111.;- I !• ,|iIMMMnn!-n,;',.|r !'.■,: Ill J'! il II I :■' '■'. liiiMlhlii!!.'!! -V.-.i !(Ut!l VJ\. ili'if inini IM^^^^^ liiiiiiiii'iiii 1- ^ INTRODUCTION TO ECONOMICS BY HENRY ROGERS SEAGER Tio/essor of Tolitical Economy in Columbia University THIRD EDITION. REVISED AXD ENLARGED « d a J 4 . ^r^4 : "' ?'r '■ ■-■ » , ■ • • • O. J « i •3 > 1 , • , I- , - . , ... , - • ''■> '/' '' .*''* ■'it u • ' . . 1 «'' NEW YORK HENRY HOLT AND 1907 COMPANY Copyright, 1904, 1905 BY HENRY HOLT AND COMPANY i- t « < ' ' c *■ ^ ' ^ « • C < t tf THE QUINN & BODEN CO. PRESS RAIIWAY, N. J. PREFACE TO THE FIRST EDITION The presentation of economics to college classes is a task of no little difficulty. If lectures are depended upon exclusively, much time must be wasted in imparting information that could be acquired more quickly and more surely from the printed page. On the other hand^ exclusive reliance on a text-book results in narrowness and dogmatism on the part of both teacher and student. A combination of the lecture and text- book methods offers a means of escape from these difficulties, but to make this satisfactory, a text-book especially designed for the purpose must be used. Such a book should contain not only the information needed, but a systematic exposition of economic principles, intended to introduce rather than to ex- haust each topic considered. It need not be elementary because the lectures which supplement it may be relied upon to clear up difficulties. On the other hand, it ought to give some account of the development of economic theories and of the views of the writers who have contributed most to this development. In writing the following treatise, I have tried to keep these considerations constantly in mind. The principal feature which distinguishes it from other college text-books is its full treat- ment of the subject of distribution. This is the part of the study which is of greatest interest and importance ; yet it is the part most neglected in current manuals. Experience as a teacher leads me to think that the difficulty of making the laws of distribution intelligible is exaggerated. Even if it were not, I should still consider a serious effort to instruct a class in these laws a most valuable exercise in economics. In the following pages I have tried to explain the productivity theory of dis- tribution and have made free use of the writings of my hon- oured colleague. Professor Clark, who has contributed so much to an understanding of the subject. The fact that I still cling to a modernised Ricardian theory of rent, despite his criticisms of iii S7 iV Preface that doctrine, and that I employ a somewhat different method for measuring the productiveness of labour and capital, does not lessen in the least my obligations to him. While making prominent the laws of competitive distribution, I have tried not to neglect the influence on actual distribution of monopoly, and have devoted four chapters to different phases of the monopoly problem. Another distinctive feature of the book is the introductory sketch of the rise and progress of modern industry in England and the United States. These chapters are designed to sug- gest the historical perspective so necessary to the judicial treatment of contemporary problems and, incidentally, to present some of the industrial facts which must otherwise have been deferred to later portions of the book. To secure space for this innovation, I have been compelled to omit the discussion of government revenues and expenditures usually contained in manuals of economics. I have done this the more willingly because within the last few years as many as three excellent treatises on public finance have appeared as fruits of American scholarship. The bibliographical note at the end of Chapter III. and the references for collateral reading appended to most of the chap- ters have been added for the guidance of general readers. Asterisks (*) have been used to distinguish the works that are especially recommended. So many and various are the obligations to other writers of which I am conscious, that a detailed acknowledgment is out of the question. I cannot, however, refrain from recording my special debt to my former teacher and colleague. Professor Patten, of the University of Pennsylvania. To his wholesome distrust of accepted opinions, so ably communicated to his students, I owe more than I can express. I must also ac- knowledge my indebtedness to Professor Marshall's standard treatise and to the works of Finance Minister von Bohm- Bawerk. Among those who have read portions of my manuscript, Professor J- F. Johnson of New York University has put me under special obligations by his criticisms. Any merit which may attach to the chapters on money and credit is largely due Preface v to him. My manuscript has also been improved by the sug- gestions and criticisms of my colleague, Dr. A. S. Johnson, and to him my thanks arc due for that most trying service which friendship can command, the correction and revision of my proof. Greatest of all is my indebtedness to my wife, who has helped me at every stage of the work. Columbia University, New York, Decern der /j, igoj. PREFACE TO THE THIRD EDITION The principal change which has been made in this edition is the addition of two new chapters. Several instructors who have found the book adapted in other respects to their require- ments have expressed regret at the omission of the entire sub- ject of public finance. To remedy this defect the chapters on Government Expenditures and Government Revenues and on Taxation and Tax Reform in the United States have been in- serted just before the concluding chapter. Another important change is the complete revision of the chapter on Production and Distribution. As the introduction to the somewhat difficult sections on distribution which follow, this chaper has an important role to play. I hope that in its amended form it may prove more satisfactory both to teachers and students. Among the numerous other changes and corrections that have been made in the text, two only require special mention. The statement of the law of diminishing returns as it applies to labour and capital (§72), has been made to harmonise with the statement of the same law for land (§64). The verbal inconsistency involved in the presentation of this important principle in the earlier editions was a source of confusion which is now removed. The other change is the omission of the sec- tions (§§287 and 288 in the former editions), in which a novel plan for combining a local land tax with a state inheri- tance tax was advocated. Further consideration has convinced me that the plan calls for fuller explanation than is possible in a general text-book, and has also made me less confident of its practicability. vi Preface Since this book was first printed there has been unusual activity in the publication of works on economics in the United States. While it has not been possible to refer to these in the text, I have tried to add all of the more important recent titles to the References for Collateral Reading appended to most of the chapters. Helpful suggestions to aid in the revision of the book for this edition have come to me from many quarters, and I am glad to have this opportunity to make general acknowledgment of my obligations. Especially valuable has been the assistance of Professor Roswell C. McCrea of Bowdoin College, who devised the improved diagram which appears in Chapter IX. Jaffrey, New Hampshire, September 30, igo^. PAGE CONTENTS CHAPTER I The Rise of Modern Industry in England Economics Defined— Its Relation to other Sciences— Politics and Law — History — The Manorial System — Manorial and Modern Systems Contrasted — The Guild System — Merchant Guilds^ Craft Guilds — Change from Local to National Regulation — The Black Death — Enclosures — The New System — Contrib- uting Causes — The National System — Debasements of the Coinage — Statute of Apprentices — Monopolies — The Mercan- tile System — The Industrial Revolution — Mechanical Inven- tions — Spinning — Weaving — Steam Transportation — The Laisscc-faire Policy — Abolition of Restrictions — Rise of Factory System — Effects of Factory System — Conclusion,' . i CHAPTER n The Industrial Expansion of the United States Colonial Period — Liberty, Private Property, and Equality — Slave vs. Free Labour — The National Industrial Ideal — Physical Characteristics of the United States — The Atlantic Seaboard — The Middle West — The Far West — The New Possessions- Development of Transportation Facilities — Growth of Railroads — Crossing the Continent — Increase in Traffic — Growth of Pop- ulation — The Foreign and Native Born — The Distribution of the Population — The Negroes — The Foreign-Born — Concen- tration of Population in Cities — Agricultural Development of the United States — Invention of Improved Implements — Recent Changes — Principal Agricultural Products of the United States — Corn— ^Hay — Wheat — Cotton — Development of Mining Industries — Iron and Coal — Gold — Silver — Cop- per — Petroleum — Mineral Products, 1900 — Development of Manufacturing Industries — Manufactures of Iron and Steel — IManufacturcs of Cotton — Concentration in Manufacturing— The Development of Foreign Trade — Changes in Exports — Summary — Conclusion, 20 vii viii Contents CHAPTER III Preliminary Survey of the Field of Economics PAGS The Motives to Business Activity — Characteristics of the Economic Man — Self-interest — The Larger Self — Love of Independence — Business Ethics — Utility — Free Goods — Economic Goods — Value — Relation between Utility and ^"aIue — Value in Use and Value in Exchange — Price — Production and Consumption — The State of Normal Equilibrium — Effort and Sacrifice In- volved in Production — The Cost of Production — Work and Pay — The World's Workers — Wages — Property and Its Earn- ings — The Methods of Economics — Deduction — Induction — • Statistics — The Laws of Economics — Necessity of Recasting Economic Laws — Outline of Book — Conclusion — Bibliograph- ical Note, 46 CHAPTER IV The Consumption of Wealth Characteristics ■ of Human Wants — Law of Diminishing Utility — Present vs. Future Goods — Wants Determined by Social Stand- ards—The Law of Demand — The Law of Variety — The Law of Harmony — The Law of Least Social Cost — Adaptation of Consumption to the Environment — Adaptation to Tastes of Producers — Progress Due toChanges inTaste — Adaptation to Laws of Economical Production — Economical Consumption — Nutritive Value of Different Foods — Luxury — Necessaries for All before Luxuries for Any — The Point of View — Fallacies Respecting Luxury — Defensible Luxury — Saving vs. Spending — Statistics of Consumption — Consumption in the United States — Family Budgets — Two Aspects of Consumption — Conclusion, 63 CHAPTER V Value and Price The Valuations of a Crusoe — Value in Use Depends on Marginal Utility — Valuations Refer to Units of Commodity — Qualifica- tions — Marginal Cost and Value — The Rlelation between Utility and Disutility — Surplus Utility— Marginal L'^tility and Value in Industrial Society — Different Goods Valued by Different Classes — Valuation even of Single Goods Complex — Valuation a Social Process— IMarginal Cost and Value in Industrial So- Contents ix PAGE ciety — Complications in Calculation of Social Cost — Valuation of ConipleinciUary Goods — Factors in Production Complement- ary Goods — Values in Use and Values in Exchange — Values in Exchange Expressed as Prices — Exchange Values Cannot Increase or Decrease — The Value of Money — Influences Affect- ing It — The Determination of Prices — Buyers' Calculations — Sellers' Calculations — Four Possil)Ie Cas-es — One Buyer and One Seller — Several Buyers and One Seller — One Buyer and Several Sellers — Two-sided Competition — An Illustration — The Actual Practice — The One-price System — Market Prices — Normal Prices — Summary — Conclusion, 8r CHAPTER VI Production : Land and Natural Forces Production Defined — Manufacturing and Trading as Productive as Agriculture — Factors in Production : Nature and Man — Capital — The Productiveness of Land — Progress in Production — Dif- ferent Characteristics of Different Pieces of Land — Old and New Countries Contrasted — Differences in Expenses of Pro- duction Due to Differences in Land — Farming — Manufacturing — Conclusion — The Law of Diminishing Returns — Statement of Law — The Extensive and Intensive Margins of Cultivation — Other Differences in Lands — An Illustration — Suburban and Country Plots of Land Contrasted — City and Country Plots of Land Contrasted — Conclusion — Summary — The Rent of Land, 107 CHAPTER VH Production : Labour and Capital Labour as a Factor in Production — Qualities Influencing Product- iveness of Labourer — Qualities are Either Inherited or Acquired — Health and Strength — Intelligence and Judgment — Ambition, Energy, and Perseverance — Imagination, Ingenuity, and Knowl- edge — Evolution and Production — Capitalistic Production — ■ Advantages of Capitalistic Production — Capital Goods and Cap- ital — Fixed and Circulating Capital Goods — Specialised and Free Capital Goods — Fixed Capital Increasing — Capital Subject to Law of Diminishing Returns — Also Labour — Methods of Accumulating Capital — Saving and Investing — Borrowing and Investing — Borrowing Not Always for Investment — Capital Goods, Not Money, Saved — Buying Stocks and Bonds l^ocs Not Add to Capital — Kinds of Capital Goods — Land and Cap- ital — Acquired Skill Is Not Capital — Dealers' Stocks Are X Contents PAGE Capital — Money — Progress in Capitalistic Production: The Middle Ages — The Growth of Commerce — Influence of the Industrial Revolution — Summary — Conclusion, . . . 