stock of goods somewhere in the residence district, or even out in the desert, where land is free for the asking. We may say at once that if he is a wise merchant he will not try to operate his store in the residence district, cer- tainly not in a desert. Here we have the principle of site rent. The down-town business lot, like our best located farm on the RETURN TO LAND (RENT) 335 island, enjoys the best location. For that reason it yields economic rent. Superior urban sites, like agricultural lands above no-rent land, yield economic rent though the owners them- selves utilize them. If the owner and the utilizer are different persons, the economic rent takes the form of contract rent. Otherwise it becomes a part of the utilizer's total income. The unearned increment. — Closely associated with economic rent is what is commonly called the unearned increment, which means the added value given to land by society and not by land- owners as such. For the sake of clearness we may confine our attention to urban sites, for it is there that social forces have had the greatest influence in raising land values. Our discussion of urban rents has paved the way for the state- ment that retail-store sites are determined largely by the habits of the consuming public. One block is better than another for certain kinds of retailing. Just why it is better is a matter to be determined in every individual case : perhaps it is the location of the courthouse, or of the post office, or of a popular theater. Whatever the reasons — important as they are in actual business practices — we need only to remember that equal-sized business sites produce unequal amounts of eco- nomic rent, and that these inequalities rest largely on forces usually independent of the owners of the sites. Twenty years ago, to cite an example, an eastern capitalist acquired a vacant business lot in the city of Denver for $10,000. In the mean- time his taxes and loss of interest on his investment totaled $17,000. Recently he sold the lot for $100,000, realizing over and above its entire cost to him the sum of $73,000. Not once in the twenty years did the capitahst visit Denver. Nor was it owing to any influence of his that the city grew, and that the people there acquired the habit of passing his vacant lot in great numbers. Yet without effort, and even without any show of foresight, for he had reluctantly taken the lot on an old debt, 33G ELEMENTARY ECONOMICS 1)11 I i:i;i:xT Itilizmion OF Similar Piecks ov Land. How did the erection of this hotel affect the value of adjacent sites? RETURN TO LAND (RENT) 337 he gained a small fortune. As one of his friends expressed it, he reaped where he did not sow. Single-taxers argue that all such increases in value should go to society and not to in- dividuals. These arguments are best expressed by the single- taxers themselves in a well-known pamphlet entitled A Single- No Man's Land. In almost every city is to be found a fringe of sites around the business center undesirable either for stores or for residences. Tax Catechism. The following three questions and answers indicate the nature of the catechism : Q. What is meant by the Single Tax? A. The payment of all public expenses from ground rent, the nor- mal revenue, thus eventually abolishing all taxes. Q. What is the ethical basis of the Single Tax? A. The common right of all citizens to profit by site values of land which are a creation of the community. Q. What is meant by the site value of land? A. The market value of situation irrespective of improvements. 338 ELEMENTARY ECONOMICS Any discussion of the unearned increment is incomplete with- out some mention of a contrary movement known as the un- earned decrement. This concept can best be explained by reference to another concrete example. Several years ago a group of men built an apartment house in the city of Chicago on land then valued at $30,000. At that time the neighborhood was one of the best in the city. Shortly afterward several small store buildings were built near by. Then the elevated railroad was built down the middle of the street, and finally one of the large department stores built a warehouse on an adjoining lot. Desirable tenants could no longer be secured. The apartments were necessarily let to lower-income classes. The result was that the value of the ground declined from $30,000 to $15,000. Here was a loss inflicted on a small group of individuals by other individuals and by society at large. While no one believes that in the typical American city the decrement equals the increment, the fact must not be forgotten that a portion of the increment is offset by a decrement. 78. Economic Rent and Price Economic rent does not enter into price. — The usual notion is that economic rent is one of the factors in setting price. This notion, however, is incorrect. Economic rent does not deter- mine price ; rather price is the chief factor in determining economic rent. It will be remembered that our island farmer who cultivated the best soil enjoyed a constantly increasing economic rent as the increasing demand for wheat forced the price upward. We assumed that his economic rent was twenty bushels of wheat per acre. Had his economic rent been thirty bushels instead of twenty it is not likely that the price of wheat would have been materially affected, for, as we have seen, the demand for wheat caused the price to be set at a point which would permit of the cultivation of the no-rent piece of land. RETURN TO LAND (RENT) 339 When contract rent equals economic rent — the two always tend to approximate — the former likewise does not enter into price. Hence the retail store utilizing the best site can sell as cheaply, all other things being equal, as its competitor on a poorer location. It is a well-known fact that one of the large variety-store companies will not locate in a city unless it can secure a relatively high-rent site. Similarly, the high contract rents paid by tenants on the rich soil of Iowa or Illinois do not affect the prices of their products. Economic rent and agricultural values. — Those accustomed to buy and sell farm lands determine land values by fertility, location, and height of interest rate. Their first consideration is to ascertain the average yield of the piece of land they are trying to buy. Obviously, the more fertile the land the greater the yield. But this is not the only consideration. They must also estimate the cost of getting its product to market. An acre of corn land ten miles from an elevator, other things being equal, is less valuable than an acre nearer at hand. For in both cases the item of transportation cost must be taken into account. Finally, the value of a piece of land, or if we prefer, the value of its economic rent, depends also on the normal interest rate, for as the interest rate declines land values rise. Thus, a farm which would be considered to be worth $20,000 when the normal interest rate is 5 per cent, would be worth $25,000 if the interest rate should drop to 4 per cent. The methods employed to determine the value of a piece of unimproved land may be explained by the simple device as shown on page 340. First the economic rent is determined. Divide the rent by the normal rate of interest. The quotient is the value of the land. Economic rent and urban values. — Compared with agri- cultural lands the process of determining the value of urban sites is usually a more difficult matter. Farm products are tangible, easily measured, and have a well-known market price. 340 ELEMENTARY ECONOMICS Likewise the skill and ability ordinarily required to conduct farming operations are widely scattered among many persons. In the retail business, for example, the situation is different. The prospective buyer of a business site may feel safe in some cases in merely capitalizing the economic rent as represented Physical Property Capital Value Rent Interest Rate Fig. 10. by the contract rent of the tenant. More often he would exercise greater care in arriving at the value of the site under consideration. In other words, even where a business site has enjoyed a uniform rent for years, the determination of its value is a " hazardous occupation." RETURN TO LAND (RENT) 341 Determination of the value of residence sites is still more difficult, for the utilities that flow from a home have an un- settled market price. The best step to take in trying to arrive at the value of such a site is to secure the opinion of a great many persons. Even if the site is improved and the prospective buyer expects to rent it, the opinion of disinterested parties is valuable, for after all it is to just such persons that he expects to rent the property. The market values of adjoining proper- ties are also a fair guide, particularly if they are being utilized by tenants ; for it is a safe assumption that the united judgments of many buyers and sellers are approximately correct. In any case, the ultimate value of the site must be determined by so- ciety, for the difference between this particular site and some other one is largely a social matter. EXERCISES AND PROBLEMS 1. Distinguish between economic rent and commercial rent. 2. Why is one piece of farm land preferred to another piece ? 3. What factors determine this preference? 4. What is no-rent land? 5. Just how can a farmer afford to operate no-rent land ? 6. How does a change in the price of wheat affect the economic rent of wheat lands? 7. What effect has soil "butchery" on economic rent? 8. Just how does improved means of transportation affect economic rent? 9. How in general is economic rent affected by an increase in population ? 10. How does custom and habit assist to determine the economic rent of store sites? 11. What other factors are important? 12. Explain what is meant by "unearned increment." 13. What is the relation between this increment and the single tax? 14. Distinguish clearly between an "increment" and a "decre- ment." 342 ELEMENTARY ECONOMICS 15. What is the relation between economic rent and price? 16. Why does economic rent not enter into price ? 17. Just how does the interest rate affect land values ? B 1. Make a tour of inspection about your community. a. Notice the wide variations- in the utilization of business sites. b. Do these business sites yield more or less than equal-sized sites in the residence districts? c. Notice the sites which form a fringe about the business section. i. How are they utilized? ii. What about the improvements found there? iii. Do they seem to be in a state of transition f Explain. d. Contrast the various residence sections. i. What factors cause some sites to yield more economic rent than others? ii. Just how do these factors differ? e. Notice the number and location of vacant sites. i. Why are these not utilized? ii. Are there evidences of owners trying to secure unearned increments? /. Widen your definition of "urban economic rent." 2. Suppose you were to become heir to a cultivated farm located in Patagonia. How would you determine its selling price? 3. Inquire among business men and others concerning some instance of unearned increment. a. Determine as accurately as possible the size of the increment (difference between buying price and selling price). h. Estimate the interest on the investment at a fair rate. c. Subtract from the interest any income that may have been received. d. What portion of the increment appears to have been unearned f e. Is this portion more or less than it seemed to be when you began your examination ? 4. Find an example of "decrement" in your community. a. What influences caused this decrement? 6. Have you heard any one propose that society should com- pensate the owner for his loss ? Who ? RETURN TO LAND (RENT) 343 5. If you were seeking a site for a cigar store, how would the location of the following influence you : a. Other cigar stores ? b. Dry goods stores? c. Restaurants ? d. Show houses? e. Garages ? /. Hotels? g. Soda fountains ? h. Drug stores? i. Railway depots? C !.■ A prominent United States senator once made the public state- ment that the high prices of farm products then prevailing were caused by high rents. a. Would you expect this statement to be criticized? Why? b. What fixes the price of any farm product ? c. What is the relation between the prices of farm products and the economic rent of the land on which they are grown ? 2. Why does the contract rent of a piece of land often differ widely from its economic rent? 3. How are the following likely to affect the economic rent of farm lands : a. Improved machinery? b. Discovery of new fertilizer? c. Improved methods in farming? d. Change in interest rate ? e. Automobiles ? 4. A merchant located on the fringe of a business district often advertises that he can, owing to the low rent which he pays, sell goods cheaper than competing merchants nearer the business center. a. Why is his rent lower than theirs? b. Suppose he gets the business of his competitors. i. How will the economic rent of his site be affected? ii. How would this affect his contract rent ? iii. Would this claim of cheap rent continue to be valid? Explain. c. Does his lower rent permit him to undersell his competitors ? 344 ELEMENTARY ECONOMICS 5. Assuming that each piece of farm land yields its entire economic rent to its owner, why do tenants prefer one piece over another? Explain with some detail. 6. Sometimes a retail merchant advertises that he can afford to undersell his competitors because he happens to own the store site which he utilizes. a. Does the land underneath his store building earn rent? Explain. h. Suppose a competitor who does not own his store building should invest the value of his site in railroad bonds, i. Would he be justified in advertising that he could undersell his competitors because he owned bonds? ii. How would the buying public regard such an advertise- ment? c. If he can afford to distribute his rent among his customers, why should he not also advertise that he can undersell his competitors because he owns his own capital or because his wife and children wait on his customers without pay? SUPPLEMENTARY READING Bullock, Introduction to the Study of Economics, 3d ed., pages 435-446. Ely, Outlines of Economics, 3d ed., pages 407-426. Fetter, Economics, Vol. I, pages 89-168. Johnson, Introduction to Economics, pages 215-231. Seager, Principles of Economics, pages 229-243. Seligman, Principles of Economics, 5th ed., pages 371-391. Taussig, Principles of Economics, 2d ed.. Vol. II, pages 55-106. CHAPTER XXV RETURN TO CAPITAL (INTEREST) 79. Interest Peculiar to Modern Industry Attitude of the medieval church toward interest. ^ — ^The church fathers of the Middle Ages looked on the taking of inter- est as a sin. In assuming this position they were influenced no doubt by the fact that most loans were consumption loans — that is, loans contracted for the purpose of acquiring consumable goods. They did not believe that money was productive. Consequently, they declared that a debt was fully discharged when the borrower returned all that he had borrowed. Because of the refusal of the church to countenance the taking of in- terest, the money-lending business, as was noticed in an earlier connection, naturally fell into the hands of the Jews and the Lombards. Here no doubt is one of the chief causes of the bitter feeling that existed between the Jews and their Christian neighbors. The latter, regarding all interest as usury, looked on the Jews with contempt. Shakespeare clearly recognized the two divergent viewpoints when he made Shylock say in the Merchant of Venice : "Signior Antonio, many a time and oft In the Rialto you have rated me About my moneys and my usances :" To this Antonio, the merchant, answered : "If thou wilt lend this money, lend it not As to thy friends ; for when did friendship take A breed of barren metal of his friend? But lend it rather to thine enemy. Who, if he break, thou mayst with better face Exact the penalties." 345 346 ELEMENTARY ECONOMICS Rise of a money-lending class. — Despite the attitude of the medieval church many Christians loaned money. Especially widespread was the practice of moneyed men to evade the spirit of the law without violating its letter by becoming silent partners in trading enterprises. Gradually the attempt even to comply with the letter of the law was abandoned ; one by one the nations withdrew their support from this particular canon law. Then the church reluctantly bowed its head to the force of expediency. From that time, accumulations of wealth have more and more sought outlets to investments. Now numerous groups give their entire time to bringing lenders and borrowers together. We have seen already how important in this respect are the various kinds of bankers. Only a little less so are note brokers, real estate loan agencies, building and loan associations, and lawyers. So common is the phenomenon of borrowing and lending that scarcely one of us has ever given a thought of why interest can be paid, and how much the rate should be. Yet no subject in modern economics has created more discussion and debate. The ablest economists of the time have spent years on the why phase of interest, and have published monumental works to support their conclusions. This unsettled situation, however, need not deter us from glancing hastily at the question in its broadest aspects. 80. Why Interest Is Paid and How Much The viewpoint of the borrower. — We have learned already that labor and land, when assisted by capital, produce more than when working alone. The best evidence of this fact is the tremendous volume of modern production compared with what we might expect to be produced if all capital were removed or if it had never existed. No one doubts that the sudden dis- appearance of capital from the face of the earth would in a RETURN TO CAPITAL (INTEREST) 347 short time result in the starvation of half of the human race. The borrower, then, since he knows from experience and observation that he can afford to pay a premium for the use of capital, is willing, if necessary, to bid up to the point of his expected gain. The wide variety of business enterprises combine with the different expectations of enterprisers, to make these independent bids cover a wide range which we may illus- trate as follows : y \ K \ L \^ \y V — A 1 ? ( : / ) X Fm. 11. Borrower A is willing if necessary to go to AK (12 per cent) ; B, to BL (8 per cent) ; C, to CM (5 per cent) ; and D, to DN (4 per cent). It should be noticed that the borrowers' curve is a demand curve. 348 ELEMENTARY ECONOMICS The viewpoint of the lender. — The lender also knows that capital is productive, but that in itself does not explain satis- factorily why he saves rather than spends his capital. Saving means abstinence for the ordinary individual, and, as we shall see, modern production bids for the savings of all regardless of wealth and income. Furthermore, it is a human characteristic H X that the normal man prefers present goods to future goods — ■ that is, present consumption to future consumption. This characteristic is most prominent among primitive peoples and among children. The American Indian seldom ever stored food for future consumption, though he was aware from experience that famine might be expected before the approaching winter RETURN TO CAPITAL (INTEREST) 349 was over. Most boys and girls would rather eat their candy or cake today than to wait until tomorrow. Even older children often prefer to see a second-rate film today to a much better one next week. Even adults are not free from this form of im- patience, though as a general rule it is less prominent among them. Since most of us value present goods more highly than future goods, it follows that some inducement must be held out to us to cause us to postpone consumption — ■ that is, to ex- change present goods for future goods. This inducement we call interest. It is the price for waiting. Different people set different prices on the pain of waiting. Some demand a very high reward, some a more moderate one, a few have no prefer- ence, while occasionally we are able to find an individual that actually prefers future to present goods. We may arrange the various savers in the manner as shown on opposite page. Those to the left of Z will pay to be permitted to save, and those at Z will save without reward. As we move along the curve to the right of Z the price demanded for abstinence rises. E demands EP (4 per cent) ; F demands FQ (5 per cent) ; G demands GR (8 per cent) ; while H, who has the least desire to postpone consumption, demands HS (12 per cent). Fixing the current interest rate. — We may now inquire how the current rate of interest is fixed. Since the borrowers are really buyers of capital and the lenders sellers of capital we can apply the principle developed in the chapter on determining the market price of goods. Like buyers of goods, borrowers have a maximum price (interest rate) in mind ; and lenders, like sellers, consider only a minimum price (interest rate) . Borrower A, to revert to Fig. 11, is willing to go as high as 12 per cent but no higher. Borrower B will go no higher than 8 per cent, while borrowers C and D have in mind a maximum rate of 5 and 4 per cent, respectively. Lender H must have at least 12 per cent ; lender G, 8 per cent ; lender F, 5 per cent ; and lender 350 ELEMENTARY ECONOMICS E, 4 per cent. Obviously, any one of the lenders would be willing to supply, to the extent of his lending capital, the wants of borrower A. But A, eager to pursue his own economic advantage, quickly sees, since he does not desire all the capital available, that some of the lenders have a minimum rate far below his maximum. Also those with lower minimum rates will not permit any one of their number to secure A's maximum rate at the expense of leaving their savings uninvested. Thus from the opposing forces there emerges an interest rate which will permit the largest amount of money to be loaned. This we call the current rate, and its location may be illustrated as follows : Fig. 13. RETURN TO CAPITAL (INTEREST) 351 81. Variations in the Interest Rate The risk element. — So far in our discussion of the interest question we have considered only pure interest, and the current rate of pure interest. We may now examine some of the forces that cause (1) the current rate of contract interest to be above the current rate of pure interest, and (2) variations in rates of contract interest. Risk is the chief cause for the difference between pure interest and contract interest. No debt, we may say, is absolutely sure to be paid, though in the case of United States bonds uncertainty is reduced to a minimum. Risk in- creases rate. Government obhgations bear a relatively low rate of 3 or 4 per cent ; railroad bonds, 5 per cent ; ordinary bank paper (promissory notes) , 6 or 7 per cent ; while collateral loans made by pawn shops often bear a rate of 30 or 40 per cent. A portion of the interest income, therefore, represents risk. Fixity of investment. — Some loans or investments are pre- ferred to others even where there is the same element of risk in- volved. A railroad bond, for example, usually bears a lower rate of interest than a first-class farm mortgage. Here the risk element is very low, but bonds are much easier sold than are mortgages ; hence the difference in rates. Banks also vary rates of interest paid on deposits according to the degree of fixity. City banks often pay 2 per cent on checking deposits and 3 per cent on savings. Depositors may withdraw the former on demand, while in the latter case the bank has the right to compel formal notice of several days. Likewise in lending money, banks usually charge less interest on a call loan than on a time loan. One they can have paid on demand ; for the other they must wait until it is due. Thus we see that the lender who reserves the right to have his loan returned to him quickly must accept a less reward for his waiting than would be necessary if he were willing to forego this reservation. Also the borrower 352 ELEMENTARY ECONOMICS is unwilling to pay as much premium for capital over which he has an uncertain control as he would pay if his control were made more certain. Variations among industries. — It often happens that a cer- tain industry is prosperous above the average. Usually, under these circumstances, enterprisers, eager to enlarge their busi- ness, pay a higher interest rate than is current at the time. Other enterprisers seeing the prosperity of this particular in- dustry will quietly enter the field and bid high for capital. As a result there is some variation in the interest rates among different industries. Variations among localities. — In a large country like the United States there is a wide variation in the interest rate. Even the states recognize this fact in their usury laws. Some restrict the legal rate of interest to 6 per cent, some to 7 per cent, while others permit as high a rate as 10 per cent. Three closely related causes account for this variation : (1) relative scarcity of capital, (2) cost of supervising loans, (3) lack of information on the part of lenders. In the newer sections of the country, capital is scarce. Yet it is there that capital can usually be used to the best advantage in improving farms, in building cities, and in starting manu- factures. Naturally, enterprisers bid high for the scanty stock. The question may very properly be raised, however : Why does not the capital of older sections flow to these regions of high interest rates? First of all, there is a greater degree of un- certainty connected with the industries here than would be the case if they were being carried on in the older settled regions. For that reason a lender hesitates to loan his funds, especially if he is not in a position to supervise them to the extent of protecting his own interests. The next best thing he can do is to send them to some bank or mortgage concern in the newly settled section with instructions to loan them to the best RETURN TO CAPITAL (INTEREST) 353 advantage. Granted that the security offered is ample, yet there has been some cost in handHng the funds, which will appear in the form of higher interest rates. Finally, the lender, unless he is in a particularly good position to get information, is likely to know little about either the borrower or the banker. Hence he prefers to loan his funds nearer home even at a lower rate. EXERCISES AND PROBLEMS A 1. Just why did the medieval church oppose the taking of interest ? 2. What is the difference between a consumption loan and a pro- duction loan ? 3. In the conversation between Shylock and the merchant Antonio, what is the significance of the following expressions: "usances"? "barren metal"? "exact the penalties"? 4. Just how was a silent partner able to loan money without evad- ing the law ? 5. What are the two aspects of interest ? 6. Why will borrowers pay interest on loans? 7. Why must lenders be rewarded? 8. What determines the maximum interest rate a borrower will pay? 9. What is the lowest interest rate which a lender will accept? 10. Just why are present goods usually valued more highly than future goods? 11. Is saving painful ? Explain. 12. Why should the legal interest rate be higher in Wyoming than in Massachusetts ? 13. What is a "call loan"? 14. Why do lenders prefer a call loan to a time loan? 15. Why is the interest rate on bonds usually lower than the div- idends on stocks of the same concern? 16. Why is a railroad bond more negotiable than a farm mortgage ? 17. What kind of real estate mortgages resemble bonds? 18. Where is the best market for real estate mortgages usually found? 19. Why are real estate mortgages usually recorded? 354 ELEMENTARY ECONOMICS B 1. Put the following questions to some friendly business man: "Why are you willing to pay interest on borrowed money? " "Would you be willing, rather than to do without, to pay a higher rate than you now pay?" "How would an increase in the current interest rate be likely to affect your business?" 2. Examine any metropolitan newspaper for quotations on New York interest rates. a. Name the various kinds of loans found. b. Which bears the higher interest rate? c. Consult some banker regarding the New York interest rate, i. Inquire about the nature of a demand loan. ii. Ask him to explain why the rate on commercial loans varies but slightly. d. Compare these quotations with quotations found in older newspapers. 3. Call to mind instances when present goods commanded a very high premium over future goods ; when future goods were more greatly desired than present goods. 4. Name five forms of investment with which you are familiar. a. Which bears the highest interest rate? the lowest? b. To what extent does risk cause the difference? 5. Inquire of some banker concerning the opportunities of banks in the older states to loan money in the newer regions. C 1. Aristotle spoke of money as being barren, and hence incapable of producing interest. a. Do enterprisers borrow money, or is it, in the long run, equip- ment for producing goods? b. What assurance has an enterpriser that his borrowed equip- ment will reproduce itself and something over in the way of interest? 2. Suppose it should become generally known that excessive profits are being made in the manufacture of shoes. a. How would this knowledge affect enterprisers in other lines? b. What would be the effect on the production of shoes ? c. Would the prices of shoes rise or fall ? Why ? RETURN TO CAPITAL (INTEREST) 355 d. How would this change affect the profits of shoe-manu- facturers ? 3. Discuss the desirability of a state legislature fixing a legal rate of interest above which the law provides a penalty for going. 4. As a result of an insistent demand the government established in 1916 a farm loan bank which furnishes farmers money at a moderate rate of interest. a. From which sections of the country would you expect the demand to have been the strongest? Why? b. How did the bankers regard this new bank? c. Has it succeeded to an extent in equalizing the interest rate over the whole country? 5. The "sacrifice" theory of interest is often criticized on the ground that such men as Rockefeller and Morgan make no sacrifices in abstaining from consuming their wealth. a. Can wealthy men like these save all the capital needed ? b. Which savers exert the greatest influence in fixing the interest rate? c. Do these savers sacrifice ? Explain. SUPPLEMENTARY READING Bullock, Introduction to the Study of Economics, 3d ed., pages 423-435. Ely, Outlines of Economics, 3d ed., pages 493-524. Fetter, Economics, Vol. I, pages 235-313. Fisher, Elementary Principles of Economics, pages 410-432. Johnson, Introduction to Economics, pages 217-231. Seager, Principles of Economics, pages 262-282. Seligman, Principles of Economics, 5th ed., pages 313-328. Taussig, Principles of Economics, 2d ed.. Vol. II, pages 3-43. CHAPTER XXVI RETURN TO THE BUSINESS MAN (COMPETITIVE PROFITS) 82. Place of the Business Man in Industry The business man combines the factors of production. — Hitherto we have discussed the place of land, labor, and capital in production, and the share of distribution going to each, as if these factors were guided in their work by internal forces. Both land and capital are stone blind. Workers, too, need direction^ Some one must anticipate probable demands, determine the relative amount of each factor to employ in production, and provide for supplies of raw materials. In other v/ords, there is a productive function apart from land, labor, and capital. Consequently, there has developed in modern industrial society a group of men who devote their time and abilities to performing this function. Such men we call enter- prisers. Every business man, in fact, no matter how large or how small his operation, is necessarily an enterpriser. Responsibility of the business man. — Since it is the func- tion of the enterpriser to combine land, labor, and capital in such a way as to make them productive, .it naturally follows that he must assume all of the risks involved in his undertaking. Modern practices require him to enter into binding contracts for the factors of production before he has prepared a single unit of his goods for the market. One about to undertake the manufacture of cloth, for example, must rent or purchase a 356 RETURN TO THE BUSINESS MAN 357 site for his plant, must construct factory buildings, and finally he must agree with cloth-weavers to pay them certain wages. The farmer has similar experiences. He buys or rents land, prepares the soil for seeding, plants, and cultivates. He may or he may not reap crops sufficiently valuable to pay for the costs involved. Whether or not he does, is no concern of land, labor, and capital ; that is, each of these factors is protected by a binding contract with the enterpriser. Every enterpriser must take these risks ; otherwise enterprisers would not be enter- prisers. The importance of risk-taking is overlooked by many, who, blinded by the brilliant successes of some enterprisers, assume or pretend to assume that the typical business man's reward in the form of profits is always unjustified. Herein lies the weakness of any system that would eliminate the enter- priser from industry. Characteristics of the business man. — The business man of this country possesses certain characteristics which we may examine at this point. First of all, the typical American enter- priser is daring ; so daring in fact, that foreign observers have said that he would be willing, if necessary, to pay to be allowed to assume business risks. Overdrawn as this statement is, it points to a significant tendency. Not only is he daring, but he is resourceful. Like a good soldier he watches every movement of those opposed to him, takes advantage of every opportunity, and uses his own forces to the best advantage. In short, he often accomplishes the impossible. Moreover, the typical American enterpriser is imaginative. Particularly among our captains of industry do we find this characteristic well developed. On no other ground can we explain the numerous trans-, continental railroads, the irrigation projects of the Southwest, the great steel mills at Gary, Indiana, and Bethlehem, Penn- sylvania, and the Panama Canal. Such projects do not result from accident ; they must mature in the mind before they 358 ELEMENTARY ECONOMICS become realities. James J. Hill owed much of his success as a master railroad-builder to a highly developed imaginative ability. In a more modest way the pioneer farmers of the West and Middle West saw in the future the long stretches of timber land and the trackless prairies give way to prosperous farming communities. They not only saw, but they also dared to make the " great venture," to pit their resourcefulness against the hostility of an unsettled country. Source of the business man's characteristics. — Enter- prisers, in common with all other members of the human race, get their business characteristics from two sources : (1) heredity, (2) education. Some are especially endowed by nature ; some acquire success as enterprisers, by long hours of study and application ; a few combine both characteristics to a high degree. It is safe to say, however, that the typical business man — farmer, merchant, manufacturer — is fairly well born and fairly well trained ; that is, he can attribute his economic suc- cess partly to his ancestors and partly to his own efforts. What he lacks in heredity he may usually make up in education. Which of these two forces is the more important? At the risk of starting a fruitless discussion we may say with some assurance that heredity asserts itself especially strong during the earlier years of business, while education and training (experience) necessarily exert themselves at a later date. The importance of the sources of business