120 CHAPTER VIII Production : Co-operation and Business Organisation Co-operation in Labour — Varieties of Co-operation — Dependence of Co-operation on Development of Markets — The Influence of Improved Transportation Facilities — Qualities Necessary to Effective Co-operation — Such Qualities Developed by Co-oper- ation Itself — The Advantages of Co-operation — The Disad- vantages of Co-operation — Other Considerations — Methods of Gauging the Advantages of Co-operation — Statistics of Pin- making in 1776 and To-day — Progress Greatest in Manufac- turing — Business Organisation — The Entrepreneur — Qualities of a Good Entrepreneur — The Single Entrepreneur System — The Partnership — The Corporation — Advantages of the Cor- poration — Its Disadvantages : Diffused Responsibility — ^Misuse of Borrowing Power — Disregard of Public Interest — Practical Aspects of Corporation Problem — Large vs. Small Scale Pro- duction—Advantages of Large Scale Production — Division of Labour — Expensive Machinery — Advantages in Trans- porting Industries — Economy in Buying Supplies — Economy in Connection with By-products — Can Spend More on Ex- periments — Business Enterprises Classified — The Repre- sentative Firm — Summary — Relation between Production and Distribution, I37 CHAPTER IX Production and Distribution Distribution Concerned First with ]\Ioney Return — Replacement Fund Deducted to Determine Money Return — Distribution of Money Income and of Real Income — Durable Consumption Goods Contribute to Real Income — The Net Product Consists Mostly of Unfinished Goods — The Real Income of Goods Ready for Consumption — The State of Normal Equilibrium— In which Net Products and Real Income are Interchangeable — Actual Society Tends Towards the Normal — Graphic Presentation of Foregoing Propositions — The Expenses of Production — The Replacement Fund — Insurance Premiums— Interest — Wages — Rent — Taxes— The Normal Expenses of Production— Normal Contents xi PAGE Prices Just Cover Normal Expenses — Market and Normal Prices — Production and Distribution — Causes of Poverty and the Theory of Distribution, 155 CHAPTER X DiSTRinuTioN : Net or Competitive Profits The Wages of Management — The Wages of Management Set a Minimum below Which Profits Will Not for Any Length of Time Fall — The Wages of Management May Be a Very Large Sum — Conditions Fixed for the Entrepreneur — The Power of Substitution — The Source of Profits Above the Wages of Man- agement — Price Fluctuations a Source of Profits — Explana- tion — Efforts to Control Prices — The Consequences of the Failure of Such Efforts — Dealings in " Futures " — Dealings in " Futures " Illustrated by Reference to Wheat — The Eco- nomic Function of Speculation — Speculation vs. Gambling — Conclusions — The Influence on Profits of Rising Prices — Of Falling Prices — Alternations between Prosperity and Depression in the United States — The Influence of Discov- eries and Inventions on Profits — Increased Profits of Some En- trepreneurs Offset by Diminished Profits of Others — The Influ- ence of Improvements in Methods of Production on Profits — The Process by which Profits are Eliminated — Change a Cause of Profits — Profits and Losses the Normal Consequences of Progress — The Influence of the Variableness of Climate on Profits — Progress Diminishes Man's Dependence upon Nature — Insurance as a Means of Escaping Consequences of Changing Natural Conditions — Profits and Losses Tend to Balance Each Other — Profits and Rent — Profits in a New Countrj' Usually in Excess of Losses — Practical Problem Connected with Profits Due to Exploitation of Virgin Natural Resources — The Influence of Changes in the Other Shares on Profits — The Effect of Changes in Wages — Summary — Conclusion, . . 169 CHAPTER XI Distribution : Monopoly Profits The Nature of Monopoly — Distinction between Monopoly and Dif- ferential Advantage — Buyers' Monopolies — The Kinds of ^lo- nopoly — The Importance of Different Kinds of Monopoly in the United States — ^Monopoly fs. Competitive Industry — Limit ations on the Power of Monopolies — The Power of Substitution — Sugar an Example — Substitution in Connection with a Rail- road — Potential Competition as a Check on ^Monopoly — The Case of the Single Village Store — Competition in Connection xii Contents PAGE with Railroads — The Fear of Governmental Interference a Check on Monopoly — Conclusion in Reference to Efficacy of Checks — The Law of Monopoly Price — A Patented Brand of Soap as an Example — Another Case — Law of Monopoly Price Indicates the Limit of Price Rather than the Actual Price — Complications in Connection with Monopoly Prices — Practice of Asking Different Prices for the Same Goods Not Unusual — Final Statement of Law of Monopoly Price — Reasons for Con- cealing Monopoly Profits — Methods of Concealing Monopoly Profits — The Overcapitalisation of Monopolistic Corporations — Stock Watering — Difficulty of Measuring Monopoly Profits — Funded Income Defined — The Role of the " Innocent Invest- or " in Connection with Monopolies — Monopoly is Not Nec- essarily Antagonistic to Public Interest — Desirable Monopolies Should Be Regulated — Monopoly Profits Not Always Large — The Influence of Monopoly Profits on the Other Shares in Dis- tribution — Practical Phases of Monopoly Problem Treated in Later Chapters, i88 CHAPTER XII Distribution : Rent Contrast between Profits and Other Shares in Distribution — The Nature of Rent — Problems Connected with Rent — The Source of Rent — The Principal Grades of Land Distinguished — Store Sites — Residence Sites — Plots Devoted to Truck-Farming — Farm Land — Grazing Land — Fertility as Important as Situation in De- termining Rent — The Demand for Land of Different Grades — Rent Includes L^sually a Marginal as well as a Differential Element — The Calculation of Rent — Summary of Explanation of Rent — Graphic Representation of the Theory of Rent — ■ The Rent of Land of Grade D — The Total Rent — Other Causes of Rent — The Rent of Sources of Water Power — The Rent of Mines — Apparent Exceptions to the Law of Rent — The No- rent Margin Found in Connection with Various Uses of Land — The Rotation of Crops Complicates, but Does Not Con- tradict the Law of Rent — The Average Return the Basis for Calculating Rent — Land Fit Only for One Use May Command High Rent — Other Exceptions — Obstacles to the Exact Cal- culation of Rent — Investments of Capital in Land and Rent — • The Capitalisation of Rent — Rent a Funded Income — Summary of the Theory of Rent — Includes Usually a Marginal as well as a Differential Element — But May Be Calculated as a Dif- ferential from the Intensive No-rent Margin — A Surplus Income — Does Not Arise Where Best Land is Superabunda.nl —Its Relation to Law of Diminishing Returns — Return from Contents xiii PAGE Permanent Improvements Subject to Law of Rent — Price of Land — Rent Capitalised at Current Rate of Interest — Actual Rent Differs from Economic Rent — The Metayer System — The Rent of Buildings Distinct from Ground Rent — Importance of Rent in United States — Rent as a Source of Income in Great Britain, 205 CHAPTER XIII DiSTKii3UTioN : Wages Wages Defined — The Wages Question — Differences in Rates of Wages Due to Varying Capacities of Working Population — Differences Determined in Same Way as Rents — The Relation between Members of Different Groups — Tendency towards Uniformity of Wages in Each Grade — The Different Grades, into which Workmen Are Divided Overlap — Workmen below the Margin of Their Group — In Practice the Number of Grades of Workmen is Very Large — The Causal Relation between Marginal and Higher Wages — The Rate of Wages Depends on Demand and Supply for Workmen of Each Given Grade — Dif- ferences in Wages Perpetuated by the Immobility of Labour — Efficiency and Time Wages Contrasted — Other Causes of Dif- ferences in Wages — Differences in the Cost of Living — Differ- ences in Cost of Mastering Different Trades — Differences in Agrecableness of Different Occupations — Allowance for Dan- gers Incurred — Allowance for Chance of Success — Social Esteem a Factor — Also Regularity of Employment — Finally Chances of Promotion Considered — Competition Would IVIake Advan- tages of Different Employments Equal if Men were Exactly Alike, but They are Not — The Influence of Heredity Indeter- minate — The Influence of Habit, Custom, and Education — Dif- ferences in Standards of Living Perpetuate Differences in Wages — Educational Opportunities Enjoyed by Children in First Grade — Children of the Middle Class — Their Choice of Occupations — Standards of Living Not Rigid — Children in the Third Grade — The Fourth Grade — The Fifth Grade — Non- compeling Groups — Reasons for Failure to Invest More Cap- ital in Education — Conclusion — The Determination of Marginal Wages, 22a CHAPTER XIV Distribution : Interest Interest Defined — Interest. Rent, and W^ages — Differences in Rates of Interest — The Mobility of Capital Depends upon the Re- placement Fund — Differences in Rates of Interest Eliminated xiv Contents PAGE by Compelition — Differences in the Same Branch of Produc- tion — Differences in Different Branches of Production — Causes of Differences in Rates — Monopoly — Interest on Permanent Improvements — Specialised Forms of Capital Have Little Mobility over Short Periods — And Are Conse- quently Liable to Depreciate — Differences in Risk of Loss — Differences in Social Esteem — Differences in Rates between Different Sections — Interest on Money — Reasons for the Pay- ment of Interest for the Use of Money — Money or Pur- chasing Power the Form first Assumed by the Replace- ment Fund — Interest on Money — Loans Made Uniform in Each Money Market — Differences in Risk Cause Differences in Rates of Interest — Differences in Rates of Interest Less Extreme than Differences in Wages — How Marginal Wages and Marginal Interest are Determined — Marginal Rates May be Studied at the Margin of Cultivation — Entire Return at the Margin Constitutes Wages and Interest — The Circum- stances Determining the Amount of the Joint Share — The Influence of Entrepreneurs — Qualities and Quantities of Workmen and Capital Goods Important — Both Wages and Interest High in the United States — Workmen and Capital Goods Compete as well as Co-operate — This Com- petition Leads to Comparisons and Substitutions by which Wage and Interest Rates are Determined — The Law of Distribution for a Society in the State of Normal Equilib- rium — The Same Law Applies Roughly to Actual Industrial Society — The Law of Distribution Illustrated — An Increase of Capital Increases the Marginal Productiveness of Labour — • The Mutual Interdependence of Shares in Distribution, . 244 CHAPTER XV Value, Price, and Distribution Summary of Theory of Value — Exchange Value and Price — The Law of Price — Relation between Incomes of Consumers and the Expenses of Production — The Influence of Monopoly upon the Shares of Income Secured in Competitive Industries — Graphic Representation of Production and Distribution — Restatement of the Law of Rent — Restatement of the Law of Wages — The Wages of Marginal Workmen — The Law of Interest — The Calculation of the Replacement Fund — The Life Period of a Capital Good Depends upon Rates of Wages and Interest — The Law of Interest Applies to Gross Earn- ings of Capital Goods — Restatement of the Law of Com- petitive Distribution — The Same Law Generalised — True Contents xv FACE Relation between Expense of Production and Value — The Determination of Shares in Distribution a Complex Form of Valuation — The Productivity Theory of Distribution — The Exchange Theory of Distribution — Interest a Discount on Future Goods — The Exchange Theory True from View- point of Lenders — The Sense in which Capital Goods are Productive — Exchange and Productivity Theories Comple- mentary, Not Contradictory — The Wages-fund Theory — Conclusions Drawn from the Wages-fund Theory — Criticism of the Theory — Other Objections, and Con- clusion, 265 • CHAPTER XVI Value, Price, and Distribution (Concluded) Ultimate Determinants of Distribution — Statistics of Population — Significance of These Statistics — Birth, Death, and Marriage Rates of Principal Countries — Comment on the Table — The Malthusian Doctrine of Population — Influence of the Doctrine on Economic Thought — Criticism of the Doctrine — Premisses in Reasoning about Population — The Physiological Check — The Influence of Social Customs — The Economic Check — The Influence of the Standard of Living — A Stationary Popula- tion — Conditions Necessary to a Low Birth-rate — Causal Relation between the Standard of Living and Wages in the United States — Population Should Grow at the Top, Not the Bottom — The Influence of Immigration and Emigration — The Growth of Population Controlled by Standards of Liv- ing — The Growth of Capital — The Growth of Wealth in the United Kingdom — In the United States — Growth of Ag- ricultural and Manufacturing Capital — Necessary Cautions — Present Preferred above Future Goods — Reasons for this Preference — The Motives to Saving — Progress Strengthens These Motives — The Ultimate Determinants of Distribu- tion — The Balancing of Utilities against Disutilities, . . 283 CHAPTER XVn Money and the Monetary System of the United States The Disadvantages of Barter — The Nature and Functions of Money — Money a Standard of Value — Also of Deferred Pay- ments — Prices and the Value of Money Vary Inversely — Sta- bility of Value a Desirable Attribute of J^foney — Various Com- modities Used as Money in the Past — Qualities Needed in a xvi Contents PAGE Good Money — The Role which the State Plays in Connection with Money — Coinage and the Printing of Paper Moneys Standard, Token, and Credit Money — Gresham's Law — An Illustration — Gresham's Law and the Present Monetary Sys- tem of the United States — The Adoption of the Gold Standard in Europe — Its Adoption Outside of Europe — Monetary His- tory of the United States — The Gold Standard Law — Present Monetary System of the United States — Gold Coin Kept at a Constant Parity in Value with Gold in Coin — ^How the Parity between Gold and Silver Coin Is Maintained — History of United States Notes — The Gold Reserve — National Bank Notes — Stability of the Gold Standard — The Limping Stand- ard — The Silver Hoard — Objections to Sale of Silver Dol- lars — The Function of Token Money — Token Money of the United States — The Function of Credit Money — Objections to Credit Money — Credit Money of the United States — Conclusion, 302 CHAPTER XVIII Credit and Banking The Nature of Credit — Book Credit — The Banking Business — Based on Confidence — The Check System — Checks and Drafts — Money and Credit — Importance of Deposits to Banks — Forms of Bank Loans — Call and Time Loans — Banks Lend Their Credit by Means of Deposit Accounts — Or Bank Notes — Inter- est on Bank Loans — Paid for Control over Capital — Gold Coin is Capital — Credit is Not Capital, but it does the Work of Standard Money — Limitations on the Use of Bank Credit — Interest on Call Loans Usually Low — Short-time Loans — Competition Adjusts Bank Rate of Interest to General Rate — Ought Banking to be Regulated? — Reasons for Favouring Regulation — History of the National Banking System — The Present Law — Protection for Depositors — Faults in System — United States Bank Notes are Perversely Elastic — Freer Note Issue Necessary — Defect in Reserve Requirements — State Banks — Savings Banks — Trust Companies — Conclu- sion, 323 CHAPTER XIX Some Unsettled Monetary Problems Unsettled Problems— The Value of Gold and Prices— Demand for Gold in Arts — Monetary Demand — Not Unlimited— Money and Credit — Recent Fluctuations in Monetary Demand— The Re- Contents xvii PAGE serve Demand — Conclusion in Reference to Demand — The Sup- ply of Gold — Probable Future of Gold Supply — Measuring the Value of Money by Method of Index Numbers — Defects in the Method — Relation between Value of Money and Level of Prices — Price Statistics — Reasons for Fluctuations in Prices — The General 'JVend of Prices — Statistics Not Exact — Interna- tional Bimetallism — The Time for it Probably Passed — The Silver Question in the United States — The Probable Conse- quences of the Free Coinage of Silver — The Future of the Gold Standard — The Multiple Standard, .... 