characteristics becomes significant when we try to account for the place of the enterpriser in industry. We know what he does, but we must also know why society rewards him for his services. If he is created of finer clay than most men, then, so far as his share in distribution is concerned, he resembles land. If he succeeds by study and training then he resembles labor. In either case, his reward is a differential — that is, it depends on his superiority over the margin. RETURN TO THE BUSINESS MAN 359 83. The Nature and Source of Profits Profits are residual. — With tlie place of the business 'man estabhshed in modern industry, we may now turn to the nature and source of the distributive share which goes to him for his services. The enterpriser, we have seen, enters into a contract to pay definite amounts to land, labor, and capital for assisting him in his enterprise. Eventually, when the product is sold, the enterpriser is in a position for the first time to strike a balance between what he has paid out and what he has received. If the\ latter exceeds the former we say that he has made a profit.' Otherwise, unless the two items are exactly the same, which is unlikely, we say that he has made a negative profit — that is, suffered a loss. Obviously, then, pro fits^are, ^residual. They are what is left over after all other snares in distribution have ^een paid. They stand exposed to every fluctuation in the size of the payments for raw materials and to the three factors of production. Guarding against price fluctuation. — In the last sentence above we have the key to the source of profits, ^ri^efluctua^ tions — in wages, interest, rent, raw materials, and finished products — are at the bottom of all profits or losses. If the\ prices of everything entering into the product of any particular \ enterprise were absolutely fixed, and the price of the finished j product itself known in advance, there would be little room iox/' _grofits. Usually there is no way to guard against price fluctua- tion, and it is not certain that enterprisers in general would wel- come any change that might threaten the existence of their profits. Often a house-builder, when he agrees to erect a struc- ture at a certain price, protects himself by contracting at the same time for the building material to be used in its con- struction. Clothing manufacturers, also, when they sell men's 360 ELEMENTARY ECONOMICS suits for future deliver}^ often base their prices on a previously arranged price for cloth. The highest development in this respect has been m the flour industr3\ To protect themselves from possible loss, millers usually are willing to forego possible gains by buying wheat for Courtesy of Mr. Leslie F. Gates, Chicago. Scene on the Chicago Board of Trade. future delivery. We can best understand how this is done if we consider a concrete case. IMiller A is asked in December to make a price on flour to be delivered in June. Not wishing to take chances he looks up the quotation of May wheat and finds, let us say, that it is SI. 00 per bushel. With this information he can as easily fix the price of flour to be delivered in June as he could if he were selling out of his present supply. Miller A RETURN TO THE BUSINESS MAN 361 then buys on the Board of Trade at $1.00 a bushel enough May wheat to fill his flour contract. Let us suppose that when the time for the dehvery of the wheat has arrived (May) the market price is 99 cents a bushel instead of $1.00. Miller A can compel delivery at the contract price, which is $1.00. Or he can, if it is possible, buy his wheat in the local market at 99 cents and sell out his Board of Trade contract at one cent per bushel loss. Suppose, however, that the market price in May was $1.01 instead of 99 cents. In that case he could compel delivery of wheat at $1.00 a bushel, or go into the local market and buy it at $1.01, selUng out his Board of Trade contract at one cent per bushel profit. The important thing to notice is that our miller has protected himself from fluctuation in the price of wheat, preferring security to possible profit. In any case his wheat costs him $1.00 a bushel irrespective of the market price. This illustration is stripped of the numerous complica- tions which arise in such transactions, but it contains in es- sence the principle of what we may call industrial insurance — that is, insurance against loss by price fluctuation. Competitive profits resemble rent. — There is one striking similarity between profits and rent. Rent, as we have seen, is a differential ; that is, it arises from differences in fertility or location. Profits likewise owe their existence to differences. The best enterpriser, like the best farm land, produces abun- dantly ; and like the best farm land he cannot produce enough for all. Consequently, society is compelled to resort to poorer enterprisers just as it is to poorer lands. But the costs of production of poorer enterprisers are higher than for better enterprisers in the same industry, and they must get a return equal to what they have paid for the use of land, labor, and capital, in addition to their own wages. In other words, the poorest enterpriser in any industry tends to set the price of its product, while all other enterprisers in the same industry enjoy 362 ELEMENTARY ECONOMICS a reward, called profits, for their superior skill. As a result, profits, like rent, do not enter into price. Price fixes profits; profits do not fix price. Figure 14 illustrates this point. Society- demands the services of four enterprisers, A, B, C, and D, in a certain industry. A's cost of producing one unit of the product Fig. 14. is AL ; B's cost is BM ; C's cost is CN ; and D's cost is DR. Clearly, the market price cannot be less than DR. Conse- quently, on each unit A will enjoy a profit of LS ; B, of MT ; and C, of NO. If A's profit were WS instead of LS the price of the product would not be materially affected, for the price DR is still necessary to keep D in business. RETURN TO THE BUSINESS MAN 363 Competitive profits tend to disappear. — The fact that A, B, and C, in the illustration above, enjoy profits, will cause them to enlarge their operations in order to increase their profits by increasing their output. The demand for this particular product can ordinarily be increased only by lowering the price. But a lower price means less profit per unit. D, let us say, will be driven from business and C will become the marginal pro- ducer. Obviously, the unit profits of all will fall and it is likely that both A and B as well as C will suffer a decline in total profits. As competition increases, prices will continue to fall until, we are safe in saying, profits will tend to disappear. To put the same thought in different language, competitive profits are always in the process of extinction. This tendency is the basis for the trite saying, "' Competition is the life of trade." 84. Cooperation and Profits General attitude toward profits. — Most of us regard profits as something entirely different from rent, wages, or interest. When a friendly manufacturer says that he will sell us one of his products at cost we assume at once, and correctly so, that he has in mind merely to forego his profits. Why should he not also share with us a portion of his income arising from his land or capital? One is just as legitimately his as the other. In any case his total income is decreased by just so much. We would not expect a laborer to donate us an hour's work ; nor a capital- ist, the use of a hundred dollars for a month's time ; nor a land- owner, the use of a piece of his land. Why then are we not surprised when some one offers to make a gift of his profits? The difference lies no doubt in the fact that profits are not salable, that the sacrifice made to get them is not so noticeable, and that they are residual. Whatever the reason for its exist- ence, the general notion prevails that profits can be eliminated easier than rent, wages, or interest. 364 ELEMENTARY ECONOMICS Cooperation aims to eliminate profits. — The most ambitious attempts to eliminate profits have taken the form of coop- eration. Everywhere groups are planning how to carry on this or that kind of industry without the assistance of professional enterprisers. Farmers organize cooperative grain elevators, creameries, and threshing " rings " ; merchants combine to purchase goods in larger quantities ; while consumers pool their buying ability in order to deal directly with jobbers, whole- salers, or manufacturers. Does the elimination of the pro- fessional enterpriser eliminate profits? If the farmers of a certain community can manage a grain elevator so successfully as to show a residual element at the end of the year, they have earned a profit. Perhaps it is returned to them the next year in the form of increased price or of decreased storage charges, yet that does not alter the fact (1) that it is profits, and (2) that it arose as a, result of their skill as enterprisers. They have eliminated the enterpriser without eliminating his reward. In other words, our group of farmers has assumed the risks of the business and is entitled to any residual element that may arise. Basis of successful cooperation. — Since competition tends to eliminate profits, and since the profits of any particular enterpriser are likely to come from a relatively large number of individuals, the saving to any one individual by the elimination of the enterpriser is usually small. As a consequence, co- operation is ordinarily possible only by people who are willing to exert themselves in order to effect petty savings. Gen- erations of self-denial have accustomed the working classes of England to give careful attention to their purchases of food and clothing. In this country, on the contrary, we have always looked on petty savings as something akin to parsimony, and hence to be carefully avoided. Here we have the reason for their general failure in this country. The typical American RETURN TO THE BUSINESS MAN 365 housewife, even among the ranks of unskilled labor, has not yet learned the difference between nine cents and ten cents, though this difference if spread out over the average family expenditures of this group for a year would aggregate forty or fifty dollars. Cooperation is also likely to be hampered in those localities or countries in which enterprisers are especially skilled. The European retailer is compelled to get excessive profits to cover losses caused by his slow-paying customers of the upper classes. Here such compulsion is neither necessary nor justi- fiable ; merchants do not strive for certain customers, as they are likely to do in Europe, in order to gain respectability. Occa- sionally cooperation is undertaken to break a monopolistic hold on some industry. Fruit-growers, for example, have found it necessary in some sections of the country to market their own products in order to keep from being literally robbed. Success of cooperation in various industries. — Coopera- tion is, by its very nature, more successful in some industries than in others. Retailing appears to offer the best opportunity : a relatively small amount of capital is required; no great amount of enterprising skill is necessary ; and those interested come in contact with it daily. Cooperative manufacturing, however, is a more serious matter. Here must be settled im- portant questions, such as the hiring of labor, changing the character of the product, and seeking new markets. To answer these questions successfully the hired manager must have such skill and ability as to attract the attention of com- peting manufacturers, who would either get him away or force the cooperative concern to raise his wages to a point where profits would be endangered. Moreover, the risks involved in retailing are comparatively small, so that the members of the association can very well afford to carry them. The largest of the English retail cooperative societies — the Rochdale Stores — has not attempted to establish its manufacturing business on a 366 ELEMENTARY ECONOMICS cooperative basis, largely because of the impracticability of the scheme. EXERCISES AND PROBLEMS A 1. Why are profits a share in distribution? 2. What is the chief function of the enterpriser? 3. Just why are profits residual? 4. Characterize the typical American enterpriser. 5. Why in the successful conduct of a business is imagination as important as skill? 6. In what way does enterprising skill resemble land? labor? 7. Should enterprisers be guaranteed a profit by society ? Explain. 8. What is the source of profits ? 9. How may an enterpriser protect himself against risk? 10. How does this protection affect profits and losses? 11. In what way do profits resemble rent? 12. What is the relation between profits and prices ? 13. Why do competitive profits tend to disappear? 14. How are profits related to cooperative schemes? 15. Why has cooperation usually failed in the United States? B 1. Many business men, farmers in particular, call their entire net income profits. Interview some retail merchant that owns his own store building. a. How much does he set aside each year as rent? b. What amount of interest does his capital earn? c. What portion of his income does he attribute to his own wages ? d. What is the government's share in the way of taxation? 2. Call to mind a successful enterpriser in your community, o. What are his most outstanding business characteristics? b. Does he give attention to details? 3. Question a retail merchant concerning advertised sales in which goods are offered at cost. o. What does he understand by "cost" in this connection? b. Does he always use the word "cost" in exactly the same way? c. What variety of meanings may the word have? d. Analyze your own notion of its meaning. RETURN TO THE BUSINESS MAN 367 4. Examine, if possible, any attempts that have been made in your community to eliminate profits through cooperation. a. What was the nature of these attempts? b. Did any one oppose them? Who? c. How well did they succeed? C 1. Explain in each case why the following are, or are not, enter- prisers : a. Farmers. e. Professional beggars. b. Bankers. /. Railroad engineers. c. Scissors-grinders. g. Factory managers. d. Gamblers. h. Taxi-drivers. 2. Give reasons why American enterprisers should be more daring than their European competitors. 3. Explain just how the profits of a cotton-cloth manufacturer may be affected by the following : a. New inventions and discoveries in spinning, weaving, dyeing. b. Increase or decrease in the ravages of the boll weevil. c. Changes in style of clothing. d. Production of wool, flax, and silk. e. Changes in the current rate of wages for farm labor, railroad men, weavers. /. Changes in the current interest rate. 4. Recently a convention composed of wheat-growers declared that the low price of wheat then prevailing was caused by speculation on the Chicago Board of Trade. On the same day a body of millers assembled in a near-by city made the claim that speculation in wheat caused wheat prices to be too high. Discuss. 5. Sometimes a miller is found who refuses to have any dealings with a wheat exchange on the ground that to do so would be speculation. a. Can a miller trade in wheat without speculating ? How? 6. Can a miller who sells flour for future delivery avoid specula- tion if he refuses to buy wheat for delivery at the same time ? Explain. c. Are millers more than other people likely to become wheat speculators ? 368 ELEMENTARY ECONOMICS SUPPLEMENTARY READING Bullock, Introduction to the Study of Economics, 3d ed., pages 460-467. Ely, Outlines of Economics, 3d ed., pages 525-541. Fetter, Economics, Vol. I, pages 317-381. Seager, Principles of Economics, pages 198-212. Seligman, Principles of Economics, 5th ed., pages 351-370. Taussig, Principles of Economics, 2d ed., Vol. II, pages 158-191. CHAPTER XXVII SOCIALISM 85. Nature and Purposes of Socialism What is socialism ? — The spread of socialism throughout the world during the past generation, with its doctrines and claims so out of harmony with the established order of things, is the most striking social phenomenon of the time. Socialism is claiming the attention of many of the most thoughtful people, though giving their attention to the movement does not imply that they are giving it their support. They believe, however, that sooner or later the socialistic question must be decided one way or another ; and for that reason they, as members of society, desire to act as intelligently as possible when that time comes. As students of economic questions we too should learn something about the demands of socialism, its program of action, the arguments of its supporters, and finally about the social conditions out of which it has grown. Socialism, in brief, is a program which calls for the social- ization of the instruments of production ; that is, a program which demands that the state alone shall own the instruments of production. Under socialism there would be no professional enterprisers and no capitalists. Some socialists would also abolish private property in land, though this doctrine is not now universally held. Since there are to be neither enterprisers nor capitalists, it naturally follows that under socialism the shares that now emerge in the form of profits and interest would go to the workers in the form of increased wages. For that 369 370 ELEMENTARY ECONOMICS reason socialism is best treated as a problem of distribution, though by its very nature the first changes in a state passing to socialism would be made in production. We must exercise care in this connection to rid our minds of the common fallacy that socialism means a redistribution of property so that all the members of society may have exactly the same amount of wealth. Unfortunately, some of the more radical socialists themselves have created this wrong impression by their in- temperate assertions. The abolition of profits and interest, and perhaps of rent, does not imply that all of the members of a socialistic state are to be equally wealthy. It merely means that there will be no opportunity for investment, and no opportunity to serve as a private enterpriser. Wealth may be accumulated and in- herited, and enterprising skill may be utilized by the state and rewarded accordingly. Under socialism no great leisure class will be possible ; that is, every one will labor. Tasks will be appor- tioned according to strength and ability and rewarded accord- ing to need. Socialists lay the blame for our industrial ills, such as unemployment and crises, to the present system of industry. They insist that in a socialist state everybody will be employed ; and that production will be nicely adjusted to need. Basis of socialism. — The socialists themselves claim that the system of private industry has broken down ; that labor is being exploited to pay profits and interest ; and that there is no prospect of better things unless the state goes over to socialism. The most bitter opponents of socialism dare not contend that all of its friends are crazy or even cranks. There must be, then, some basis for the socialistic movement which we see on every side. There is no denying, as we have seen in a previous chapter, that inequalities of income and wealth are glaring. Just why one man should be able to amass a fortune of a half billion dollars while millions are propertyless cannot be ex- SOCIALISM 371 plained on the ground either of foresight or of thrift. Is it any wonder, then, that men of all walks of life are giving careful attention to every proposal that has for its end a more healthy condition of industrial society? Different socialistic programs. — As is to be expected, different men have arrived at different conclusions regarding the socialistic program which the state ought to undertake. We may in this connection notice four different groups of socialists : (1) Utopian socialists, (2) Fabian socialists, (3) Christian socialists, and (4) Marxian socialists. The first of these groups, called the Utopists, was confined to France, England, and the United States. Among its mem- ber were included two Frenchmen, Saint-Simon and Charles Fourier. One of the most prominent Englishmen in this group was Robert Owen, founder of a communistic settlement at New Harmony, Indiana. In this country one of the best-known dis- ciples of Fourier was Horace Greeley, editor of the New York Tribune. These men had high ideals, and they made painful sacrifices in an effort to change them into actualities. The Fabian socialists are Englishmen. They believe that socialism will come "\Yhen the people are once awake to its merits. To hasten this day the Fabian society of England offers prizes for essays and other papers dealing with socialism, which they print for general distribution. The group of Christian socialists lay great stress on the necessity of society following the doctrines of the early Christians, who, they contend, shared their posses- sions in common. One of the outstanding figures of the group was Charles Kingsley, a noted English preacher and the author of Westward Ho! and Hypatia. More important for our discussion are the Marxian socialists. The chief figure of this group was Karl Marx (b. 1818 ; d. 1883), whose monumental work, entitled Capital (Das Kapital), is aptly called the bible of modern socialism. In this work one 372 ELEMENTARY ECONOMICS Declaration of Karl Marx and His Friends, 1848. THE COMMUNIST MANIFESTO. CHAPTER I. BOUEGEOISIE AND PROLE TAEIAT. 1 HE history of society in the past is the history of class struggles. Freemen and slaves, patricians and plebians, nobles and serfs, guild members and journeymen — in short, oppressors and oppressed, have always stood in direct opposition to each other. The struggle between them has sometimes been open, sometimes concealed, but always continuous. A never ceasing struggle, which has invariably ended, either in a revolutionary alteration of the social system, or in the comajon destruction of the contending classes. In earlier historical epochs we find almost everywhere a minute division of society into classes or castes — a variety of grades in social life. lu Ancient Rome we find patricians, knights, plebians, slaves; in Medieval Europe, feudal lords, vassals, burghers, journeymen, serfs; and in each of these classes here were again grades and distinctions. Modern bourgeois society which arose from the ruins of the ieudal system has not wiped out the antagonism of classes. New classes, new conditions of oppression, new modes and forms of carrying on the struggle, have been substituted for the old ones. The charateristic of our epoch — the epoch of the bourgeoisie, or middle class — is that the struggle between the various social classes has been reduced to its simplest form. Society tends more and more to be divided into two great hostile classes — the Bourgeoisie and the Proletariat. From the serfs of the middle ages sprang the burgesses of the early Communes; and from this municipal class were devel- oped the first elements of the Bourgeoisie. The discovery of America, the circumnavigation of Africa, gave the bourgeoisie or middle class — then coming into being — new and wider fields of action The colonization ot America, the opening up of the East Indian and Chinese markets, the colonial trade, the increase SOCIALISM 373 may find the claims of socialism ably set forth and ably defended. Two of them we may properly examine at this point. (1) Marx insisted that laborers produced much more than they re- ceived in the form of wages. This excess he called surplus value. What he really meant was that the two shares in distribution, profits and interest, were really portions of wages withheld from labor. (2) Marx also held the view that the interests of capital and labor could never be reconciled. Hence he speaks of the " inevitable conflict " between these two factors in production. He believed, and his followers hold the same view, that it is only a question of time until the laborers of the world would be compelled to crush capitalism. Hence, they are inclined to oppose any schemes that have for their end the reconciliation of capital and labor. Here we have the reason for the inability of sociaUsm and organized labor to agree. Organized labor recognizes the mportance of the employer in industry. Moreover, its efforts are directed to the betterment of the working classes, and hence, a postponement of the " inevitable conflict." Socialism in operation. — The usual argument advanced against any proposal for the government regulation of industry is that it is socialistic. Every legislative act of Congress which has had for its end government interference in enterprise has been bitterly attacked on this ground. /Yet strange as it may appear, what is socialistic in one generation is likely to become a settled and widely accepted policy in the next. When the national government decided in 1887 to regulate interstate com- merce, many weU-meaning persons thought they saw the begin- ning of a socialistic state. Forty years of practice have pro- duced a change. No longer is there any opposition to the principle embodied in regulating railroads. This, however, is but a single illustration ; it might be duphcated almost indefinitely."/' From Congress, the state legislature, and city 374 ELEMENTARY ECONOMICS councils there issues forth a constant stream of so-called socialistic legislation; that is, legislation which gives society more complete control over the factors of production. The longest step in this direction, taken to be sure as a war measure, occurred in December, 1917, when President Wilson, acting under authority conferred on him by Congress, took charge of the railroads of the country. Whatever our notions about socialism may be, whether we favor its doctrines or oppose them, we cannot shut our eyes to the fact that society is more and more intervening in the affairs of private industry. 86. Criticisms of the Socialistic Program Character of human motives. — Criticism of the socialistic program may be made on several different grounds. Even those who are inclined to be friendly toward the views of socialism feel that socialistic leaders have minimized the importance of the motives which cause the normal individual to exert himself economically. Here no doubt is a source of weakness, for socialists seem to take too much for granted. They see modern industrial society as it is now constituted with its various groups of workers, its enterprisers, and its capitalists. They see large income streams flowing into the pockets of the last two groups. Perhaps they see also the skill of the enterprisers and the sacrifice of the savers of capital. Back of all of the labor, the skill, and the sacrifice is the desire to possess goods. If socialism meant nothing more than a socialization of pro- duction, little objection could be urged against it by those who sympathize with its aims. May it not mean more than merely a socialization? May it not also mean the destruction of the force that drives men to their best endeavors, not only enter- prisers but laborers? May it not ultimately undermine the very industrial structure which modern society has erected? These are pertinent questions which demand attention and SOCIALISM 375 even serious consideration ; for the first step in socialism, if it be decided to give it a trial, may be to reshape human nature — that is, to destroy individual selfishness. The institution of private property. — A second obstacle to the socialistic goal is the institution of private property. For SRAUoe Copyright Underwood & Underwood, New York Soldiers and Sailors Breaking up a Socialist Meeting (in Boston, Mass.). centuries individuals the world over have been accustomed to hold various forms of property to the exclusion of all the rest of mankind. Each one speaks of Ms land, Ms money, or Ms 376 ELEMENTARY ECONOMICS goods. No other race of people has held so stubbornly to this principle as have the English, who insist that a man's house is his castle. For the individual to give up his property rights to society is beyond the conception of the ordinary man. It is doubtful if more than a scant few, all avowed socialists, would subscribe to such a principle. The assumption might be drawn from what has just been said that socialism is opposed on the ground that practically every one in this country owns property which a socialistic state would take over. Such, however, is not the case, for in so far as land is concerned more than one- half of the people of the United States are propertyless. Why, then, we may ask, do not those who would profit under socialism immediately vote to adopt the system? The answer is easily given when once we really understand human nature. First, the great bulk of men have never questioned, even in their own minds, the sanctity of private property rights. Second, the typical propertyless individual hopes some day to possess property of his own. Here, as in the case of economic motives, considerable education will be needed before any thorough- going socialistic program can be carried out. A broad education it must be, which will emphasize the superior needs of society, the subordination of individual rights to social rights, and the spiritual admonition that it is more blessed to give than to receive. Difficulties of administration. — - Assuming that a state has advanced to the point where its members are willing to exert themselves just as efficiently as they do now and to give up portions, at least, of their private property to the state, there would still remain serious administrative problems. Capital would be just as necessary under the new condition as under the old. Enterprising skill could not be dispensed with. Some one would have to make decisions as to amount and character of output, and to methods of distribution. What SOCIALISM 377 particular goods shall be produced? in what quantity? how- much shall be paid to each workman ? how much shall the enter- priser get? The number of questions of this character which we might raise is limitless. The mere fact, however, that socialists cannot answer any one or all of such questions does not necessarily condemn the socialistic program. Every new program must face the same difficulty. It is doubtful, for example, if Jefferson, or Franklin, or any other one of the men who drew up the Constitution of the United States in 1787, could have answered one-tenth of the questions which have since confronted the national government. Simply be- cause we cannot see how each detail is to be carried out in a socialistic state, is not sufficient ground on which to reject socialism. Our final judgment must be based on more evidence. 87. Some Substitutions for Socialism Government regulation. — Earlier in the chapter mention was made of the fact that society in this country has under- taken a variety of industrial activities which show unmistakable tendencies toward the socialistic program. Socialists them- selves say that these undertakings are mere substitutes for socialism, if not indeed flimsy makeshifts. The most outstanding substitute of this nature is government regulation. We have already seen how Congress has provided, in the Interstate Commerce Act and its amendments, for regu- lating trade among the states. But the national government has gone much farther in this respect. We have anti-trust laws, child-labor laws, pure-food laws, drug laws, laws regulating the inspection of meat products, government manufactures of war materials, and public shipyards. Our participation in the Great War compelled unheard-of regulative measures in pro- duction. Raw materials were apportioned among manu- factures, the country experienced " coalless " days, while even 378 ELEMENTARY ECONOMICS consumers were told what they might eat. Since government regulation seems to be the first step toward government ownership and government operation, all such regulative meas- ures are regarded by many with grave apprehension. Government cooperation. — The government has also co- operated in some industries. The most familiar example in this respect is the ship subsidy, whereby the government for a nominal economic service pays to shipowners stated sums of money in order to encourage shipbuilding and ship operations. Irrigation is another example. Here the government builds storage basins from which it supplies water to farmers in the near-by regions. In other words, the government cooperates in production. Obviously, grave dangers lurk in government cooperation, for to open the government purse to the hands of private individuals on the pretense of public welfare, is a temptation sometimes difficult to resist. I The problem of government operation. — Our government has had too little experience in the operation of industry, to permit of any judgment being formed as to the merits of government ownership. We have conducted the post office with a fair degree of efficiency, and, much to the surprise of many people, the national government dug the Panama Canal at an enormous cost free from suspicion of graft or political jobbery. Could we hope to carry on other industries with the same measure of suc- cess? Some say. Yes ; others. No. Neither side has much data on which to base conclusions. Those who answer yes, point to the success of the post office as an evidence of government efficiency. Those who answer no, lay stress on the temptation of public officials to be careless with public affairs. They direct attention to the " pork-barrel " practices of making appropria- tions for public improvements, and from this fact they conclude that industry in general would be in grave danger if directed by the government. Government operation is likely to become SOCIALISM 379 increasingly important as a social problem, and for that reason it is our duty to give careful attention to its solution. EXERCISES AND PROBLEMS 1. Why may socialism be considered a distributive problem? 2. May it be also a productive problem ? Explain. 3. Why should every one carefully examine the claims of socialism ? 4. Account for the hazy notions many people have concerning socialism. 5. Do socialists look forward to an equal distribution of wealth? of income ? 6. What essential beliefs divide socialists into groups ? 7. Just what did Marx mean by the expression, "surplus value"? 8. Do socialists urge friendly relations between employer and employee? Why, or why not? 9. What human motives hinder socialism ? 10. What is meant by the expression, "the institution of private property"? 11. What administrative problems would confront a socialistic state ? 12. What important present-day questions of production would persist under socialism? 13. Why, or why not, may we justly demand that the solution of every administrative problem be pointed out before we give a respectful hearing to the principles of socialism? 14. What is a substitute for socialism? B 1. Consult with some well-known socialist in your community. a. Ask him about the socialistic attitude toward present-day production, consumption. h. Get his opinion on the trend of public thought regarding socialism since 1910. c. Inquire concerning the administrative difficulties socialism is likely to meet. d. Get his views on the relation of socialism to organized labor. 380 ELEMENTARY ECONOMICS e. Learn the general attitude which socialism takes toward religion, education, marriage, charity. 2. Inquire at random among older acquaintances concerning their notions of socialism. a. How many of the whole number appear to have given socialism any serious thought? b. How many appear to have fixed convictions on the subject ? c. From your experience in this connection, what would you say regarding the general attitude of the American public toward socialism? 