345 CHAPTER XX Foreign Exchange and the Tariff Question The Nature of Foreign E.xchange — Anglo-American Trade — Ster- ling Exchange — The Gold Points — The Rate of Sterling Ex- change — The Rate of Interest and Foreign Exchange — Prices of Stocks and Foreign Exchange — Prices of Commodities and Foreign Exchange — Ways of Quoting Foreign Exchange — Three-cornered Exchanges — Exchanges between Gold and Silver Standard Countries — A Country's Gold Supply Reg- ulates Itself — The United States Should Normally Export Gold — Foreign and Domestic Trade Compared — Peculiarities of Foreign Trade — Principle ControllingForeign Trade — The Policy of Protection — The Advantages of Free Trade — History of Protection in the United States — The Home-market Argu- ment — The Infant-industry Argument — Argument of List — Protection in tlie United States Since the Civil War — The Wages Argument — Political Ideal of Protectionists — The Tariff of 1897 — The Burden of Protection — Coniplexitj^ of the Tariff Question — Present Status of the Tariff Question in the United States — The Strength of Protection — Opposition to Protection to Trusts — Folly of Protecting Exploitation of Lim- ited Natural Resources — The Burden of Protection to Pro- ducers for Export — Retaliatory Tariffs — The Future — Free Trade — The Present Trade Policy of the United Kingdom — The Free-trade Movement, i860- 1870 — The Protectionist Re- action — The Present Outlook Abroad, 361 CHAPTER XXI The Lai'.our ^Movement Obstacles to Free Competition in the Labour Market — The Dis- advantages of Wage-earners as Bargainers — Competition by Employers an Active Force — Nature of the Labour Movement — Objects of Labour Unions — The Membership of American xviii Contents PAGE Unions — Of British Unions — Importance of Legal Questions — The Development of Trade-union Law in the United King- dom — Growth of Unions — English Law of Conspiracy — Labour Unions Liable for Damages — The Law in Reference to Labour Unions in the United States — The Influence of English Prece- dents — The Benefit Features of Labour Unions — Collective Bargaining — Employers' Objections to Collective Bargaining — Conclusion — Strikes and Lockouts — Use of the Boycott in the Coal Strike — Difficulty of Enforcing Law during Strikes — Plans for Avoiding Strikes — Trade Agreements — State Board of Conciliation and Arbitration — Reasons for Government In- terference — Compulsory Arbitration — New Zealand's System — The System of New South Wales — Use of the Injunction in Connection with Strikes — Legal Justification — Extension of Scope of Injunctions — Reasons for Opposing Resort to Injunc- tions — The Influence of Labour Unions on Wages — The Case of Open Unions — Labour Unions Sometimes Monopolies — State and Federal Laws Helpful to Unions — Monopolistic Unions to be Condemned Like Other ]\Ionopolies — Educational Work of Labour Unions — Schools of Citizenship — Active in Securing Needed Labour Laws — The Future of the Labour Movement, 385 CHAPTER XXII The Legal Regulation of Labour Reasons tor the Legal Regulation of Labour — Employees Do Not Always Bargain on Equal Terms with Employers : Children — Women — Men — Dangerous Trades— Purpose of Protective Laws — History of Labour Legislationin Great Britain — 1802-1831 — Act of 1833 — Mining x\ct of 1842 — The Present Law — Constitu- tionality of Labour Laws in the United States — Conflicting Decisions of American Courts — Decision in Utah Eight-hour Law Case — Value of this Precedent — Child-labour Laws in the United States — Purpose of Such Laws — Laws Regulating Labour of Women — The Agitation for a Universal Legal Eight-hour Day — Objections to Plan — Restrictions of Labour of Men Defensible — The Sweating Evil — Conditions in the Clothing Trades — Remedies Tried in Great Britain and the United States — Australasian Experiments — Conclusion — The Regulation of Dangerous Trades — System in Great Britain — Employers' Liability in the United States — The Workmen's Compensation Act of Great Britain — Continental Systems — Backwardness of the United States in This Field — Arguments for and against the Legal Regulation of Labour — Need of Uniformity in the United States — The Future, . . . 412 Contents xix CHAPTER XXIII Legal and Natural Monopolies PAGE Importance of the Monopoly Problem — Public Legal Monopolies — Purposes of Such Monopolies — The United States Post-office — Private Legal Monopolies in Great Britain — In the United States — The Patent System — Arguments for and against Pat- ents — Objections Answered — Proposed Reforms in the Patent System — Patents as a Source of Monopoly Profits — Registered Labels and Trade Marks — The System of Copyright — Defects of American Law — Natural Monopolies in the United States^ Natural Monopolies of Situation — The Anthracite Coal Com- bination — Its Present Status — Need of Regulation — Other Mo- nopolies of Situation — Natural Monopolies of Organisation — The Business of Supplying Water — The Gas and the Electric Light Monopolies — The Street Railway Monopoly — Reasons for Combination — Advantages of Combination — The Telephone Monopoly — Advantages of Monopoly — Methods of Increasing Telephone Rates — Monopoly Profits of Municipal Monopolies in the United States — Such Profits Now Capitalised — The So- lution of the Municipal Monopoly Problem — Arguments for Public Ownership — Against Public Ownenship — Other Con- siderations — Situation in the United States — In Europe — Meth- ods of Regulating Municipal Monopolies — Obstacles to Regula- tion in the United States, 434 CHAPTER XXIV The Railroad Problem in the United States National Monopolies of Organisation — Circumstances Making the Railroad Business Monopolistic — Progress toward Concentra- tion in the Railroad Business in the United States — Discrim- ination in Railway Rates — Between Commodities — Between Places — Between Persons — Reasons for Discriminations — Case of the South Improvement Company — Monopoly Profits from the Railroad Business in the United States — National Regu- lation — The Interstate Commerce Act — Defects in the Act — Its Interpretation by the Courts — Amendment of 1903 — Argu- ments for and against National Operation of Express and Telegraph Businesses — Arguments for National Ownership and Operation of the Railroads — Argument against the Pol- icy — Other Considerations — Need of Reform in Interstate Commerce Act — Changes Recommended by the Commission, 460 XX Contents CHAPTER XXV Capitalistic Monopolies, or Trusts, IN the United States PAGE Capitalistic Monopolies or Trusts — Motives for Organisation of Trusts — The Early Trusts — The Present Trusts — Organisation of the United States Steel Corporation — The Earlier Trusts — • Progress of the Trust Movement — The Motives of Manufac- turers — The Activity of Promoters — Reasons for Formation of Steel Trust — Distrust of Trusts on the Part of the Public — The Successful Trusts — Extent of Control of Trusts over Production — Resulting Control over Prices — Limits to this Control — Conflicting Opinions in Reference to Trusts — Econ- omies Effected by Trusts — Reduced Expenses for Advertising — Saving in Cross Freights — Better Adaptation of Production to Demand — Minor Advantages — Illegitimate Practices of the Trusts — Obtaining Rate Discriminations from Railroads — Price Discrimination among Places — Unfair Contracts with Dealers — The Tariff and the Trusts — The Tariff the Mother of Some Trusts — Other Evils — Overcapitalisation — Corruption of Public Officials — Excessive Prices for Trust Products — The Constitutional Obstacle to Legal Regulation of the Trusts — The Common Law — Anti-Trust Legislation — The Ohio Act of 1898 — Futility of Anti-Trust Acts — The Present Status of the Trusts — Published Reports now Required by National Gov- ernment — Plans for Securing Legal Control over the Trusts — Such Control Should be Exercised by the Federal Government — Voluntary Federal Incorporation Advocated — The Regula- tions Needed — Suppression of Practices Leading to Unfair Competition — Reform of Tariff on Triist Products — The Future of the Trusts— Power of Substitution a Weapon for Controlling Monopolies, 476 CHAPTER XXVI Plans of Economic Reform Four Plans of Economic Reform — Profit-sharing — Objections to the Sliding-scale System — Objections to Sharing Losses — Other Plans of Profit-sharing — Labour Copartnership — in Great Britain — The English Co-operative Wholesale Societj' — The Scottish Society — Present Status of Copartnership — Reasons for Backwardness of the United States — Reasons for Success and Failure of Co-operative Experiments — The Future of Labour Contents xxi FAGS Copartnership— Land Nationalisation — Advantages of Private Property in Land in Great Britain — In the United States— The Present Problem— Evils of Absentee Landlordism — The Situ- ation in the United States— The Single Tax— Objections to the Single Tax — It Is Inadequate — It Would Involve Wholesale Confiscation— Conclusions as to Single Tax — Socialism — Com- munism — Plans for Realising Socialism — Economic Advan- tages of Socialism— Moral Advantages — Objections to Social- ism — Difficulty of Apportioning Labour Force Economically — Difficulty of Valuing Goods — Difficulty in Connection with Capital — Progress under Socialism — Conclusion — The Social- ism of Karl Marx — Criticism— Conclusion 510 CHAPTER XXVII Government Expenditures and Government Revenues Importance of Public Finance — Government Expenditures in United States — For Education — For Defence — For Protection — For Charitable Relief — For Industrial Purposes — For De- partments of Government — Miscellaneous — Government Ex- penditures Designed to Promote the General Welfare — Public vs. Private Expenditures — Division of Governmental Functions in United States — Corresponding Division of Expenditures — Relative Importance of Public and Private Expenditures in United States — Sources of Public Revenues — From Public Lands — From Public Industries — From Special Assessments and Taxes — From Loans — War Loans — Industrial Loans — De- ficiency Loans — Restrictions on Borrowing Power in United States — Revenue from Gifts— From Fines and Fees — Defini- tion of a Tax — Taxation Should Fall on Each in Proportion to Ability — The Equal Sacrifice Theory — Principal Taxes in United States — Tax Provisions of Federal Constitution — Shift- ing and Incidence of Taxes — Incidence of Customs and Excise Taxes— Property and Poll Taxes — Evasion of General Property Tax — Evidence of Evasion — Incidence of General Property Tax -Classification of General Property Tax — Tax on Land Paid by Land Owner — Capitalisation of Land Taxes — An Example — Old and New Land Taxes Contrasted — Tax on Buildings Paid by'lpccupiers — On Mortgages by Borrowers — Injustice of Personal Property Tax — Conclusions — Corporation Taxes — Gross Receipts Taxes — Net Income Taxes — The Special Fran- chise Tax of New York State— Its Resemblance to Land Tax —Liquor License Taxes — Inheritance Taxes, .... 533 xxii Contents CHAPTER XXVIII Taxation and Tax Reform in the United States PAGE Practical Aspects of Taxation — The Tariff of United States — Cus- toms and Internal Revenue Duties Compared — Advantages of Internal Revenue System — Substitution of Corporation Taxes for General Property Tax — Unequal Assessments — Disad- vantages of General Property Tax — Taxing System of New York State — Corporation Taxes — The Special Franchise Tax — Inheritance Taxes in United States — And Abroad — Justification for Progressive Rates — Advantages of Inheritance Taxes — The British Income Tax — State Income Taxes — The Federal In- come Tax — The Income Tax of 1894 Unconstitutional — Argu- ments for and against Federal Income Tax — Place of Taxation in Theory of Distribution — Three Classes of Taxes Distin- guished — Conclusions as to Land and Special Franchise Taxes — Conclusions as to Customs and Excise Taxes — As to Inheri- tance, Income, and General Property Taxes — Difficulties in Way of Tax Reform — Tax Problem of Cities — Reform of Federal Revenue System — Of State Taxation — General Prop- erty Tax Abolished — Inheritance Taxes Extended — Corpo- ration Taxes Advocated — High License System Extended — Real Estate Tax — Special Franchises — License Taxes — Con- clusions as to Municipal Taxation— General Conclusion, . . 