3. Confer with the best-informed anti-socialist in the community and get his reaction on the claims made by your socialistic friends. Then you wiU be in a fairly good position to think for yourself. 4. Analyze the answers of the business men to whom you put the following questions : a. What is the origin of private property? 6. Why should an individual be permitted to own and control private property? c. Would you favor the socialization of all private property? . d. How would such a change affect society? industry? 5. List any arguments you may think important in support of the government ownership of railroads. List also opposing arguments. 1. How would you expect a change to socialism to affect the following : o. Farming? h. Plumbing? c. Retailing ? d. Manufacturing? e. Teaching? /. Preaching ? g. Professional begging? h,. Lending money? i. Renting residence houses? J. Coal-mining ? k. Professional singing? 2. Imagine a system of socialism in operation in this country, o. What problems concerning production might arise? SOCIALISM 381 b. How would society be able to secure the services of skilled enterprisers ? c. From what source would capital come? d. What would determine the wages of plumbers, carpenters, unskilled workers ? 3. To what extent, if at all, are the following socialistic : a. Maintenance of free public schools? h. Regulation of street-car fares? c. City ownership of a gas plant? d. Fixing the price of wheat? 4. Explain just why socialism should oppose labor strikes, coopera- tion, profit-sharing, social insurance. SUPPLEMENTARY READING Bullock, Introduction to the Study of Economics, 3d ed., pages 494-513o Ely, Outlines of Economics, 3d ed., pages 627-640. Fetter, Economics, Vol. II, pages 470-490. Fisher, Elementary Principles of Economics, pages 35, 36, 369-371. Seager, Principles of Economics, pages 613-627. Seligman, Principles of Economics, 5th ed., pages 64, 136, 655-658. Taussig, Principles of Economics, 2d ed., Vol. II, pages 443-478. CHAPTER XXVIII SOCIAL INSURANCE 88. The Risks of Industry Nature of the risks. — ■ One of the most outstanding features of modern industry is the constant risk to which laborers are exposed. Equally important is the inability of the laborer either to avoid the risk or to bear the financial burden which it may incur. We usually associate risks of industry with acci- dents such as cuts, burns, bruises, or even death. But risk, every laborer knows, has a wider application. Sickness from natural causes, overwork, or exposure, stares him constantly in the face. His " job " is insecure at the best, while old age can be forestalled only by premature death itself. Any one of these calamities, if long continued, endangers the worker's independence and tends to demoralize him. What to the well- to-do and the rich may appear as trifles, loom large in the experiences of the mass of labor. An accident, a few weeks' illness, or a month's idleness means self-denial on the part of every member of the family. Many an industrious worker has struggled for years only to find from time to time his scant savings swept away in doctor bills. Even though he be for- tunate in these respects there still remains old age with its lower earning power, its dependence, its aches and pains. Few laborers above the age of sixty-five are independent, the great majority of them depending more or less on relatives, friends, or public charity. 382 SOCIAL INSURANCE 383 Inability of individuals to carry risks. — Since it is a self- evident fact that workers are endangered on every hand, why do they themselves not adequately prepare for enforced idleness or old age ? A complete answer involves many considerations. First, a worker, like other people, gives little thought, as long as he is well and strong, to accident, sickness, or old age. He sees no need for taking measures against a calamity that may never come. His greatest concern is in his immediate task. Present wants obscure future demands. Suppose, however, that the typical American workman, realizing the risks to which he was exposed, should decide to save enough to tide him over periods of sickness or idleness, or even to maintain him in decency during his old age. Even then it is doubtful that he would succeed, for no system of budgets yet devised for the workers shows any surplus above present needs, large enough for such a purpose. The simplest calculation shows that family incomes of five or six hundred dollars a year are too slender to permit of savings of any consequence. For the same reason our worker carries little or no insurance against loss, even where insurance is possible. The two chief obstacles to individual protection, therefore, are lack of foresight and lack of funds. Either alone is of no avail. Arguments for social insurance. — If the individual will not or cannot protect himself against industrial mishaps, it is the duty of society to come to his aid. Society has a varied interest in the welfare of its workers. First, the workers are members of society. Second, society in the long run does provide for all. Third, society enjoys the product of labor. We have learned already that the interests of society are best promoted by giving attention to the interests of its individual members. Any large group of dependents, we may safely assume, is a menace to the social group of which they are a part. Furthermore, it is doubtful if society as a whole would be more greatly hindered 384 ELEMENTARY ECONOMICS if some form of insurance were provided in place of the prev- alent haphazard methods now employed in our charity work. It is a fact generally overlooked that nowhere in this country do the authorities intentionally permit individuals to starve or to go unattended if aged or ill. In other words, our state- regulated charities guarantee a minimum of food, clothing, and shelter. Since this is true, the question may be raised : Why change the plan now in general use ? A change is desirable if for no other reason than to make the recipient feel that he is not an object of charity, but an unfortunate partner in a mutual protective concern controlled by the state. Finally, it is doubtful if a well-regulated insurance scheme that provides contentment as well as protection would in the long run cost society a dollar. Workers free from worry turn out more prod- uct than those who fear to take a day off with a day's loss of wages or those who return to work before they are physically fit. In any case society as such consumes the product of labor and ought out of sheer justice to be willing to protect laborers against risks for which they themselves are not responsible. Risk an element in costs of production. — Employers have generally protested against social insurance on the ground that the payments they are called on to make are an unbearable burden. Every one of these same employers provides for the wear and tear on buildings and machinery by setting aside what is known as the replacement fund. When a steam boiler, for example, is no longer fit for use, he buys a new one from this fund. We may properly inquire as to the source of this fund. Production, we have already learned, merely means creation of utilities. The obsolete steam boiler has been transformed, so to speak, into shoes, hats, cloth, or whatever else the finished product of that particular factory happens to be. Obviously, the price of the finished product must, under normal conditions and in the long run, be large enough to provide for deterioration SOCIAL INSURANCE 385 CopyriglU Underwood & Underwood, New York Building a Modern Skyscraper. 386 ELEMENTARY ECONOMICS in instruments of production. Otherwise the world would soon be out of such instruments. Why should a distinction be made between a worn-out machine and a worn-out worker ? If society can afford to repair and replace steam boilers, why may it not afford to doctor its sick and injured, and to pay at the end of a worker's life a lump sum to his dependents? The world, as we shall see in the following paragraphs, is fast coming to believe that society cannot escape the responsibility ; that is, that prices must be high enough to care for a portion, at least, of the costs of labor upkeeps. 89. Kinds of Social Insurance : Europe Accident insurance. — Of the various kinds of social in- surance the most important in many respects is accident in- surance. In 1884 Germany provided that employers must form mutual accident insurance associations, which should collect dues from employers and pay benefits to victims of accidents or, in case of death, to the family of the deceased. The employers themselves manage the affairs of their respective associations, though the German government through its Imperial Insurance Office exercises a certain amount of oversight and acts as a mediator in all cases where an injured employee is dissatisfied with the award made by one of the associations. Ten years later Norway instituted a government-controlled system of accident insurance. The employers of that country pay into a state insurance fund premiums which are based on the size of wages and the degree of risk to which each employee is exposed. The state itself administers the funds, paying the victims of accidents according to a carefully prepared scale. In 1897 an English law provided that employers should be liable for accidents to their employees, but it did not provide that em- ployers should organize for mutual protection ; that is, each employer could insure his men against accident in some insur- SOCIAL INSURANCE 387 ance society, or, if he preferred, carry his own risk. One of these three methods has been adopted in practically every European country. The administration of accident insurance is fairly easy. In Germany, the benefits paid during the first thirteen weeks following an accident come from a sick fund, which the em- ployees themselves must largely provide. Obviously, the object of this scheme is to restrict the use of the funds of the employers' associations to those who suffer from serious accidents. Besides, since the first thirteen payments come largely out of the pockets of the employees, there will be less temptation for an employee to pretend to be injured in order to get a few weeks' rest. Insurance against illness and old age. — The German plan of insuring against illness was instituted in 1883. There the state requires each employer to purchase weekly from the post office, insurance stamps for each of his employees. At least one-third of the cost of the stamps must be contributed by the employer, who may, if he chooses, deduct the other two-thirds from his employees' wages. Should an employee become ill he has his stamps, which are fastened to insurance cards, as evidence that he is insured. The provisions of the German law cover many different aspects of illness. (1) Naturally the first provision is for free medical attention. In case of serious accidents, such as the loss of a leg or an arm, the state supplies artificial limbs. (2) Free hospital service is also furnished where necessary, and special attention is given to hospitals for young mothers and babies. (3) One-half of the wages of an ill workman are paid for a maximum period of six months. (4) Finally, small benefits are paid to the dependents of deceased employees. Germany provides also for compulsory insurance against the hazards of old age. As in the case of illness employers must affix stamps to insurance cards, being permitted to withhold at most one-half of the amount from employees' ^wages. The 388 ELEMENTARY ECONOMICS buying of stamps begins for each employee at the age of sixteen. Benefits are first paid at the age of seventy, or earher to those who are totally incapacitated for labor. Both the premiums on the insurance and the benefits paid to the insured are relatively small. The first average only a few cents each week (3^ to 9) while the latter average approximately one dollar a week. Copyright International Film Service, New York. Feeding the Unfortunate. Here we see homeless men being fed at public expense. Great Britain has also provided insurance against illness (1912) and old age (1908). In each case the British law is similar to that of Germany. British employers must purchase illness insurance stamps for their employees, the two groups sharing about half and half in their cost. The benefits resemble the benefits under the German system, the chief features being SOCIAL INSURANCE 389 free medicine, free hospital service, and weekly sick benefits ($2.50 for men and $1.75 for women). Under the British old- age pension law any wage-earner of that country, when he reaches the age of 70, is entitled to a small pension if he can prove that he has lived in Great Britain during the past twenty- six years and does not already have an annual income exceeding about $150. Insurance against unemployment. — The most difficult of all forms of social insurance to administer is unemployment insur- ance. Dishonest employees may pretend to be ill or injured only at the risk of having their dishonesty easily detected. In the matter of unemployment, however, the situation is different. No human agency yet devised could successfully distinguish between inability to find work and laziness. For that reason unemployment insurance has lagged behind. In the Belgian city of Ghent, however, the trade unions, assisted by donations from the city treasury, have undertaken to pay small benefits to the unemployed. Since the unions themselves are vitally interested in the money they pay out, abuse of the benefits on the part of the dishonest is reduced to a minimum. Great Britain has undertaken in a much more ambitious way to insure against unemployment. There employment bureaus supported by the state attempt to keep unemployed labor moving in the direction of jobs. Certain trades enjoy special protection against unemployment. In these trades employers must pro- vide each employee with stamped cards, which guarantees, in case of unemployment, a small benefit of $1.75 a week for a maximum of fifteen weeks. 90. Progress and Outlook of Social Insurance IN THE United States Constructive legislation. — The only important step taken in this country toward state regulation of social insurance has 390 ELEMENTARY ECONOMICS been in connection with industrial accidents. Until recently the old common law, which lays a great deal of responsibility for accidents on the employees themselves, was in full force. Under this law an injured workman had no legal redress against his employer if it could be proved that either he or any of his fellow employees had been the cause of the accident. Even when the employer was clearly to blame it was almost im- possible for an injured employee to secure damages, owing to the heavy costs of court htigation. Now and then an injured em- ployee was able to secure a large damage from his employer, but this was the exception rather than the rule. Usually also a large portion of such awards went to pay legal fees and court costs. It must not be thought, however, that the employer had no worries in this connection. He stood in constant dread of being sued for damages resulting from accidents ; and the fact that he usually won his cause in court carried little consolation, for legal successes are excessively costly. It is little wonder then that Congress as well as various state legislatures finally gave attention to providing compulsory accident insurance. In 1908 a federal law provided accident insurance for a majority of the industrial employees of the government. A little later many of the states took steps to protect privately employed workmen. The result has been that more than one-half of the states have workmen's compensation laws. Naturally these laws vary in detail, yet they possess in general three characteristics: (1) protection for workers in hazardous occupations, (2) little or no responsibility for acci- dents placed on employees, (3) costs of maintaining insurance imposed on employers. In some of the states, employers must provide accident insurance for their employees. In others it is a matter for employers and their employees to decide ; usually with the provision that the refusal of either party to enter into such voluntary arrangements as were provided by the SOCIAL INSURANCE 391 Copyright, Underwood & Underwood, New York. Dependent on Charity. Numerous private organizations assist in caring for dependent members. 392 ELEMENTARY ECONOMICS state puts the party refusing at a disadvantage before the courts. A comprehensive program for social insurance. — Leaders of American thought have given careful attention to the question of social insurance in the hope of being able to formulate a set of general principles for the guidance of legislatures in enacting workmen's compensation laws. This they have done : the most active group, the American Association for Labor Legis- lation, has indorsed substantially the following standards : A. Compensation — Medical attendance. Two-thirds of regular wages. $20.00 weekly maximum. 15.00 weekly minimum. Funeral expenses. One-third of wages to widow. B. Compensation to be the only remedy — Neither employer nor employee may bring suit under law of negligence. C. Exemptions from comi^ensation — Farm laborers. Domestic servants — • Hotels and restaurants excepted. D. Employers given option as to methods of insurance — Mutual associations. Stock companies. State insurance. E. Compensation laws administered by permanent accident board — F. Methods of settling claims — Arbitration. Accident board. Th. program is, to say the least, an ambitious one. It has for its end liberality as well as justice. It provides for the injured workman in a way so as not to offend his sense of self- respect ; gives employers an opportunity to choose their own SOCIAL INSURANCE 393 insurance plan; and finally, it does away with undue risk, financial uncertainty, and costly litigation. The outlook. — The awakened consciousness of the people to the burdens which society for centuries has been laying on its weakest members is a sign of social health and social progress. It points to the day when the unfortunate industrial worker can demand as a right the financial protection of society ; a day when it is fully recognized that it is just as important to provide for wear and tear on men as for depreciation of inanimate machin- ery; a day when the strong will adequately recognize their responsibility to the weak. Social obligations, however, are two-sided. Workers as individuals. and as an industrial group cannot escape their responsibility to the larger social group. All have duties. No one can stand aloof from the crowd. A mutual understanding of the rights and duties of each is likely to be the longest step to be taken in reaching what some con- sider the industrial millennium. EXERCISES AND PROBLEMS 1. Why are manual laborers, more than others, exposed to sickness, accidents, and death? 