563 CHAPTER XXIX Economic Progress The Nature of Economic Progress— Changes in Wages and Hours of Labour — Progress in Consumption — Increased Variety — Increased Harmony — Reduced Costs— Increased Economy — Consumers' Leagues — Progress in Production — Progress in Distribution— Reasons for Persistence of Low Wages — Influ- ence of the Growth of Population — Economic Justification of Competitive Profits— Monopoly Profits— Rent and Interest — Justification of Rent— Justification of Interest— Unequal Dis- tribution of Wealth Results from Inequalities among Individ- uals — Inheritance Taxes — Progress in the Future — The Func- tion of Labour Unions— Of Labour Laws— The Regulation of Monopolies — Of Housing Conditions — Free Public Schools — Tax Reform — Progress Depends on the Individual — Probable Course of Wages, Interest, and Rent in the Future— Economic Progress and the Moral Elevation of the Race— The True Goal of Economic Progress — Conclusion, 589 CHAPTER I THE RISE OF MODERN INDUSTRY IN ENGLAND S I. Economics, or political economy, is the social science Economics which treats of man's wants and of the goods (/'. e., the ^ °^ commodities and services) upon which the satisfaction of his wants depends. It analyses wants, classifies goods with reference to them, and considers all of the circumstances which affect the production and distribution, or sharing, of goods among the injdividuals who compose society. In discussing production and distribution economists treat the same prob- lems that engage the attention of business men, but from a social rather than an individual point of view. It is to em- phasise this distinction that economics is styled a " social science." A definition easy to remember is that economics is the " social science of business." § 2. Closely related to economics are the other social Its Rela- sciences, sociology, pol itics, law. and history. By some writers other° sociology is made to include all of the social sciences, not ex- Sciences cepting economics. Others define it as the science which treats of the beginnings of society and of the first principles of social organisation. Still a third group understands the term to include problems connected with society's treatment of its dependent classes. Whichever of these definitions is accepted, the relation of sociology to economics need cause no confusion. The latter has to do primarily with contemporary conditions and with the relations between independent, self-supporting individuals and families, and the goods upon which their well- being depends. Politics and Law History The Mano- rial System 2 Rise of Modern Industry in England Politics treats of the political organisation of society, and law is the aggregate of rules and regulations through which formal expression is given to the social will. Neither is likely to be mistaken for economics, although both inlluence largely the business institutions and practices with which economics is concerned. The political organisation determines what classes shall have a dominant inHuence in choosing the laws that are to be passed and enforced, and laws themselves establish stand- ards to which all must conform. The solution of most of the practical economic problems which are discussed in later sec- tions of this work will be found to hinge upon the repeal of unwise laws or the enactment of wise ones. History, in the broadest sense, is the narrative of past events. To the economist economic or industrial history, the narrative of past events touching relations between men and goods, is of special significance. In fact, a knowledge of the principal facts of modern industrial history is so necessary to an understanding of present economic phenomena that it has seemed wise to introduce this work with a sketch of the Rise of Modern Industry in England, and of the Industrial Expan- sion of the United States. § 3. The earliest form of industrial organisation of which we have full knowledge from English history is the " mano- rial " system. In existence before the Norman Conquest, it was not entirely superseded until the sixteenth century, and, therefore, controlled English industrial activity for a longer period than any system which has since developed. To understand it clearly it is necessary to remember that during the period when it flourished international intercourse took the form of fighting more commonly than that of trading, that each country was economically self-sufficient or nearly so, and that in order to maintain itself each community was forced by its ignorance of efficient industrial processes to give nearly all of its time to providing for the satisfaction of its primary wants, for food, clothing, and shelter. The manorial system was thus, on one side, a method of organising the nation for military purposes and, on the other, a plan for securing the cultivation of the soil. It is the latter aspect which interests the economist. The Manorial System 3 The manorial system was at its heij^ht about the middle of the thirteenth century. At that time the whole culti- vated portion of England was divided up into estates or " manors " averaging about 5000 acres in extent. The actual work of tillage on these manors was performed for the most part by serfs or " villeins," whose position was, from our modern point of view, peculiar. The villein was not a slave, and yet he could not legally leave the place in which he was born or neglect his customary work without the consent of the lord of the manor. On the other hand, although he did not own the allotment of land which he cultivated, he was entitled to it by immemorial usage and might appeal to the manorial court for redress if it was withheld from him. The method of tillage was even more remarkable. Instead of being divided up into a number of separate farms or allotments, each to be cultivated independently and continuously by the same tenant, the arable land of the manor was divided up into three great fields, hundreds of acres in extent, each one of which was planted with a single crop. The usual practice w^as to sow one field with wheat or rye, another with oats or barley, and to allow the third to lie fallow as a preparation for the heavy crop to be grown the following year. The ordinary allotment made to a villein was some thirty acres, assigned usually in half-acre or acre strips from different parts of the farm. By this plan the villein was enabled to participate in the different kinds of agriculture carried on in the different fields, while at the same time he received a share of the good as well as of the poor land. He paid for his allotment, not with money, but with labour, and the amount of labour was fixed by immemorial cus- tom. The most important labour was " week-work," /. c, work on the land which the lord retained for himself for two or three days each week throughout the year, and " boon-day " work or continuous work on the lord's land for one or two weeks during the ploughing season and the season of harvest. In addition certain presents and special services were required of the villein at stated seasons. The manorial system w^as so different from that which now prevails in the Western World that it will be desirable to indi- Manorial and Modern Systems Contrasted 4 Rise of Modern Industry in England cate some of the more important points of contrast. In the first place, fully nine-tenths of the population of England lived in the country on these manorial estates, and the larger part consisted of the villeins and their families. To-day in Great Britain nearly two-thirds of the people live in cities of io,ooQ or more inhabitants. Secondly, most of the inhabitants of the manor were condemned to live and die where they were born, and few of them ever visited other places or came in contact with other ways of living. The difficulty and danger of travel, the scarcity of money and other forms of wealth that might be treasured up and easily transported, and the poverty of those of the villein class, were all conditions serving to reinforce the legal obstacles to the free movement of population from one part of the country to another. It was a rigid system of status in which children were forced to follow in the footsteps of their fathers and only those of rare ability could hope to rise above the positions to which they were born. Thirdly, each villein family produced for itself practically everything it required. The few exchanges in which villeins participated consisted in the barter of their products for the small quantities of salt, iron, and other foreign goods, which they needed and could not pro- duce for themselves. Under these circumstances the stimulus of competition, so active where production is for the general market, was almost entirely absent. The result was that slow development of industrial processes which made the perpetua- tion of the system for so many centuries possible. The crops to be sown and the methods of cultivation had become matters of tradition and the idea of improving upon the wisdom of the fathers touching these subjects was foreign to the thought of the age. Thus generation followed generation, dividing up the land in the same way, using the same crude implements, sub- sisting on the same sorts of food, dwelling in the same sorts of houses, and wearing the same sorts of clothes. Fourthly, as already stated, money was almost unknow^n to dwellers on the manorial estates. Between the products of their labour and the commodities they themselves desired, there was no confus- ing intermediary to leave them uncertain whether they were receiving all to which they were entitled. Thus the mediaeval state was largely relieved of one of the most serious economic The Guild System 5 responsibilities of a modern government, the duty of supplying a good medium of exchange. § 4. Contemporaneous with the manorial system in the coun- The Guild try was the guild system in the town. To understand the latter ^yst^'" it is necessary to remember that towns grew up as centres /^ . \ of trade and that their populations were made up in part of .' / ) persons who had broken away from the restraints of manorial ^ life. The result was constant friction between the inhabitants , ,/ of the towns and the nobles who so largely dominated the coun- ^^ try. At the same time there was in progress a struggle be- /r, . - ^ tween the latter, who were jealous of the royal power, and the king, which made an alliance between king and townspeople so natural as to be almost inevitable. The king guaranteed the dwellers in the towns special privileges, confirmed usually by royal charter, while in return the townspeople promised special contributions to the royal exchequer and unswerving loyalty in time of emergency. Since trade was the primary purpose of the town, trading ^iierchant privileges were those first demanded, with the result that Guilds practically whole towns were incorporated as trading or " merchant guilds." The privilege was usually confined to a monopoly of trade in all but the most necessary articles within the town itself. Often, however, the privilege embraced the trade in certain products in other towns or even throughout the kingdom. Interesting features of the merchant guilds were the minute rules by which they regulated the conduct of their members in reference to buying and selling. In this respect they were not unlike modern stock exchanges, except that the rules of the strictest exchange are lax in comparison with those of the merchant guild. The purpose of the rules of the latter was to promote fair dealing, fraternal relations between members, and, in gen- eral, a regard for the interests of the trade as a whole, in place of exclusive regard for individual gain in special transactions. Such matters as the times and places for holding particular markets, the qualities of goods to be dealt in, and the methods of bargaining to determine prices came in for special regula- tion. The enforcement of these rules was entrusted to wardens or inspectors appointed from guild members, and the punish- 6 Rise of Modern Industry in England ments inflicted on transgressors ranged from public censure to fine, imprisonment, and expulsion from the guild. Craft As the towns grew they came to be the seats of various ^"^ handicrafts, and within one hundred years after merchant guilds were organised " craft guilds " began to be formed. These were unions of the artisans engaged in each particular handicraft and were designed partly to promote honest work, fraternal relations, etc., as in the case of the merchant guilds, and partly to secure for their members the right to trade in their own products. Like the merchant guilds, the craft guilds formu- lated and enforced most minute regulations concerning the con- duct of their members. Thus, night work was frequently pro- hibited, weights and measures were regulated, and the adulter- ation of goods was forbidden. As voluntary associations of nominal competitors both mer- chant and craft guilds undertook to restrain competition in the interest of the whole trade. They rendered for their members many of the services, such as protecting their persons and prop- erty, which are now performed by the state or government ; but in addition they bound their members not to pass beyond cer- tain limits in their competition with their guild brothers lest the interests of the corporate group should suffer. Thus in the towns, as in the country, competition was much restricted at this period and in its place local customs and local regulations largely determined the direction of industrial activity. In the towns the institution of private property was more highly developed than in the country, since most town wealth was personal and the effective utilisation of town land re- quired it to be more completely under the control of the person using it. At the same time, a town " common," or piece of land used in common by all the townsfolk, was a usual feature of town organisation, and in other ways the original connec- tion of the towns with the manors was shown. Change § ^. The decav of the manorial system and of the guilds from Local ,',..,.„, ' * to National was SO gradual that it is difficult to trace its progress. The Regulation flj-st great change was a substitution of money payments for the labour dues formerly required of villeins. This was part of a general substitution of money exchanges for barter in all departments of industrial life and probably did more than The Black Death 7 anything else to break down the mediaeval and usher in the modern system of industry. The change was made possible for England by the active demand for her wool on the Conti- nent, especially after the Crusades in the thirteenth century, which did much to develop international trade. In exchange for wool, silver was imported, and this was coined and gradu- ally put into circulation in all parts of the country. Lords of manors did not oppose the change because it was clearly to their advantage to permit their villeins to substitute money payments for their labour dues, so long as they could hire labour as it was required, particularly in cases where their lands could be profitably converted into great sheep runs. The last attempt to perpetuate the old svstem was made The Black Death after the terrible epidemic known as the " Black Death " (1348), which carried off from one-third to one-half of the population of the country. As a result of this frightful mor- tality lai)our became scarce and dear. Rather than pay the high money wages demanded, the lords of manors and the king united in the attempt to compel the villeins to make the same labour return in exchange for their allotments as under the old service system. " Statutes of Labourers " ordering workmen to accept the customary wages were passed in 1351, and subse- quent years, but they seem to have had little practical effect. The Peasants' Revolt in 1381 seems to have been in part due to the bitter feeling engendered by these statutes, and though not immediately successful, it helped forward the transition from older conditions to newer ones which were more favour- able to labour. The onerous labour dues required of villeins had been so far given up by 1400 that the succeeding century has been styled " the golden age of the English labourer." The same cause which made possible the introduction of a Enclosures money economy stimulated another tendency that was on the whole advantageous, the enclosure of lands that had previously been allotted to villeins or held in common and their transfor- mation into great sheep ranches. The higher the price of wool the greater the profit to be reaped by the lord of the manor from converting his whole estate into a sheep run. When, by the Black Death, the dearness of labour was added to the deaf- ness of wool as an inducement in this direction, " enclosing >» ■ 8 Rise of Modern Industry in England proceeded at a rapid rate, with the resuU that agricultural land came more and more to be private property as it is now under- stood in the United States. The New As a consequence of these changes, and others of subordinate System interest, English rural life had, by the beginning of the six- teenth century, assumed something of its modern character. The cultivators of the soil continued to produce for themselves most of the commodities they consumed, but no longer under a system of joint labour. They still raised about the same crops, but there was not the dull uniformity of the earlier period, and some improvement in methods had been made. In each agri- cultural district market towns had grown up to which farmers brought such of their products as were saleable and where they bought some of the commodities they could not produce advan- tageously for themselves. They paid money rents for their lands and if they worked for others received mone}- wages as their compensation. The changes in the towns were as marked as those in the country. With the strengthening of the central government, the guilds, and especially the merchant guilds, were deprived of one of the chief objects of their existence, that is, the protec- tion of their members. Moreover, trade had become so much more extensive and important that the practice of giving asso- jiations with limited membership monopolies of its different branches was felt to be inexpedient. The loss of their monopoly privileges was fatal to the merchant guilds as indus- trial organisations, and those which continued in existence be- came mere social or religious clubs. The craft guilds survived for a longer period, but many of their functions also were assumed by the national government and the scope of their influence was narrowed. The immigra- tion of foreign artisans was also a circumstance tending to lessen their importance, though they did not relinquish their monopolies without vigorous and in some cases prolonged re- sistance. By 1600 the guilds had ceased to be the dominant in- fluence shaping town life. Contribut- The most marked characteristic of the period which suc- ing Causes qqq(^q^ ^as national regulation of industry. This was ushered in by a series of events which can be only mentioned in passing. The National System 9 The accession of Henry VII. to the throne in 1485 gave the country a strong ruler just at a ';inie when protracted civil war had prepared the people for sweeping changes. The central- ising policy which he inaugurated was continued by Henry VIII. and Elizabeth, neither of whom lost an opportunity to substitute national for local control and regulation. These changes were favoured by the invention of printing, which fos- tered the national literature, and by the discovery of America and of the ocean route to the Orient, which stimulated the national ambition. Henry VIII. 's quarrel with the Pope, on the subject of his divorce, severed the religious bond that at- tached England to the Continent. In becoming head of the Church as well as head of the State, Henry did much to exalt the importance of the crown in the eyes of his subjects. Through these influences national life was stimulated and reliance on the general government increased. The result was the industrial organisation which for lack of a better name may be described as the " National System." § 6. The extent to which the general government under- The took to regulate industry in England in the time of the gys^g^f Tudors is to-day hardly credible. We are so accustomed to the idea that the state should interfere as little as possible with business that the contrary system, in which regulation is relied iipon usually and competition only under exceptional circum- stances, is difficult to imagine. And yet this was the condi- tion until comparatively recent times in England and in most European countries. The practice of the Tudor sovereigns was not diflerent in principle from that of their predecessors. Henry III., for example, caused an " Assize of Bread and Ale " to be issued in 1267, which prescribed standard weights for the farthing loaf of bread, varying with the price of wheat, and required municipal authorities throughout England to enforce the regu- lation. Even before this an " Assize of Cloth," issued in 1197 by Richard I., had declared that all woollen cloth made in Eng- land should be twenty-four ells * in length, and had appointed inspectors or " aulnagers," to confiscate pieces falling below this standard. But the Tudors established and maintained for * An ell was forty-five inches. lo Rise of Modern Industry in England more than a century a strong central government and enforced, as had no earher sovereigns, their national regulations. Debase- Henry VIII. 's arbitrary modifications of the monetary sys- the Coinase t^"""* made when he was hard pressed for revenue, illustrate a bad phase of national regulation. On two different occasions, under cover of effecting a recoinage of the worn and mutilated money of the country, he caused the silver coins in circulation to be withdrawn and put out in their place coins which not only were lighter in weight, but contained a smaller proportion of silver. Under his successor, Edward VI., this policy of debasement was carried so far that for a time the standard coin contained only one part of silver to three parts of alloy. A modern government might carry through such a policy once, but the attempt to repeat it three or four times within a few years would certainly precipitate a revolution. Statute of Under Elizabeth, governmental regulation took a happier tices turn. More politic than her father, she was never led by lack of revenue to disregard so completely the nation's interests. The most important piece of industrial legislation of her reign was the " Statute of Apprentices," enacted in 1563. This com- prehensive measure undertook to regulate the relations between masters and their journeymen and apprentices with the same minuteness that was characteristic of the guilds. " It made labour compulsory and imposed on justices of the peace the duty of meeting in each locality once a year to establish wages for each kind of industry. It required a seven-years' apprentice- ship for every person who should engage in any trade; estab- lished a working day of twelve hours in summer and during daylight in winter ; and enacted that all engagements, except those for piece work, should be by the year, with six months' notice of a close of the contract by either employer or employee. " * Besides these general regulations it contained others of a more special character, the enforcement of which would have left very little scope to competition to determine any of the relations between workmen and their employers. Monopolies Another form of interference with industry very common during the reign of Elizabeth was the granting of monopolies. The most defensible were the great trading monopolies, such * Cheyney, Indus trial and Social History of England, p. 156. The Mercantile System 1 1 as the " East India Company," chartered in 1600, which had to incur very heavy expenses in estabHshing trade with distant lands and could hardly hope to recover the sums invested un- less protected by a monopoly, at least for a term of years. But other monopolies were granted with equal readiness. Among the articles whose production and sale were thus restricted to particular individuals towards the close of Elizabeth's reign were currants, salt, iron, powder, playing cards, calf-skins, hides, potash, vinegar, coal, steel, aqua vitze, brushes, bottles, saltpetre, lead, oil, glass, paper, starch, sulphur, and new drapery. Even the personal popularity of Elizabeth did not prevent an outbreak when this list was read in Parliament, and she was forced to promise to revoke some of the more ob- noxious grants. § 7. Consistent with this treatment of industries carried The on in England was the policy towards foreign trade known as System the " Mercantile System," which was pushed to the greatest lengths during the seventeenth century. The central idea of this system was that the sure index of increasing national wealth is an increasing national supply of the precious metals. In harmony with this view it was held to be the essence of sound commercial policy to export commodities of high value and to import in return commodities of low value plus specie. The difference in value between commodity exports and im- ports was called " the balance of trade," and a balance on the side of exports was styled " favourable " because it was thought to entail an importation of gold or silver. One of the most obvious regulations dictated by mercantilist theory was the prohibition of the export of the precious metals. Such a regulation had been enacted in England as early as 1 38 1 and it was continued as regards English coin until so late a date as 181 6. To encourage the exportation of commodities, bounties were frequently paid, such as the famous corn bounty introduced during the reign of William III., in 1689, and continued until England ceased, even in years of abundant harvests, to be an exporter of the grains. To discourage im- ports — except gold and silver — a great variety of measures were resorted to, ranging all the way from low duties to abso- lute prohibitions. Discriminating duties on imports from 12 Rise of Modern Industry in England certain countries, such as France, trade with which showed normally an unfavourable balance, were also common. Closely related to these trade regulations was the colonial policy ap- proved by the thought of the age. The mother country sought to limit the industries of her colonies to the production of raw materials and to monopolise the trade consisting in the impor- tation of these materials and the exportation to them of needed manufactured articles. Other examples of governmental interference might be given^ but enough has been said to indicate how completely every department of industrial activity was subject to governmental regulation. The place of the local regulations which lost their force with the decline of the manorial and guild systems was largely filled by these new national regulations, and the field left to individual enterprise and competition was still very restricted. Only gradually did the conviction dawn in the minds of English statesmen that free competition is, for many relations of industrial life, a more effective regulator than gov- ernment inspectors, backed though they be by the whole power of government police. This conviction did not bear fruit in a modification of national policy until after what has been styled the " industrial revolution." T^^ 8 8. In 1 7 so England's industrial future was, to sav the Industrial , i , • i tt • • i • j ,"• • Revolution least, problematical. Her iron industry was in a declining state in consequence of the destruction of her forests, from which the charcoal, still used in smelting iron ore, was obtained. Coal mining was becoming more and more costly because of the difficulty of keeping the mines free from water. Manu- facturing still retained its etymological significance of " mak- ing by hand" {niami, facere), and England was little more favourably situated than other countries to develop textile and other manufactures by hand processes. In agriculture much progress had been made since the sixteenth century, but the smallness of the country precluded any great development along agricultural lines. Finally, the country was on the eve of a great struggle with France to determine which should be the dominant power in America and India, and this struggle- might well cause anxiety in England, since France was larger in area and three times as large in population. In the light of Mechanical Inventions 13 this situation no one would have ventured in 1750 to predict for England the marvellous growth which she was about to experience. The new factors which started the industrial revolution Mechanical before the end of the eighteenth century and made England °^^° *^°^ for the greater part of the nineteenth the leading manufactur- ing country of the world, were inventions which brought about the substitution of power machinery for hand labour in many fields of industry and enabled England to utilise on a great scale her magnificent coal and iron resources. Of these the most important, although not the earliest, were James Watt's improvements in the steam engine. His single-acting pump- ing engine was patented in 1769 and his double-acting machinery-propelling engine in 1782. The first was applied to work a bellows in an iron foundry even before it was set up in 1777 to pump out a Cornish coal mine. In both con- nections it proved incomparabh' superior to the Newcomen engine which it superseded. The double-action engine was first employed to run a cotton mill in 1785, and that date marks the turning point in England's history as a manirfacturing country. In its use to furnish a blast for smelting iron ore by moans of bituminous coal the steam engine cheapened machinery ; in its use to keep coal mines free from water it cheapened fuel ; finally, in its use to propel cheap machinery by the aid of cheap coal it enabled English manufacturers to under- sell all competitors in foreign markets. By itself the steam engine did not accomplish this result, Spinning since the machines which it was to propel had also to be in- vented. In 1750 both spinning and weaving were hand processes, and even before Watt was occupied with his engines other inventors had been busied with the question of substituting power machinery for hand labour in these industries. Tlie first improvements displaced the old- fashioned spinning wheel. In 1764, or thereabouts, a poor weaver by the name of James Hargreaves devised the " spin- ning jenny," or multiple spinning wheel. About the same time other inventors hit upon the idea of spinning by means of rollers. Richard Arkwright, a barber, made a commercial success of this process with his " water frame," patented in Weaving Steam Transpor- tation 14 Rise of Modern Industry in England 1769. In 1779 Samuel Crompton, another weaver, combined these new processes in his " spinning- mule " and thereby gave to power spinning something of its present efficiency. Power weaving was perfected less rapidly. The Rev. Edmund Cartwright invented the first power loom in 1785, but it was not until after 1800 that it began to displace to any con- siderable extent the old weaving frame. About the same time that Cartwright made his invention, Henry Cort, an iron and steel manufacturer, devised the puddling process for trans- forming pig into malleable iron, and machinery for rolling the latter into bars of convenient size for further manufacture. By the end of the century the use of water and steam power in place of hand and foot power was beginning to make its way into every important branch of English manufacturing, and the latter term was coming to have its present meaning of " making by machinery." The industrial revolution \^as not fully consummated until the same power which had transformed manufacturing processes was applied to transportation. Robert Fulton's in- vention of a successful steamboat in 1807 was the first step in this direction. It was not, however, until 1838 that the first steamship crossed the Atlantic, and it is only in our own day that ocean freights are beginning to be moved predominantly by the power of steam. The invention of the locomotive by Robert Stephenson in 181 4 made possible the application of steam power to land transportation. The first English railroad was opened for traffic in 1825 and placed England more than a decade in advance of other European countries in her utilisa- tion of this important aid to industrial development. Cheap- ened means of transportation contributed quite as much as cheapened processes of manufacture to the marvellous growth of England's industries during the last century. They enabled her to ship her goods to the most remote quarters of the world and to import in exchange the cotton, wheat, and other raw materials for whose production she was less well adapted than for manufacturing. Thus these applications of steam power multiplied many fold the advantages which England derived from her abundant supplies of coal and iron and helped to con- firm her possession of the title of " mistress of the sea," which The Laisscz-fairc Policy 15 she had acquired towards the close of the seventeenth cen- tury. § 9. One of the principal effects of the industrial revo- 'J he lution was a radical change in governmental policy in Eng- y^^.