2. Just how expensive, both from the individual and the social view- point, is each of these forms of disability? 3. How does it happen that such a large proportion of old people are more or less dependent ? 4. Why does not the normal individual guard himself more care- fully against accident and sickness? 5. Can the typical American workman afford to carry any great amount of life or accident insurance ? Why, o^ why not ? 6. Why should society undertake the protection of individuals? 7. Why is charity inadequate? 8. Just how does society guarantee a minimum to every individ- ual member ? 394 ELEMENTARY ECONOMICS 9. Why should society as a whole replace machines and not men ? 10. What influence did the autocratic government of Germany have on the development of social insurance among the Germans ? 11. In what particular respects does the English plan of social insurance differ from the German plan ? 12. What are the outstanding features of accident insurance? 13. Why has social insurance developed slowly in the United States? 14. Just to what extent have we gone? B 1. Call to mind any financial distress which you have observed caused by accident or illness. a. To what extent was the laborer responsible for his own accident or illness? b. Did he carry accident or sickness insurance? What kind? c. Was he a member of a fraternal order? Which? d. Did his employer aid him? How? e. Did his trade union assist him financially? /. How far, if at all, was he aided by organized charity ? 2. Investigate any organized effort that is being made in your community to help the poor and unfortunate. a. What are the sources of financial support? i. To what extent, if at all, are these funds raised by taxation ? ii. Enumerate other methods of raising funds (tag days, etc.). h. What is the attitude of the people who are helped ? c. How is pauperization prevented? 3. Name the various agencies in your community which extend financial assistance to the distressed. a. Which are religious in nature ? b. Which emphasize personal visitation? c. Which have membership dues? d. Which are purely philanthropic? 4. Inquire as to the general attitude of your older acquaintances toward the county or other public almshouse. a. Does any stigma attach to its occupants ? Why, or why not ? b. Does any one take the view that it is merely a method of guaranteeing a minimum subsistence to each member of society? Who? c. What is the viewpoint of the occupants themselves? SOCIAL INSURANCE 395 5. Look about for other means of extending financial assistance to the incapacitated : a. Public hospitals. h. Government pensions. c. State and federal houses for disabled soldiers and sailors. d. State institutions for the unfortunate. e. Old people's homes maintained by fraternal organizations. May we consider these as forms of social insurance ? Why, or why not? C L The assertion is often made that each individual usually has it in his own power to provide against the dependency of old age by saving systematically during his productive years. a. Might the typical American workman be more frugal ? How ? h. What other factor is necessary in saving ? c. Calculate the annual saving necessary for 40 years to insure an income of $300 a year at the age of 60 on a six per cent basis. , 2. One of the best-known American cartoonists showed recently the attitude taken by men engaged in hazardous occupations. A structural steel worker standing on a narrow beam twenty floors above the street and an aeroplane pilot in his machine a thousand feet above, each observing the other, remarked how foolish some men were in taking risks. Why did each minimize his own risk and magnify the risk of the other? 3. Suppose that society should devise some plan whereby house painters would be insured by the public against accident, sickness, old- age dependence, and unemployment. a. Would the number of house painters tend to increase or decrease ? Why ? h. How would the wages of house painters be affected ? c. What would be the probable effect on the cost of painting a house ? d. In what way, if at all, would taxes be affected? e. Would a plumber's income be changed as a result? How? 4. Would you class the following as forms of social insurance : a. Government pensions? h. Free treatment in railroad hospitals ? c. State aid for the blind ? 396 ELEMENTARY ECONOMICS d'. Insane hospitals? e. Retiring allowances to aged preachers? /. Teachers' pensions? g. Payments from a fii-emen's pension fund? SUPPLEMENTARY READING Ely, Outlines of Economics, 3d ed., pages 57, 587-595. Fetter, Eco7iomics, Vol. II, pages 349-365. Seager, Principles of Economics, pages 598-612. Taussig, Principles of Economics, 2d ed.. Vol. II, pages 323-345. CHAPTER XXIX THE SHARE OF THE GOVERNMENT IN DISTRIBUTION (TAXATION) 91. Government Revenues and Government Expendi- tures Revenues of various taxing bodies. — The number of taxing bodies to which any particular individual may be subject varies from a few to twenty-five or thirty. Farmers as a rule are sub- ject to only four or five such bodies, while a dweller in a large city, with its parks, hospitals, sewerage system, high schools, city colleges, or technical schools, and with numerous other agencies for the betterment of social conditions, finds a much greater number of official boards which have authority to tax his property. Our problem will be much simplified, however, if we confine our attention to (1) national taxes, (2) state taxes, and (3) local taxes. The national government possesses practically unlimited power in the matter of taxation, and, strange as it may appear, needs, under normal conditions, the least revenue. The states have much less power to lay taxes, though their needs in times of peace are greater than those of the national government. Finally, local needs — city, school, county, township — are the greatest of all ; yet they must be sup- plied by taxing bodies hedged about with constitutional or statute restrictions. In most states, for example, the taxing power of each school board is limited to a small per cent of the total wealth in the school district. This limitation may be imposed by constitutional provision or by legislative enactment. Similar 397 398 ELEMENTARY ECONOMICS limitations are very generally placed on city, county, township, road, bridge, park, and other taxes. We should be warned at this point that the emphasis we may lay on the restrictions on local taxing boards is in no way indicative that they are un- desirable, or even detrimental to the best interests of society. Receipts and expenditures of the national government. — Since the second year of the Civil War the receipts of the national government, aside from loans, have been largely derived from import (tariff) and excise (internal tax) duties. From approximately sixty million dollars in 1860 the annual ordinary receipts of the national government rose to three quarters of a billion dollars in 1914, and, under the stress of the Great War, to something like eight billion in 1919. The expenditure of these vast sums has taken a multitude of forms. During the last year prior to the outbreak of the War in Europe in 1914 the ordinary expenditures were as follows : Civil and miscellaneous $170,530,235.45 War Department 173,522,804.20 Navy Department 139,682,186.28 Indians 20,215,075.96 Pensions 173,440,231.12 Interest on the PubUc Debt .... 22,863,956.70 Total $700,254,489.71 It is to be noticed that federal expenditures are undertaken primarily for national defense ; that is, the federal government assumes the duty of protecting state and local governmental units from foreign interference, leaving them free to manage their own affairs : about 70 per cent of the entire expenditures go directly or indirectly to war purposes. State and local expenditures. — State expenditures go largely to the militia, to schools, to charitable institutions, and to the maintenance of the courts. Their chief sources of revenue are real estate taxes, and license fees of various sorts. The SHARE OF GOVERNMENT IN DISTRIBUTION 399 last few years have seen the activities of the states in these respects grow rapidly. The causes are obvious. People are more and more coming to the conclusion that the state govern- ment is in a position to take over many so-called private func- tions at a material saving in money cost. Nowhere else, Expenses of the Cities of the United States for Various Purposes: 1902-1912. PER CENT 20 40 60 80 100 1912 191 I 1910 1909 .«^:^^mm^ 908 ^m^^m ^^ \\\ mkvyyj: fy^mss.^sm',WA ^My(My¥>zym SS^M 1907 .906 ^^^?^8 ^^^^^ iHIH^BKX ^.fe^^^^g^gg^ 1905 1904 1903 1902 ssss5?^?ss^s^^^5i^i II II I II \y>yz/^^mss>^^^^ '^^^^x^z^^mt^^i 1 1 1 II HI l>s^i^^^N^^^^^^ sesse5sea«>^^s^^!i II 1 1 1 1 1 1 KyAV/^^m^^>i<^^mm, EDUCATION mum POLICE DEPARTMENT GENERAL GOVERNMENT HIGHWAYS conservation of HEALTH FIRE DEPARTMENT ^^^1 CHARITIES, HOSPITALS, AND CORRECTIONS I I ALL OTHER however, have receipts and expenditures grown as in the local units. The incorporated cities of this coiintry spend practically as much money each year as the national government and the forty-eight state governments combined. In 1914 the budget of the city of New York equaled approximately the total of all the state budgets west of the Mississippi River. In 1913 400 ELEMENTARY ECONOMICS the per capita expenditures of cities was almost thirty dollars, while the same item for state expenditures was four dollars, and for the national government ten dollars. Heavy city expenditures have been accompanied in too many cases by extravagances and mismanagement. The influence that goes with the expenditure of municipal funds is an attraction which few local politicians can resist. It means patronage and hence, power. Here, then, is a problem which must be confronted, and unless the next generation aids in solving it, young people now being educated by the state shall not have returned to society the full measure which it has a right to expect from its heavy invest- ments in free schools. Definition of a tax. — It will add to clearness of the subject, if, at the outset, we distl^nguish between a tax and two other revenues that resemble taxes. " A tax is a payment, usually in money, exacted hy the government for the purpose of carrying on public enterprises for the common good." It will be noticed that payment is compulsory, and that expenditures are made for the benefit of society as a whole. Examples are the general property tax, income and inheritances taxes, and excises. Resembling a tax somewhat are the special assessment and the fee. As its name suggests, the special assessment is levied for the purpose of defraying a special public charge. Professor Seligman defines it as "a payment made once for all to defray the cost of a specific improvement to property undertaken in the public interest, and levied by the government in proportion to the particular benefit accruing to the property owner." Of the several kinds of special-assessment enterprises the best- known is the construction of city pavements. The same authority defines a fee as "a payment to defray the cost of each recurring service undertaken by the government primarily in the public interest, but conferring a measurable special advantage on the fee payer." The principle underlying the SHARE OF GOVERNMENT IN DISTRIBUTION 401 fee is public regulation, though individuals that pay it are usually benefited. Fees are charged for marriage licenses, for recording of deeds, and for numerous other public services of like nature. 92. Bases of Taxation , The benefit principle of taxation. — One of the very generally accepted principles of taxation is that taxes may be levied according to the benefits derived ; that is, the amount of each person's tax should correspond to the services which society renders him. Obviously, however, such a principle has, in practice, serious limitations. Sometimes those who are least able to pay taxes, need most the state's aid. The lower income groups, which pay a relatively small share of the school taxes, are the most highly favored by public education, for it would be cheaper for the well-to-do, in lieu of paying school taxes, to educate their own children in private schools. The truth of this statement becomes more striking when we consider that the property of unmarried persons and childless married couples is taxed for school purposes regardless of the fact that they receive no direct benefit in return. It has only been by short and somewhat halting steps that American society has arrived at the point where it is willing to abandon the benefit theory in levying school taxes. Not many years ago our state courts were " swamped " with suits in- stituted by property-owners in an effort to be relieved from being taxed to educate other people's children. In fact, in one populous Middle Western state the high school system owes its existence to the legal fiction that high school education is authorized by the statute which authorizes " common school " education. Numerous other exceptions may be found to the benefit theory of taxation. We do not inquire how much taxes an individual has paid when we admit him to a public hospital, 402 ELEMENTARY ECONOMICS a public library, or to a public park. It is indeed fortunate for society that the benefit theory has been partially abandoned, for it fails in general to make the strong bear some of the burdens of the weak. Even the well-to-do who receive no direct benefits from school taxes profit indirectly and in the long run ; for public education, if it means anything at all, ought to stand for a more enlightened citizenship, for higher industrial efficiency, and for greater security for persons and property. The ability principle of taxat on. — It accords more with our sense of justice to levy taxes according to ability to pay. This policy we follow in asking for Y. M. C. A. and Red Cross sub- scriptions, and even in urging the people to purchase government bonds. But there is also an economic justification for com- pelling the well-to-do to pay taxes out of proportion to what may appear to be the benefits derived. Clearly, the millionaire ought to contribute more than a aboring man to protect the country against foreign invasion. Both have, or ought to have, equal personal interests in preserving the sovereignty of the nation. In addition, the former has extensive property rights which he expects the government to protect. Enforced contribution according to ability, if carried into the realm of prices, would, however, lead to ridiculous results. To employ an economic term, it would destroy what we called in an earlier chapter the consumers' surplus. Acceptance of the ability principle paves the way for two other considerations. Shall a tax be proportionate or progressive ; that is, shall persons pay in exact proportion to their means, or shall the rate of pay increase with an increase in wealth? To make our problem concrete let us suppose that we have under consideration the assessment of taxes against three individuals having property valued respectively at $1,000,000, $2000, and $500. A one per cent proportionate rate would produce $10,000, $20 and $5 in taxation, thus diminishing the wealth of SHARE OF GOVERNMENT IN DISTRIBUTION 403 these three to $990,000, $1980, and $495. The question is: Has each individual paid according to his abihty? Is the sacrifice the same in the three cases ? One may mean merely the foregoing of a costly banquet ; another, the loss of a comfort ; while the third may mean sacrifice. To place the three on a more nearly equal basis progressive taxation is employed. Here, we may suppose, the individual with the lowest income pays one per cent, the next, two per cent, while the wealthiest of the three pays ten per cent. Then the amounts raised from the three would be $5, $40, and $100,000. The use of the pro- gressive system has been confined very generally in this country to income and inheritance taxes, largely because it is there, according to an old saying, that " the goose can be plucked with the least squawk." Justice and expedience in taxation. — Every one that has had experience in levying taxes lays emphasis in discussing them on the justice of taxation. It would be nearer the truth, however, to say that expediency is more often the basis on which taxing laws rest. Lawmakers know full well that no tax, whatever its size or character, is popular. For that reason they are in- fluenced in their legislation by the desire to create as little opposition as possible. Hence they cling to old taxes, to in- direct taxes, and to taxes on the rich. Paying an old tax, however burdensome and unjust it may be, in time becomes a habit much like paying the monthly grocery bill or the house rent. In other words, people become reconciled to its harshness. Indirect taxes are hidden in prices of goods, and hence are usually paid unconsciously by consumers. Few of us ever bother about the tax on tobacco, chewing gum, perfume, or playing cards. In making our purchases we compare only the value of the article to us with its price. Finally, taxes imposed on the rich are not likely to prove unpopular. The rich themselves may protest, but without support or sympathy. 