^^'^' land. As one invention followed another industrial conditions Policy were so modified that the old regulations ceased to be effectual. Specifications in regard to the qualities and the prices of goods were obviously inapplicable when methods and costs of produc- tion were changing so rapidly. Equally futile were rules in regard to periods of apprenticeship and rates of wages. Realisation of this fact came only gradually to members of Par- liament, and it was several years after Adam Smith formulated the arguments against governmental regulation and interfer- ence that have now become classic before the policy of non-inter- ference or laissez-jaire was adopted. In his " Inquiry into the Nature and Causes of the Wealth of Nations," * published in 1776, Adam Smith describes this policy as follows: " All sys- tems, either of preference or restraint . . . being taken away, the obvious and simple system of natural liberty establishes itself of its own accord. Every man, as long as he does not violate the laws of justice, is left perfectly free to pursue his own interest in his own way, and to bring both his industry and capital into competition with those of any other man or order of men. . . According to the system of natural liberty, the sovereign has only three duties to attend to ; . . . first, the duty of protecting the society from the violence and invasion of other independent societies ; secondly, the duty of protecting, as far as possible, every member of the society from the injus- tice or oppression of every other member of it, or the duty of establishing an exact administration of justice ; and, thirdly, the duty of erecting and maintaining certain public works and cer- tain public institutions, which it can never be for tlie advan- tage of any individual or small number of individuals to erect and maintain ; because the profit could never repay the expense to any individual or small number of individuals, though it may frequently do much more than repay it to a great societv." The conversion of a majority of the members of Parliament Abolition to belief in the laissez-faire policv in reference to wasfes, ap- °^ Restric- & ' f tions ♦End of Chapter IX., Book IV. l6 Rise of Modern Industry in England prenticeship, and the other matters regulated by the Eliza- bethan Statute of Apprentices occurred during the closing years of the struggle against Napoleon. In 1811 a Select Com- mittee of the House of Commons reported that " no interfer- ence of the legislature with the freedom of trade, or with the perfect liberty of every individual to dispose of his time and his labour in the way and on the terms which he may judge most conducive to his own interest, can take place without violating general principles of the first importance to the prosperity and happiness of the community." Acting upon this view in 1813, Parliament responded to a petition demanding the enforcement of the clause of the Statute of Apprentices which required jus- tices of the peace to fix wages, by repealing that part of the law. Its attention was next directed to the apprenticeship clause of the Act, and in the following year, notwithstanding the opposition of many workingmen, it also was repealed. Other legal restrictions were removed in subsequent years (e. g., the East India trade was made free in 1813; the restric- tions on emigration were abolished in 1824; restrictive features of the poor law were amended in 1834) and the way was pre- pared for the repeal of the tariff restrictions on foreign trade finally efifected in 1846. With that measure the last vestige of the policy of national regulation devised by the statesman- ship of Elizabeth and her successors disappeared. It would be a mistake to conclude, however, that the laissez-faire policy was ever, even for a few years, in full operation in England. As old regulations were abolished, humanitarian considerations secured the enactment of new ones designed less to further the interests of business than to protect the weaker classes in the community, children and women, from overwork under in- sanitary conditions. These new regulations, factory and work- shop laws, as they are called, have now assumed an importance which entitles them to separate consideration.* Rise of § 10. The substitution of expensive power machinery for System ^^^ simple tools and implements previously used in all branches of industry ushered in the present " factory system." The leading characteristics of this system are so familiar that it will be necessary merely to indicate the changes which it made in * Cf. Chapter XXII. Effects of Factory System 17 the situation of tlie labouring population of England. Previous to the industrial revolution it was customary for artisans to . own their tools and to carry on their work either in their own homes or in small adjacent shops. The master workman was assisted by a few journeymen and apprentices, but in most trades there was no wide gulf between him and them. All be- longed to the same social class. The work done was more often to meet orders given in advance than to supply the gen- eral market, and consequently the risk of loss through mis- directed production was small. In some trades, and notably in the textile industry, a class of middlemen had arisen who sui)plie(l the raw material to artisans and paid them at stipu- lated rates for turning it into finished products. This arrange- ment relieved artisans of the trouble of seeking their own raw material and of dealing directly with consumers, but it did not alter materially their relation to their work or to those who assisted them. Still another characteristic of the time was the practice of combining two or three occupations. The families of farm labourers usually had spinning wheels, and added to the family income in winter by making yarn. Weavers' families, on the other hand, usually had garden patches about their homes, and produced for themselves in summer much of the food which they required. In these ways the dependence of different families and of different localities upon single industries, which is so characteristic of the present organisation of industry, was lessened. The introduction of power machinery broke up these simple Effects of arrangements. To use such machinery economically it was systenf necessary to employ dozens, even hundreds, of hands under the same roof. Moreover, the machinery and the factory build- ing, in which it w^as installed, were too costly to be owned by the workers themselves. Their use brought forward a new class of " capitalist employers," who were w'idely separated from their employees, and were apt to look upon the latter very much as they looked upon the material instruments of produc- tion which they employed. Finally, the new machine processes of production called for different industrial qualities than those which had been at a premium when production was mostly by hand. Tlie skill of the master craftsman was now matched i8 Rise of Modern Industry in England and even excelled by the quickness of the child who fed an automatic machine. As a consequence whole classes of the population, which were previously in comfortable circum- stances, were deprived of their ability to earn even a bare sub- sistence, and other classes, for whose labour there had been little demand, found their position much improved. A further result of the introduction of power machinery was a change in the location of industrial centres. From an early period the eastern and southern counties of England had been the seats of the country's principal industries. But both water power and coal were lacking in these regions while found in abund- ance in the northern and western counties. The result w^as a great shifting of industries to the latter. This shifting of the centres of industry imposed terrible hardships upon the sec- tions which were waning in industrial importance, from the consequences of which some of the counties of England have not even yet entirely recovered. The cheapened processes of production which were so ad- vantageous to the country as a whole, were, thus, the cause of much suffering to the working class. Their introduction served to widen the gulf between employers and employees, to make whole districts dependent for their prosperity upon the condi- tion of single trades, and to encourage the employment of chil- dren and women, for whose labour there had been little demand outside of the home in the previous age. The problems which have arisen as a consequence of these changes still press for a solution, not only in England, but in all progressive countries, and give perhaps its chief interest to the study of economics. Conclusion § II- To sum up this brief sketch of the rise of modern industry in England : the course of development was from local self-sufficiency in industrial matters and local regulation to an industrial organisation of national scope, in which questions of money and trade were prominent, and national regulation was the rule. Only within the last one hundred years has the sys- tem of industrial freedom been adopted. The institutions and practices belonging to this last stage of development, now so familiar as to seem unchanging, are none of them very old — compared with the age of industrial society — and are all of them on trial, and likely, in the course of time, to be found Conclusion 19 unfitted to new industrial conditions, and to be discarded as were the institutions of the manorial system and the regulations of the Elizabethan period. Free competition, which seems to the modern mind so essential to the continuance of prosperous industrial activity, was almost unknown in mediaeval England. Private property, at least in agricultural land, hardly existed in its modern form. The granting of monopolies, which is so repugnant to the modern sense of justice, was almost as com- mon in the days of Elizabeth as is the incorporation of joint- stock companies to-day. Present practices and institutions have been adopted because they suit the needs of the time ; but as surely as conditions are changing and new needs are becoming dominant, practices and institutions must also change. REFERENCES FOR COLLATERAL READING *AsJiley, English Economic History, 2 vols.; *Cheyney, Industrial and Social History of England, Chaps. I. -VHI.; Gibhi'ns, Industry in England; *Price, Short History of English Commerce and Indus- try; Warner, Landmarks in English Industrial History; Rogers, Six Centuries of Work and Wages, and The Industrial and Com- mercial History of England; Ctinningham, Growth of English Industry and Commerce, 2 vols. CHAPTER II THE INDUSTRIAL EXPANSION OF THE UNITED STATES Colonial Period Liberty, Private Property, and Equality § 12. The story of the settlement of different portions of North America by colonists from different lands, of the mag- nificent distances, and the differences in institutions and ideas which long held them apart, and of the common interests and the common cause, first against the French and Indians, and then against the English, which at last brought them together and cemented them into a nation under the Constitution of the United States, has been too often told to need repetition. From its very nature, as a new country with unbounded natural re- sources in virgin land and forests, the United States was pre- disposed to extractive industries. The earlier settlers estab- lished themselves along the coast as farmers and Indian traders. As the Indians were driven back into the wilderness, adven- turous whites took up the business of hunting and trapping, and acted as pioneers in the westward movement characteristic of the development of the country during the last century. During the seventeenth and eighteenth centuries, the Amer- ican farmer made for himself most of the things that he re- quired. His food was the produce of his farm or game from the neighbouring forest. For clothing he used the skins of animals and homespun cloth. His house was made of rough- hewn logs. Only his gun and some of his tools and implements were purchased, and these were mostly imported from Eng- land. One important branch of manufacturing alone was de- veloped during colonial times, that is, ship-building, which early established itself in New England, and continued to be a leading industry in that section until wooden vessels were superseded by those of iron. The industrial institutions and ideas which were fostered by colonial conditions may be easily surmised. Living in com- parative isolation and enjoying almost complete industrial in- 20 Liberty, Private Property, and Equality 21 dependence, the colonists came to regard liberty as one of their dearest possessions. To direct one's Hfe and activities as one pleased came to be thought of as an inherent right with which no such extraneous thing as government should interfere. The abundance of free land and the importance to the first settlers of extending the cultivated area as rapidly as possible so that the menace of Indian massacre might be pressed farther and farther into the interior, made the system of private property in land seem natural if not inevitable. From an early period