404 ELEMENTARY ECONOMICS 93. Kinds of Taxes Shifting and incidence of taxation. — ■ An important phase of taxation relates to shifting and incidence. We have just noticed that the purchaser of a cigar gives httle or no attention, if indeed he be aware of it, to the fact that a portion of the pur- chase price is a tax which the manufacturer has paid to the national government and then shifted to the retailer, who in turn shifts it to the purchaser. The shifting of the tax on tobacco is not unique. Practically every tax can be passed on from one buyer to the next until eventually it is paid by the consumer. Duties on imports (tariff duties) are often shifted a great many times, the number depending on the number of transfers of ownership. The importer of English broadcloth pays a certain tax to the government, which he merely adds to the price of his goods. This same tax comprises a portion of the price which the garments made from it bear, and it is finally paid, not by the retail clothier, but by his customers. House taxes too emerge in the form of higher rents, while taxes on business of all sorts are largely absorbed in higher prices. It is generally held, however, that land taxes cannot he shifted; that is, the owner of a piece of land must bear the tax assessed against it. Most people doubt the accuracy of this statement. Yet it becomes obvious when we remember that the return from land is economic rent, which depends entirely on its relative superiority in the matters of production and location ; and that, if the tenant is paying full economic rent, he cannot afford to pay more ; also that the tenant cannot shift the tax by advancing the price of his products, for this price is fixed by the marginal producer. The general property tax. — The best-known tax of all is the general property tax. As the term suggests, this is a tax on wealth irrespective of its nature — that is, a tax on real SHARE OF GOVERNMENT IN DISTRIBUTION 405 estate and personal property. This tax is assessed by one town- ship or county official and collected by another. It provides the bulk of local and state revenues ; and for that reason, if for no other, it ought to be sound in principle. But usually it is not. First of all, the typical general property tax law provides for the same rate of taxation on personal property as on real estate ; and as a result it defeats its own purpose, for only the most scrupulous — so few as to form a relatively small class — will disclose their entire personal wealth to a tax assessor. This does not imply that the American people are liars or even tax- dodgers. It does mean, however, that the average taxpayer, knowing that his neighbors do not disclose their personal prop- erty, feels justified in self-defense to refrain from disclosing his own. The general property tax glares with inequalities even if nothing except real estate were taxed. Usually a state imposes, for state purposes, one fiat rate over all its counties. Each county has its own body of assessors. As a result, widely differ- ent valuations are often placed on pieces of property having about the same value. If, to take an extreme example, the state tax rate is 50 cents on each hundred dollars' valuation, and one assessor estimates the average value of farm horses at $30 and another assessor at $50, one group of horse owners is overtaxed or the other group is undertaxed. Similar inequalities may easily occur in counties having township organizations. Some attempts are made, however, to equalize taxes both within states and within counties. To that end boards of equalization and boards of review have been established. If the general property tax is so unsatisfactory, why do not the voters abolish it and substitute a better kind of taxation? The answer seems to be that an old tax whose exactions are known is better than a new tax which may carry unknown burdens. In other words, the typical taxpayer prefers to let well enough alone. 406 ELEMENTARY ECONOMICS The income tax. — The practice of imposing taxes on incomes has been general in Europe for years, and even in this country several of the states have had income-tax laws. During the Civil War the national government collected a tax on incomes. Later, in 1894, Congress again provided for a federal income tax. A few years later the United States Supreme Court declared this law unconstitutional on the ground that it was a direct tax not apportioned, as the Constitution required, among the states according to population. The people then took matters in their own hands. The result was the Sixteenth Amendment, which gives the federal lawmakers authority to tax incomes. The first income-tax law under the new amend- ment exempted all incomes below S3000 ($4000 for man and wife), and provided a progressive tax on all incomes above that point. The total amount raised the first year (1915) was approximately one hundred million dollars. Our entry into the Great War (1917) caused Congress to lower the exemption to $1000 and $2000 and to increase rates above that point. Until recently it was the general opinion that an income tax would prove to be unsatisfactory in this country. Our few years' experience, however, now leads us to the contrary view. This tax falls only on the well-to-do and the rich and it is diffi- cult to shift. It comes out of incomes, is easily collected, and has not proved excessively unpopular even among those who feel its exactions. It seems safe to predict, therefore, that the income tax will become increasingly important, both as a source of revenue and as a means for lessening the inequalities in distribution. Inheritance taxes. — An inheritance tax is collected on estates as they pass into the possession of heirs. Practically all states have such a tax, though less than a generation ago the right of the state to share in the estates of its citizens was very generally regarded with disfavor. Like the income tax. SHARE OF GOVERNMENT IN DISTRIBUTION 407 the inheritance tax is usually confined to the estates of the well- to-do and the rich, and almost always bears a progressive rate. Unlike an income tax, however, an inheritance tax is paid from capital and not from income. The principle involved in taxing estates is of great social importance. Often a deceased has no near heirs, none, let us say, nearer than a second or third cousin. AVhy, in the absence of a will, should these distant relatives have a greater interest in the estate than the neighborhood where the deceased had spent his whole life, or the business men with whom he had been associated for years? On what common-sense ground can a distantly related person, one perhaps whom the deceased had never known, claim to inherit property? Both questions were revolutionary a generation ago. They are less so now. Another generation may see them answered in the interest of the state. Other kinds of taxes. — -The forms of taxation just noticed do not by any means exhaust the list, though in many respects they are the most important. Others that might have been discussed are tariff duties, excise taxes, taxes on transactions, corporation taxes, business taxes, license taxes, and poll taxes. Each has its own problems of administration ; each serves a particular purpose ; but all at bottom involve the same general principles which we have already noted. EXERCISES AND PROBLEMS A 1. Why are there often so many taxing bodies in a community? 2. What only restricts the power of Congress to lay taxes? 3. Is this restriction important? Why, or why not? 4. In what ways are taxing powers of local units limited? 5. Why should the right of a school district to tax itself be regulated by state law ? 6. Are these regulations desirable ? Explain. 408 ELEMENTARY ECONOMICS 7. Account for the increase in the revenues of the national govern- ment during the past half century. 8. What is the chief money-spending function of the national government ? 9. What are the principal revenue sources of the school district? the county? the city? 10. What is the justification for government expenditures where private funds would otherwise be used? 11. What risks are involved in government expenditures? 12. Why, or why not, should taxes be levied according to benefit? 13. What is the relation between the need of public assistance and the ability to pay taxes? 14. Why should a school tax levied according to the benefit principle be impracticable? 15. How does the ability principle of taxation tend to equalize incomes ? 16. What is the essential difference between a proportionate tax and a progressive tax ? 17. What are the merits of each ? 18. Just what is meant by "expediency" in taxation? 19. Why is an old tax usually preferred to a new tax ? 20. When is a tax said to be "shifted"? 21. Why are taxes usually easy to shift ? Explain. 22. Which taxes are the easiest to shift? Why? 23. What is a "general property tax"? 24. What are its chief defects? 25. Why do many people, otherwise honest, falsify their personal property tax-schedules ? 26. Why should income taxes and inheritance taxes be confined to the well-to-do classes? 27. What is the essential difference between an income tax and an inheritance tax? . 28. Just why was a constitutional amendment necessary to legalize a federal income tax? B 1. Get from the local tax-collector or from the proper county official, information concerning rates of taxation, purposes for which various taxes are imposed, the cost of collection, and the attitude which people take toward each kind of tax. SHARE OF GOVERNMENT IN DISTRIBUTION 409 2. Interview some friendly taxpayer. a. How does he regard the school tax? 6. Has he suggestions to offer concerning changes in taxation? c. Does he consider the valuation placed on his own property for taxing purposes equitable compared to the valuation placed on his neighbors' properties ? d. Get his opinion on the weakness and strength of the general property tax. 3. Make a list of enterprises supported out of public funds, which enterprises provide services free to all, regardless of their tax-paying abilities. 4. Secure, if possible, published lists of personal property assessments. a. Do there appear to be any discrepancies between the valuation placed on the personal property of any individual and the amount of personal property he is reputed to possess? h. How does the total valuation of personal property compare with the total valuation of real estate for the same area ? c. Is there in your community a limit below which personal property is not assessed? If so, why? 5. Inquire of some tax-assessing official about the difficulties of determining property values, the inclination of people to undervalue their own property, the general dissatisfaction with valuations, and the criticism made of them. 6. Suppose you were a member of a lawmaking body which had before it a bill for taxing boarding-house keepers ten dollars a year each, on the ground that the money thus raised in each city would pay the salary of a boarding-house inspector for that city. a. What is your first reaction on the question? h. Do boarding-houses need to be inspected? Why? c. If so, who should pay the expense of inspection? Why? d. How would the fact that you represented a college town or a mining district affect your vote? e. How would you expect members from rural districts to vote? 1. The property of the residents of a certain section of one of the largest cities in the United States is taxed by twenty-seven taxing boards. a. Why have so many taxing boards been developed ? 410 ELEMENTARY ECONOMICS h. Is it probable that one taxing body could accomplish the same purpose ? Explain, c. Would you expect the aggregate rate to be higher in one case than in the other? Why, or why not? 2. In the matter of official patronage, measured either in numbers or in salaries, the Mayor of New York City ranks alongside the Presi- dent of the United States. a. Account for this fact. b. Compare the receipts and expenditures of the two organi- zations. c. Contrast the governmental functions of the two organizations, 3. The argument is often advanced that each should be taxed according to the benefit he gets from the expenditure of public money. a. What effect do good schools have on the number and character of the people in the community? b. How does an increase in population together with a rise in its standards affect property values? legitimate business? c. What return, then, does a childless property-owner or a child- less business man get from his school taxes ? 4. The administration of a tax levied according to the benefit prin- ciple would be extremely difficult. a. When should each property holder pay his taxes for the support of a city fire department ? b. What should each pay toward maintaining a public park? a health bureau? c. Why should not nonresident owners of vacant lots be entirely exempt from such taxes ? 5. The statement that a land tax cannot be shifted needs to be examined with care. Would the shifting be possible if the tax collected were spent on building improved wagon roads? Can you think of other expenditures that might add to the productiveness of the land taxed, and hence increase its economic rent? SUPPLEMENTARY READING Bullock, Introduction to the Study of Economics, 3d ed., pages 529-587. Ely, Outlines of Economics, 3d ed., pages 643-739. Seager, Principles of Economics, pages 472-535. Seligman, Principles of Economics, 5th ed., pages 267-270, 303. Taussig, Principles of Economics, 3d ed., Vol. II, pages 483-560. CLASSIFIED COURSE OF READING In the brief lists that follow, the standard college texts referred to at the close of each chapter are Usted as a matter of convenience, together with additional titles, under General Economics. In choosing the rest of the titles, the author has attempted to confine himself to what are coming to be known as " economic problems." Those best adapted to beginners are marked with an asterisk [*]. The rest may profitably be studied by teachers and business men ; also by advanced pupils. I. General Economics *Bullock, C. J. : An Introduction to the Study of Economics. *Carver, T. N. : Principles of Political Economy. Clark, J. B. : The Distribution of Wealth. Commons, J. R. : The Distribution of Wealth. *Ely, R. T. : Outlines of Economics. *Fetter, F. A : Economics. *Fisher, Irving : Elementary Principles of Economics. Gide, Charles : Principles of Political Economy. Gide, Charles : Political Economy. *Johnson, A. S. : Introduction to Economics. Marshall, Alfred : Principles of Economics. Mill, J. S. : The Principles of Political Economy. Patten, S. N. : The Premises of Political Economy. *Seager, H. R. : Principles of Economics. *Seligman, E. R. A. : Principles of Economics. Smith, Adam': Wealth of Nations. ♦Taussig, F. W. : Principles of Economics. *Walker, F. A. : Elementary Course in Political Economy. Walker, F. A. : Political Economy. II. Money, Banking, and Public Finance Bullock, C. J. : The Monetary History of the United States. Cannon, J. G. : Clearing Houses. 411 412 CLASSIFIED COURSE OF READING *Clare, George : The A B C of the Foreign Exchanges. Conant, C. A. : The Principles of Money and Banking. Conant, C. A. : History of Modern Banks of Issue. Dewey, D. R. : Financial History of the United States. Fisher, Irving : The Purchasing Power of Money. Fisher, Irving : Why the Dollar Is Shrinking. Fiske, A. K. : The Modern Bank. Hepburn, A. B. : Contest for Sound Money. *Hold5Worth, J. T. : Money and Banking. *Johnson, J. F. : Money and Currency. Jones, E. D. : Economic Crises. Kemmerer, E. W. : Postal Savings. Kemmerer, E. W. : The A B C of the Federal Reserve System. Kinley, David : Money — A Study of the Theory of the Medium of Exchange. Laughlin, J. L. : History of Bimetallism in the United States. MacGregor, T. D. : The Book of Thrift. Noyes, A. D. : Financial Chapters of the War. *Scott, W. A. : Money and Banking. *White, Horace : Money and Banking. *Willis, H. P. : The Federal Reserve. Willis, H. P. : History of the Latin Monetary Union. III. Labor *Abbott, Edith : Women in Industry. *Adams, T. S., and Sumner, Helen: Labor Problems. Butler, E. B. : Women and the Trades. *Carlton, F. T. : The History and Problems of Organized Labor. Commons, J. R. : Labor and Administration. Ely, R. T. : The Labor Movement in America. Gilbert, Eleanor: The Ambitious Woman in Business. Gilman, C. P. : Women and Economics. Goldroark, Josephine : Fatigue and Efficiency. Groat, G. G. : An Introduction to the Study of Organized Labor in America. Hollander, J. H., and Barnett, G. E. : Studies in American Trade Unionism. Laidler, H. W. : Boycotts and the Labor Struggle. Mangold, G. B. : Problems of Child Welfare. CLASSIFIED COURSE OF READING 413 *McLean, Anna M. : Wage-Earning Women. *MitcheU, John : Organized Labor. *Shadwell, Arthur : Industrial Efficiency. Spargo, John : The Bitter Cry of the Children. Webb, Sidney and Beatrice : Industrial Democracy. IV. Immigration Commons, J. R. : Races and Immigrants in America. *Fairehild, H. P. : Immigration. Hall, P. F. : Immigration and its Effects on the United States. *Hourwich, I. A. : Immigration and Labor. Jenks, J. W., and Lauck, W. J. : The Immigration Problem. Roberts, Peter : The New Immigration. *Warne, Frank : The Immigrant Invasion. V. Socialism and Social Insurance Angell, Norman : The British Revolution and the American Democracy. Brooks, J. G. : The Social Unrest. Brooks, J. G. : American Syndicalism. Cross, I. B. : The Essentials of Socialism. *Ely, R. T. : Socialism and Social Reform. Engels, Frederick : Socialism, Utopian and Scientific. Ghent, W. J. : Mass and Class. *Henderson, C. R. : Industrial Insurance in the United States. Hillquit, Morris : Socialism in Theory and Practice. *Hillquit, Morris : History of Socialism in the United States. HiUquit, Morris, and Ryan, J. A. : Socialism, Promise or Menace ? Hughan, J. W. : American Socialism of the Present Day. Hunter, Robert : Socialists at Work. Hunter, Robert : Violence and the Labor Movement. Kautsky, Karl : The Social Revolution. Macdonald, J. R. : The Socialistic Movement. Mallock, W. H. : A Critical Examination of Socialism. Marx, Karl : Capital. Myers, W. S. : Socialism and American Ideals. Nearing, Scott : Income. O'Neal, James : Militant Socialism. Ryan, J. A. : A Living Wage. 414 CLASSIFIED COURSE OF READING Sellars, R. W. : The Next Step in Democracy. Skelton, O. D. : Socialism, a Critical Analysis. *Spargo, John : Socialism. Spargo, John : Capitalist and Labor. Spargo, John : The Substance of Socialism. Spargo, John : Syndicalism, Industrial Unionism and Socialism. Spargo, John : The Socialists, Who They Are and What They Stand For. *Vaughan, (Father) Bernard : Socialism from the Christian Stand- point. Veblen, Thorstein : The Theory of the Leisure Class. , Walling, W. E. : Socialism as It Is. *Wells, H. G. : New Worlds for Old. VI. Tariff Modern Tariff History. The Tariff Problem. Free Trade and Protection. Selected Articles on Free Trade and Protection. The Economic Basis of Protection. Pierce, Franklin : The Tariff and the Trusts. *Stanwood, Edward: American Tariff Controversies in the Nineteenth Century. Protectionism. ; The Tariff in Our Times. Tariff History of the United States. State Papers and Speeches on the Tariff. Some Aspects of the Tariff Question. Ashley, Percy ; Ashley, W. J. : Eaton, A. M. : Morgan, J. E. Patten, S. N. : Sumner, W. G. : *Tarbell, Ida M. ♦Taussig, F. W. : Taussig, F. W. : Taussig, F. W. : VII. Trusts *Jenks, J. W. : The Trust Problem. Lloyd, H. D. : Wealth against Commonwealth. Montague, G. H. : The Rise and Progress of the Standard Oil Company. *Moody, John : The Truth about the Trusts. *Tarbell, Ida, M. : The History of the Standard Oil Company. INDEX Advertising, influence of, 40, 41. Agricultural rent, discussion of, 330- 334. Agriculture, developments in, 87, 88 ; tendencies in, 109 ; varying costs in, 116; extent of, 118; application of the law of diminishing returns to, 122-126. American Federation of Labor, in- fluence of, 312, 313. American industrial revolution, na- ture, of, 86. Arbitration, labor disputes settled by, 319-321. Balance of trade, nature of, 247, 248. Baltimore and Ohio Railroad, opening of, 156. Bank check, form of, 228. Bank note, nature of, 228. Bank statement, explanation of, 231- 233. Banking, history of, 227-237. Barter, disadvantages of, 22. Bill of exchange, nature of, 245-249. Bimetallism, description of, 213, 214, 217, 218. Bland-Allison Act, provisions of, 220. Bonds, nature of, 93. Borrower, viewpoint of, 346, 347. Building and loan association, im- portance of, 74; statement of, 76-78. Business man, characteristics of, 357, 358. Buyers' schedule, nature of, 59. Buyers' surplus, nature of, 57. By-products, utilization of, 110. California, production of gold in, 120, 218. Canals, construction of, 156. Capital, growth of, 85; definitipn and origin of, 99; discussion of, 130- 139. Capital (Das Kapital), socialistic doc- trines in, 371, 372. Capitalistic production, nature of, 132-134. Chain stores, business of, 178, 179. Checks (bank), use of, 244. Child labor, opposition to, 322. Child labor laws, enactment of, 377. Christian socialists, leaders of, 371. Circulating capital, definition of, 134, 135. City sites. See Urban land. Class antagonism, causes of, 287, 289. Clayton Anti-Trust Act, provisions of, 190. See Trusts. Closed shop, definition of, 315. Closed union, definition of, 315. Coinage, operation of, 213, 214, 217, 218. Comforts, definition of, 30. Commerce, discussion of, 241-252. Commercial bank, functions of, 229. Commercial education, scope of, 9. Communist Manifesto, extract from, 372. Competition, nature of, 141-145; in- fluence on monopoly price of, 147, 148; among railroads, 158-161; profits under, 363. Complex division of labor, definition of, 102. Conciliation, labor disputes settled by, 319. Constitution of the United States, guarantees of, 323. Consumers' goods, definition of, 100. Consumers' surplus, definition of, 50, 51. Consumption, nature of, 19, 20, 29- 415 416 INDEX 37 ; laws of, 40-51 ; aspects of, 67- 79 ; habits of, 78. Cooperation, effect on profits of, 363- 366 ; by the government, 378. Copyrights, basis of, 183 ; laws re- garding, 185. Corporation, a form of business or- ganization, 90-94. Corporation tax, place of, 407. Costs of production, variations in, 115; risk an element in, 384-386. Credit, effect of business expansion on, 275, 276. Credit money, forms of, 209. Crime, causes of, 31. Crises, causes of, 274-277. Currency. See Money. Cutthroat competition, nature of, 160. Deductive reasoning, use of, 16. Demand, nature of, 32-34, 54, 55; definition of, 33 ; elasticity of, 34-37 ; supply and, 147. See Price, Supply. Department stores, function of, 176, 177. Diminishing returns, la^w of, 122-128. Diminishing utility, law of, 44, 45. Direct marketing, nature of, 176-179. Discriminations in railroad rates, 159, 160. Distribution, inequalities in, 12 ; na- ture of, 23, 24 ; definition of, 283. Distribution of wealth, account of, 283-292. Division of labor, extent of, 100-108 ; social advantages of, 105; disad- vantages of, 105, 106. Dollar, weight of gold, 204, 205. Economic activity, motives behind, 29- 32. Economic good, definition of, 10. Economic law, nature of, 17. Economical consumption, nature of, 69-72. Economics, definition of, 4 ; nature of, 16-19; art side of, 17; material for the study of, 18, 19 ; divisions of, 19-24. Education, industry and, 8 ; tend- encies in, 9; influence of, 299-301, 358. Efficiency, elements in, 9, 102-104; consumption and, 68, 69 ; relation of wages to, 303-306. Eight-hour day, advantages of, 315. Elastic currency, definition of, 215, 216. Elkins Amendment, provisions of, 165. Embargo Act, importance of, 86. Employees. Sec Labor, Organized la- bor. Wages. Employers, organization of, 318, 319. English industrial revolution, nature of, 85, 86. Enterpriser, functions of, 100. Exchange, nature of, 22. Expenditures, nature of governmental, 397-401. Extensive cultivation, nature of, 124- 126. Falling prices, effects of, 276, 277. Family budgets, study of, 287. Federal Reserve Bank Law, provisions of, 236, 237. Federal Reserve notes, nature of, 222, 223. Federal Trade Commission, establish- ment of, 190. Fertility, a factor in rent, 334. First United States Bank, account of, 216, 217, 233, 234. Fisheries, extent and importance of, 120-122. Fixed capital, definition of, 134, 135. Forests, extent and character of, 118. Form utility, definition of, 20. Free good, definition of, 10. Free land, effect on distribution of, 283, 284. Free silver, agitation for, 221, 222. Free trade, basis of, 262, 263. See Protective tariff. Futures, the buying of, 360, 361. General property tax, nature of, 404, 405. INDEX 417 Germany, social insurance in, 386-388. Gold, not a free capital good, 137 ; price of, 205 ; characteristics of, 201, 202 ; market and mint values of, 213, 214; world production of, 217 ; production in California of, 120, 218. Gold certificate, nature of, 208. See Representative money. Gold points, definition of, 248. Gold reserves, functions of, 209. Gold standard, adoption of, 222. Gold supply, automatic checks on, 252. Good, definition of, 9. See Free good. Economic good. Government expenditures, effect of price fluctuations on, 271, 272. Government operation of industry, problems of, 378, 379. Government paper money. See United States notes. Government regulation, influence on price of, 149, 150; railroads under, 162-165 ; a substitute for socialism, 377-379. Great Britain, social insurance in, 388, 389. Greenbacks. See United States notes. Gresham's law, explanation of, 215. Hamilton, Alexander, reports on bank- ing, 234 ; on the tariff, 263. Heredity, influence of, 358. Home-owning, in the United States, 290. Honesty, an element in efficiency, 103. Hours of labor, lessening of, 105. Human motives, examination of, 374, 375. Imagination, a factor in success, 357. Immigration, different aspects of, 5; problems of, 323-326. Incidence of taxation, definition of, 404. Income, education and, 8 ; distribu- tion of, 285-287; influence of edu- cation on, 299-301. Income tax, federal and state laws on, 406. Index numbers, principle of, 273, 274. Indians, medium of exchange among, 199. Indirect marketing, basis of, 173, 174; wastes in, 175, 176. Indirect production, advantages of , 132. Individual capital, nature of, 137, 138. Individual, society and the, 6. Inductive reasoning, use of, 16. Industrial efficiency. See Efficiency. Industrial Workers of the World, pro- gram of, 313. Industry, individual viewpoint of, 6 ; social viewpoint of, 7 ; education and, 8 ; organization of, 85-94 ; diversification of, 108 ; place of capital in, 133; effect of price level on, 274-277. Inefficiency, causes of, 289-291. Inheritance tax, characteristics of, 406, 407. Initiative, a factor in success, 357. Insurance. See Social insurance. Intensive cultivation, nature of, 124r- 126. Interest, discussion of, 345-353. Interest rate, method of fixing, 349, 350; variation in, 351-353. Inter-regional trade, in the United States, 241-243. Interstate Commerce Act, provisions of, 163-165. Investing, nature of, 131. Investment bank, nature of, 230. Investments, growth of, 75 ; made liquid, 94. Iron ore, production of, 120. Joint costs, principle of, 161. Knights of Labor, sketch of, 311, 312. Labor, a factor of production, 97. See American Federation of Labor, Or- ganized labor. Wages. Labor legislation, need for, 321-324; character of, 323. 418 INDEX Labor problems, nature and account of, 311-324. Laissez faire, the doctrine of; 141-143. .See Mercantilism. Land, importance in human welfare of, 11, 12; a factor of production, 97, 114-128. Land values, relation of economic rent to, 339. Large-scale production, advantages of, 108-110. Law, definition of, 4. Law of monopoly price, explanation of, 145-147. Laws of economics, application of, 17, 18. See Economic law. Consump- tion, Diminishing returns, Diminish- ing utility, Marginal utility. Lender, viewpoint of, 348-349. Location, a factor in production, 117, 334. Lumber, production of, 118. Luxuries, nature of, 30, 31. Mail-order houses, functions of, 177, 178. Malproduction, definition of, 275, 276. Mann-Elkins Amendment, provisions of, 165. Manufactures, domestic system in, 85 ; developments in, 87 ; location of, 108. Marginal utility, law of, 46-51. Market, production for, 169, 170. Market price, determination of, 56-63. See Price. Market ratio. See Gold, Silver. Marketing, nature and extent of, 169- 179. Marx, Karl, a socialistic leader, 371. Maximum prices, nature of, 56. Medium of exchange. .See Money. Mercantilism, doctrine of, 141-143. See Laissez faire. Merchandising. See Retailing. Middleman, functions of, 21 ; place of, 173. Military self-sufficiency, maintenance of, 265. Minimum prices, nature of, 56. Minimum wage, proposals for, 392. Mining, varying costs of production in, 117. Mint ratio. .See Gold, Silver. Monetary laws, account of, 213-224. Money, introduction of, 171 ; uses of, 199-209 ; kinds of, 223 ; fluctuations in the value of, 269-271. Monopolistic profits, concealment of, 150, 151. Monopoly, limitations on, 147, 148; contrasted with competition, 141- 151. Monopoly price, law of, 145-147. National bank law, operation of, 235, 236. National bank notes, issue of, 219. Natural resources. .See Land. Necessaries, definition of, 30. New England, industry in, 108; agri- culture in, 117. New Zealand, arbitration laws of, 321. Noncompeting groups, existence of, 295-.303. No-rent land, definition of, 332-334. Obedience, an element in efficiency, 103. Observation, importance of, 18. Occupation, the choice of, 302, 303. Open shop, definition of, 315. Open union, definition of, 315. Organized labor, spirit of, 7 ; aims and methods of, 313-319. Overproduction, definition of, 275, 276. Par of exchange, definition of, 248. Partnership, advantages of, 89, 90. Patent Law of the United States, provi- sions of, 183-185; objections to, 186. Patents, basis of, 183 ; number of. 184. Piece wages, definition of, 306, 307. Place utility, definition of, 21. Plain living, gospel of, 70, 71. Point of diminishing returns, definition of, 123. Political science, definition of, 3. INDEX 419 Population, growth of (1800-1910), 98; in cities (1790-1912), 101, 104. "Pork barrel" legislation, nature of, 378. Possession utility, definition of, 21. Price, demand and, 33, 34; relation of demand and supply to, 54-63 influence of monopoly on, 145-147 effect of the flow of gold on, 252 relation of econoinic rent to, 338, 339. Price-fixing, difficulties of, 192, 193. Price fluctuations, influence on demand of, 34-37 ; guarding against, 269- 277, 359-361. Private property, institution of, 375- 377. Production, nature of, 20-22; factors of, 97-100; varying costs in, 115- 117, 359-363. Profits, discussion of, 356-366. Profit-sharing, nature and definition of, 307, 308. Promissory note, form of, 232. Protective tariff, discussion of, 256-265. Public utilities, regulation of, 190-192. Quantity theory of money, explana- tion of, 216. Railroads, developments in, 87; con- solidation of, 109 ; building of, 156- 158; mileage of, 157; competition among, 158-161 ; taken over by the government, 374. See Rates. Rates, making of railroad, 161, 162. Rates of exchanges, fluctuations in, 248, 249. Rent, discussion of, 330-341. Replacement fund, nature of, 135, 136, 384-386. Representative money, forms of, 206- 208. Resumption of specie payments, ac- count of, 208, 209, 219, 220. Retailer, place of, 172, 173. Retailing, function of, 21 ; successful cooperation in, 365-366. Revenues, ' sources of governmental, 397-401. Risk, relation of interest rate to, 351 ; in industry, 382-386. Sabotage, definition of, 313. Saving, avenues of, 74-78 ; nature of, 131. Savings banks, importance of, 74; functions of, 229, 230. "Scab" labor, definition of, 316. School attendance, in the United States, 301. Second United States Bank, account of, 216, 217, 233, 234. Sellers' schedule, nature of, 60. Sellers' surplus, nature of, 57. Sherman Anti-Trust Act, provisions of, 189. Sherman Silver Purchase Act, provi- sions of, 221. Shifting of taxation, definition of, 404. Short hauls, nature of, 162. Silver, market and mint ratios of, 213, 214; world production of, 214; demonetization of, 220-222. Silver certificate, nature of, 208. See Representative money. Silver dollar, weight of, 206. Simple division of labor, definition of, 101. Single enterpriser, place of, 88. Single tax, discussion of, 335-338. Smith, Adam. See Wealth of Nations. Social capital, nature of, 137, 138. Social insurance, discussion of, 382-393. Socialism, discussion of, 369-379. Social problems, caused by unequal distribution, 287-291; effect of' immigration on, 326. Social sciences, 'nature and content of, 3 ; inter-relation of, 5. Social unrest, causes of, 71, 72. Society, industrial viewpoint of, 3-12 ; the individual and, 6. Specialized capital, definition of, 136, 137. Speculation, function of, 360, 361. Standard of deferred payments. See Money. Standard of value. See Money. 420 INDEX Standard Oil Company, organization of, 187 ; dissolution of, 189. State banking, era of, 235. State finances, character of, 398-400. Steadiness, an element in efficiency, 103. Sterling exchange, definition of, 248- 250. See Gold points. Par of ex- change. Stock exchange, functions of, 93, 94, 219. Stocks, kinds of, 92, 93. Strike, effectiveness of, 316-319. Substitution, nature and extent of, 78, 79; influence of , on monopoly price, 148, 149. Supply, nature of, 54, 55. See De- mand, Price. Tariff. See Protective tariff. Tariff legislation, account of, 256-261 ; basis of, 261, 262. Tax, definition of, 400, 401. Taxation, nature of, 24; as an equal- izer of incomes, 292 ; bases of, 401- 403 ; justice and expediency in, 403. Taxes, discussion of, 397-407. Territorial division of labor, principle of, 106-108. Thrift, importance of, 72-78. Time utility, definition of, 21. Time wages, definition of, 306, 307. Trade. See Commerce. Trade acceptances, nature of, 244, 245. Trade debts, payment of, 243-247. Trade-marks, basis of, 183; laws re- garding, 185, 186. Transportation, function of, 21 ; de- velopments in, 87, 154-158. Trusts, characteristics of, 109 ; his- tory of, 186-188; opposition to, 188, 189; regulation of, 189, 190. Unearned increment, definition of, 335-338. Unemployment, risks of, 382, 389 ; socialistic attitude toward, 370. Union. See Organized labor, Amer- ican Federation of Labor, Closed shop. Closed union. Wages. United States notes (greenbacks), issue of, 218, 219. Urban land, application of the law of diminishing returns to, 127, 128. Urban rents, nature of, 334-338. Utility, definition of, 20-22. See Diminishing utility. Marginal utility. Utopian socialism, leaders of, 371. Value, relations of money to, 199, 200. See Consumption, D3mand, Supply. Variety stores, business of, 178, 179. Wage-earners, number in the United States, 298. Wages, nature and character of, 295- 308. See Labor, American Federa- tion of Labor, Organized labor. Wagon roads, influence of, 155. Wants, nature of, 32, 33 ; variation in the intensity of, 40 ; limitations on, 41, 42; relation of social progress to, 42-44. Waste, sin of, 72; reasons for, 118, 144, 145. Water power, place in industry of, 120. Waterways, influence of, 154, 155. Wealth, welfare and, 9-12; nature of, 10, 11; distribution of, 12, 285- 287 ; confers power on its posses- sor, 31, 32. Wealth of Nations, influence of, 141 ; extract from, 142. Welfare, wealth and, 9-12. Wheat, fixed price of, 192, 193. Wholesaler. See Middleman. Women, in industry, 305, 306. Workmen's compensation laws, extent of, 390, 391. LIBRARY OF CONGRESS 013 721 024 1