settlers were permitted in nearly all of the colonies to acquire on easy terms the absolute ownership of large estates. As long as equally promising land remained open to the border pioneer there seemed notliing inconsistent in this policy with the ideal of equality, which was fostered by the similarity of the condi- tions under which most families lived and supported them- selves. This ideal showed itself in connection not only with social usages, but also with the political organisation of the country. Short terms and rotation in office, which are charac- teristic of American public life, have from the first been de- fended in the popular consciousness on the ground that any good American citizen is competent to serve his country in any capacity. Experience with the thefts and depredations of the lawless characters that are always found in pioneer communities made the colonists peculiarly alive to the sacredness of property. It was taken for granted that property was justly acquired, and governmental machinery was largely devoted to protecting peo- ple in the use and enjoyment of their possessions. Thus, in the bills of rights which were generally appended to the constitu- tions adopted by the States after independence was achieved, life, liberty, and property are characterised as the three funda- mental and inalienable rights of American citizens. In exalt- ing the rights of property the colonists were not so much breik- ing with the institutions which they had brought with them from the Old World as giving greater prominence to familiar ideals. By so doing they paved the way for an industrial civ- ilisation which has been marked thus far by intense individual- ism in thought and practice. In conflict with the ideals of liberty and equality was the Slave vs. Free Labour The National Industrial Ideal 22 Industrial Expansion of the United States demand arising from the abundance of fertile land for a large labouring population. To satisfy this need Negro slavery was early introduced into the southern colonies, where conditions of soil and climate made slave labour profitable. The northern colonies resorted to the system of importing white servants from Europe under contracts (indentures) which required the latter to work for a certain number of years in return for their passage money. Where slavery flourished labour itself soon came to be despised by the free inhabitants, so that slaves, who were at first merely a convenience in such sections, became with the progress of time an economic necessity. The system of indentured labour had no such serious consequences. At first, a valuable supplement to the wages system which was carried on side by side with it in the northern colonies, it was given up entirely early in the nineteenth century, when easier ways were found of securing from Europe the much-needed working force. The diverse social, political, and economic ideals which North and South owed to their contrasting labour sys- tems were the root cause of the attempt of the Southern States to secede, and of the terrible Civil War through which the Union was saved and through which, incidentally, slavery was abolished. Since the issue of the Emancipation Proclamation in 1863 the wages system has been introduced in one form or another into all sections, until it has become the characteristic labour system of the whole country. § 13. When the imited colonies declared their independence of Great Britain and formed themselves into the United States, the industrial ideal of most of the revolutionists was an agri- cultural community. Appreciating the vast extent of the undeveloped resources of the country and the superior advan- tages of England for manufacturing, the founders of the Re- public coimted upon a mutually advantageous trade, consisting of the exportation of raw products and the importation of man- ufactured goods, as one of the conditions to national prosperity. England's own policy had much influence in giving a different direction to national ambition. Through her restrictive meas- ures she made trade on equal terms between the two countries impossible. The result was that even before the Federal Con- stitution was adopted some of the states, such as l^Iassachusetts The National Industrial Ideal 23 and Pennsylvania, had entered vigorously on the policy of developing home manufactures. Through the influence of the representatives of these states the first national tariff act, passed in 1789, contained distinct intimations that the building up of manufactures within the country was one of the objects aimed at. Alexander Hamilton's famous " Report on Manufactures," submitted to Congress in 1792, clearly presented and defended the ideal of national industrial independence, and when the United States was involved in 1806 in the European struggle, which had up to that time redounded to its advantage, was forced to ruin its own trade by the " Embargo Act," and, finally, in 1812, to take up arms against Great Britain in de- fence of its rights upon the high seas, this idea had gained many adherents. The tariff acts of 1816, 1824, and 1828 reflect clearly the new ambition to build up all desirable industries within the confines of the United States, and to reduce foreign trade from the position of the source of manufactured neces- sities to that of an outlet for surplus products. During the first three decades of the nineteenth century American cotton and woollen manufacturing was developed to a point where it compared not unfavourably with the same industries in Great Britain. The great inventions, which were described in the last chapter, were introduced, and in some cases improved upon, and the water-power furnished by the swift-flowing streams of New England and the Middle States was utilised. Iron and steel industries developed more slowly, owing to ignorance of the coal and iron resources of the country. Dur- ing this period the Southern States, which could not, because of their " peculiar institution," hope to develop manufactures of their own, quite reasonably objected to paying the higher prices needed to protect Northern manufacturers. Out of deference to the more important slavery issue, a compromise was effected in 1832 which resulted in lower protective duties until just before the outbreak of the Civil War. The with- drawal of the South from representation in the Federal Govern- ment during that struggle, and the thinly veiled hostility of some of the countries of Europe to the side of the North, caused a great revival of the ideal of national industrial inde- pendence. Opinions differ as to whether the protective tariffs Physical Character- istics of the United States The Atlantic Seaboard 24 Industrial Expansion of the United States and other measures that were adopted in the effort to reahse this ideal have been beneficial to the country as a whole. That they have been potent influences in strengthening the bonds which united different sections, however, and in fostering a spirit of national as distinct from State patriotism, cannot be doubted. § 14. The purchase of the Louisiana Territory from France in 1803 gave a new direction to national ambition. Hence- forth, to extend their settlements until they stretched from sea to sea, became the definite purpose of the people of the United States. The story of the way in which that purpose has been fulfilled constitutes the most characteristic chapter in the coun- try's history. As rounded out by the annexation of Texas in 1845 and the subsequent purchases from Mexico, the United States contains nearly 3,cxx),ooo square miles of territory, of which fully 2,500,000 square miles enjoy a summer climate suitable for agriculture. Geographically this region falls roughly into four great divisions. The original colonies were confined between the Atlantic Ocean and the Appalachian ?iIountains, which ex- tend with but few interruptions all the way from IMaine to Georgia. West of these mountains the valleys of the Missis- sippi River and of the Great Lakes begin, and extend in an unbroken plain, embracing more than one-half of the area of the whole country, to the foot of the Rocky Mountains. From the Rocky Mountain range to the Sierra Nevada range in Cal- ifornia and the Cascade range in Oregon and Washington, is the third division of the country, an arid plateau broken by other mountain ranges and formerly designated as the Great American Desert. West of the Sierra Nevada and Cascade mountains, and extending to the Pacific Ocean, is the fourth geographical division. A brief account of the physical char- acteristics of these different sections will contribute to an un- derstanding of the forces which have shaped the industrial expansion of the country. The region between the Atlantic Ocean and the Appa- lachian Mountains is distinguished by excellent harbours and numerous rivers and streams suitable for navigation and for use as sources of water-power. The land of this section is The Middle West 25 fairly good and, in consequence of the growth here of many of the largest manufacturing and commercial cities of the coun- try, has been more highly cultivated than that of sections more distant from profitable markets. The Mississippi Valley and the Valley of the Great Lakes The Middle form the great agricultural section of the United States. Be- sides being very level, in consequence of glacial action at an earlier period, this region has a rich soil and is well watered by the clouds which rise off the Gulf of Mexico and are deflected east by the Rocky Mountains. Its natural advan- tages for water transportation are even more remarkable. It is estimated that the Mississippi and its tributaries, the Ohio and the Missouri, are navigable for over 10,000 miles of their extent, while for nearly half that distance they are large enough to carry vessels of a considerable size. The Great Lakes offer even better facilities for transportation, although over a shorter course. As supplemented by the canals connecting Lake Superior with Lake Huron and Lake Erie with the Hudson River and with Lake Ontario, these great bodies of water make possible continuous navigation for a distance of more than 2000 miles. As outlets for the agricultural and mineral prod- ucts of the Northwest their importance can hardly be over- estimated. The western border of the Mississippi basin suffers from the same scarcity of rainfall that has given its name to the Great American Desert, and should really be treated with that section in an economic classification. This arid region is nearly looo miles wide at the northern border of the United States, but narrows to 500 miles on the Mexican frontier. Its total area is quite one-third that of the whole country. The soil of this vast territory has been found to be exceedingly fertile in those places where artificial irrigation can be employed, but even the most liberal estimates make such sections but a fractional part of the whole region. So far as can be foreseen the greater portion of it must remain useful only for its mineral deposits and for cattle and sheep ranching. The country bordering on the Pacific Ocean has a character The Far peculiar to itself. Its southern section enjoys a semi-tropical ^^ climate and is suited to the cultivation of oranges, lemons, figs, 26 Industrial Expansion of the United States and similar fruits. A lower mean temperature adapts the region farther to the north and extending all the way to Puget Sound, to the growth of wheat and other grains. Unfor- tunately this region is markedly deficient in harbours and nav- igable rivers, and for this reason, if for no other, is unlikely to attain as high a stage of industrial development as the Atlantic coast region. The New Detached from the compact area that has been described are the outlying territories more recently acquired by the United States by purchase, by annexation, and by conquest. Of these the principal are: Alaska (area, 531,000 square miles), Hawaii (6740 square miles), Puerto Rico (3600 square miles), and the Philippines (120,000 square miles). Alaska is valuable for its mineral deposits and its fisheries. The principal product of Hawaii is sugar, for which there is a ready and ample market in the United States. Puerto Rico also produces sugar in con- siderable quantities, but its chief crops are coffee and tobacco. Both islands are sufficiently near the United States to become Americanised, and are valuable as coaling stations for the nation's growing fleet of merchant vessels. The chief products of the Philippines are hemp, sugar, copra, and tobacco. The first two are much needed in the United States, and may be- come the basis for an extensive trade. In addition, the islands are said to be richly supplied with minerals of dififerent kinds. Develop- § 1 5- The foreign complications in which the country began Transporta- ^° ^^ involved shortly after the acquisition of Louisiana checked tion Facili- somewhat its internal development during the first two decades of the century. The long period of peace which ensued was very favourable to the progress of settlement, and about 1820 the era of westward expansion began in good earnest. As already indicated, the first great obstacle to westward immi- gration was the Appalachian Mountains. Building roads over these mountains and through the dense forests which sur- rounded and covered them was a task of such seriousness that state aid had to be called in for its accomplishment. Even after roads were built, travel continued to be slow, difficult, and dangerous. The need of an easier route to the Middle West was keenly felt, and led to the projection of the Erie Canal to ties Growth of Railroads 27 connect the Hudson River at Albany with the eastern end of Lake Erie. Tlie canal was completed and opened for traffic in 1825, and its superiority over the rough wagon roads as a means of conveying settlers and goods to and from the towns that were springing up about the Great Lakes and along the Ohio and Mississippi was immediately shown in the impetus which it gave to emigration from the Eastern States. While attention was being given to the building of better Growth of roads and of other canals in different sections of the country, the railroad and steam locomotive were introduced from Eng- land, the latter being used for the first time in 1829. This event marks a turning point in the history of internal improvements. In a few years there was in progress a veritable stampede for railroad construction at government expense. The States vied with each other to take the lead in this development, and bonds to secure the needed funds were issued so recklessly that by 1845 even so rich a commonwealth as Pennsylvania was brought to the verge of bankruptcy. The reaction which fol- lowed was as violent as had been the original mania. Canals and railroads were disposed of for a fraction of their cost and taxation was resorted to to make up the deficit. The net result of the policy of internal improvements at State expense was that the country secured the railroads indispensable to its de- velopment at an earlier period than would have been possible had conservative counsels ruled at this period. In comparison with the 229 miles of railroads built before 1832, there were in operation by 1840, 2818 miles; by 1850, 9021 miles, and by i860, 30,626 miles. Without the railroads the marvellously rapid settlement of the Mississippi Valley could hardly have taken place. Before the outbreak of the Civil War plans had been Crossing matured for the construction of a transcontinental railway, and ^^^j, °"^*" appeal had been made for Federal aid to carry out the project. The idea was revived as soon as the war closed, and with the aid of a Government loan and a substantial grant of land the Union and Central Pacific Railroads were finally connected. They were opened for through traffic in 1869, and served as a valuabie aid to the settlement of the Far West. Other trans- continental lines were pushed over the Rocky Mountains at 28 Industrial Expansion of the United States other points, and at the close of the century there were six different railroads crossing the country from east to west, and able to convey passengers from New York to San Fran- cisco in less time than had been required a hundred years cariier to go from New York to Washington. To aid in the building of these roads the Federal Government made land grants aggregating millions of acres and pledged its credit for millions of dollars, nor was their construction accom- plished without wholesale corruption and misappropriation of funds. It must be conceded, however, that in this case, as in the case of the state-aided railroads, the ultimate benefit to the material development of the country far exceeded the loss to the public purse. Increase in Already, bv i86i, the railway mileage of the United States Traffic J ^ ^ ' -' o was equal to that attained in 1900 by any single European state. In the latter year the total mileage for the United States was nearly 200,000 miles, as compared with only 176,000 miles for all European countries taken together. The increase in the business of the railroads in recent years has been even more remarkable than the increase in their mileage. In 1885 the number of passengers carried one mile by all of the roads of the country was in round numbers 9,000,000,000, and the num- ber of tons of freight carried one mile, 49,000,000,000."^ In 1895 the corresponding figures were 12,600,000,000 and 88,600,000,000, indicating an increase in the ten years of about 40 per cent, for passengers and 95 per cent, for freight. The increase from 1895 to 1901 was even more striking, the totals for the latter year being 17,000,000,000 passenger miles and 147,000,000,000 ton-miles, representing a gain in the six years of 35 per cent, in passenger and 66 per cent, in freight traffic. When it is considered that it is good average hauling over a country road, for a man and a team to move twenty tons one m.ile in a day, some conception may be formed from these fig- ures of the importance of the service which the railroads of the country render. No single fact so well illustrates the rapid industrial expansion of the United States as this remarkable development of its transportation facilities. * These are the units usually employed to compare the businesses of different transportation systems. The first is called the "passenger mile," the second the " ton-mile." The Foreign and Native Born 29 § 16. The following table shows the growth of population by Growth of decades from 1790 to 1900: Population Increase, Year Population per cent. 1790 3-929-214 1800 5,308,483 35-1 iSio 7,239,881 36.4 1820 9,638,453 33-1 1830 12,866,020 33-5 1840 17,069,453 32.7 1S50 23,191,876 35-9 i860 31,443.321 35-6 1870 38,558,371 22.6 1880 50,155,783 30.1 1890 62,622,250 24.9 1900 75,568,686 20.7 These figures do not include the residents of the Indian Ter- ritory, nor the populations of Alaska, Hawaii, Puerto Rico, and the Philippines. The additions to be made under these heads for 1900 make the population of the whole country about 85,000,000. In comparison with the rates at which the populations of other countries have grown during the period covered, the growth of the United States has been astonishing. In fact, history furnishes no parallel on an equal scale to the increase from 1790 to i860, when the total population doubled three times. The marked falling off in the percentage of increase since i860 is indirect proof that the chief incentive to the rapid growth of the preceding years was the abundance of fertile and practically free land which was open to settlement. It is also reassuring to those who feared lest the country should be bur- dened with a superabundant population. From the beginning of its historv the United States has each The , , ■ '• , ■ r , , Foreign year attracted large accessions to its population from abroad, and Native From 1820, when statistics of immigration first began to be ^orn kept, to 1903, over 21.000.000 immigrants came to the country. The largest number in a single year previous to 1903 was 789,000 in 1882. The number continued large, averaging abotit 500,000 each year, until 1893. when it was reduced by the in- dustrial depression. The lowest number in recent years was 30 Industrial Expansion of the United States reached in 1898, when only 229,000 immigrants were reported. By 1902 the number had increased again to 649,000, and in 1903 it exceeded 850,000. No statistics of births and deaths for the country as a whole are collected, so it is impossible to compare directly the " natural increase," that is, the annual excess of births over deaths within the country, with the in- crease due to immigration. Some notion of the relative impor- tance of these two sources of population is afforded, however, by the census comparisons of the native and foreign born. The enumeration for 1900 showed that of the total population, 65,- 800,000, or 86 per cent., were native born, and 10,500,000, or 14 per cent., foreign born. During the decade from 1890 to 1900 the native born increased 22 per cent., while the foreign born — owing to the marked falling off in immigration referred to— increased only 12 per cent. The census distinguishes also the native born of foreign parents. They aggregated in 1900, 16,000,000, or 21 per cent, of the population. The native born of foreign parentage and the foreign born taken together con- stituted in 1900 over one-third of the population of the country. Another element in the population which is of great sig- nificance is the Negro. In 1900 8,840,000 persons, or 12 per cent, of the people in the country, were coloured. This element increased from 1890 to 1900 18 per cent., while the white popu- lation increased 21 per cent. The Distri- § 17. When the first census was taken in 1790, only 5 per bauonof ^^^^^ ^^ ^j^^ population was found west of the Appalachian Population Mountains. In 1900 nearly 60 per cent, was so located. The progress of this westward expansion is indicated by the follow- ing statistics: From 1800 to 1850 the population of the North Atlantic States increased by 225 per cent., and that of the South Atlantic States by 105 per cent. In the same period the population of the North Central States increased from only 51,000 to 5,400,000, and that of the South Central from only 335,000 to 4,300,000. In the later years of this period the set- tlement of the Far West was just beginning through the migra- tion of gold seekers to California. From 1850 to 1900 the popu- lation of these sections increased as follows: North Atlantic States, 144 per cent.; South Atlantic States, 123 per cent.; North Central States, 387 per cent. ; South Central States, 22-^ 23 i6 i8 20 21 15 9 30 17 i3 68 43 34 29 18 34 II 39 23 25 146 6o 78 71 33 The Foreign Born 31 per cent.; Western States, from only 179,000 to 4,100,000. The decennial rates of increase for these different sections since 1850 are significant : Percentages of Increase of Population 1850-1860 1860-1870 1870-1880 i88o-i8qo 1890-1900 North Atlantic States, South Atlantic States, North Central States, South Central States, Western States, These figures show a gradual equalisation in the rates of growth of different sections. It may fairly be concluded from them that the westward movement of population has about come to an end, and that but for peculiar local conditions the Eastern States are likely in future to grow as rapidly as the states west of the Mississippi. The distribution of the Negro and foreign-born elements in The the United States has given rise to special problems for the sec- ^S^^^^s tions most affected. Not more than one-tenth of the Negro population has withdrawn from the states where slavery flour- ished before the Civil War. In 1900, in six of these states — Mississippi, South Carolina, Louisiana, Georgia, Alabama, and Florida — Negroes constituted over 40 per cent, of the popula- tion. In all of them the race problem overshadows all others. The The immigrants who came to the United States settled Foreign for the most part in the North and West. In 1900 over 86 per ^^"^ cent, of the total number were living in the North Atlantic and North Central States, and only 8 per cent, in the Western States. The states in which the foreign-born constituted over 25 per cent, of the population in 1900 were: North Dakota, Rhode Island, IMassachusetts, Minnesota, Alontana, Connecti- cut, and New York. If to the foreign born found in these states be added the native born of foreign parentage, the for- eign element is even more conspicuous. Thus, in 1900, persons, one or more of whose parents were foreign born, constituted in North Dakota, yy per cent, of the population ; in Minnesota. 75 per cent.; in Wisconsin, 71 per cent.; in Rhode Island, 64 per cent. ; in Massachusetts, 62 per cent. ; in New York, 59 per 32 Industrial Expansion of the United States cent., and in California, 55 per cent. It goes without saying that special measures are needed in these states to protect American ideals and American institutions from foreign influ- ences. Concentra- Next to the westward movement, the concentration of popu- P^D 1 f lation in cities was the most striking tendency of the last cen- in Cities tury. In 1800 only 4 per cent, of the people of the country lived in cities of 8000 inhabitants and upwards. This propor- tion had increased to 12 per cent, in 1850. Since then the growth of cities has been so rapid that they contained in 1900 one-third of the total population of the country. A compli- cating aspect of this growth of cities has been the large foreign element which most of them contain. According to the census of 1900 the 161 principal cities of the country, which contained 26 per cent, of the total population, included 49 per cent, of the foreign born. In 86 of these cities the for- eign born constituted more than one-fifth of the total popula- tion, in 24 of them more than one-third, and in 9 more than two-fifths. This large foreign element in American munici- palities has added its share to the economic and political diffi- culties with which these rapidly growing centres of population have had to contend. Agricultur- § 1 8. Agriculture remains to-day, as it was in the colonial mentofthe period, the dominant industry of the United States. This has United been the natural result of the extensive area of fertile land with which the country is endowed, and its still relatively sparse population. Of its principal agricultural products, three, corn, white potatoes, and tobacco, were indigenous to the New World. The first, because of the ease with which it may be grown on new land, has contributed more than any other plant to the material development of the country. In colonial days, corn, hay, wheat, and potatoes were leading crops in the North ; corn, tobacco, rice, and indigo in the South. With the invention of the cotton gin, a machine for separating the cotton seed from the cotton fibre devised by Eli Whitney in 1794, and of spinning machinery capable of treating the short-fibred variety of cotton which alone flourished on the mainland, that product began to be, as it has ever since re^ mained, " king " in the Southern States ; but com, hay^ Recent Changes ' 33 wheat, and potatoes continued to be the staples of the North. As cities arose truck and dairy farming to supply their needs became profitable. Meantime the pressing- back of the Indians encouraged the keeping of stock, since this is practicable only in localities where property can be protected. Agricultural methods, both North and South, prior to the Civil War, were exhausting to the soil, and the wearing out of old lands was a strong incentive urging settlers to bring the superior soils of the Mississippi \^alley under cultivation. The cheapness of land and the dearness of labour have been Invention conditions favourable to the invention and use of labour-saving °(j imple^' tools and machines. American farmers were from the first ments progressive. They were forced to devise methods better adapted to the conditions of a new country than those they brought with them from Europe. The invention of agricul- tural machinery was especially stimulated during the Civil War, when the labour supply became even less adequate than before to the needs of the country. In this period many of the inven- tions were patented which have made American agriculture so different from that of the Old World. The tendency of these improvements has been to increase the productiveness of American farming not so much for each acre cultivated as for each man engaged in cultivation. Only recently has attention begun to be given on any large scale to the problem of getting as much as possible out of each acre of land, because only re- cently has lack of land been felt as a serious hardship by the ambitious American farmer. Since the close of the Civil War wheat cultivation has had a Recent gteat development in the Northwest ; the " corn belt " has been extended west of the Mississippi to the very borders of the arid region, and in that region itself cattle, horse, and sheep grazing have become important industries. The extension of the " cot- ton belt " to include eastern Texas, and the rapid growth of the fruit industry in Florida and California are other changes of comparatively recent date. Meantime agriculture in the more settled portions of the country has become diversified and rotations of crops, calculated to preserve the fertile properties of the soil, have been introduced. The raising of small fruits and the keeping of cows, whose milk is sold in the city market. Principal Agricultur- al Products of the Unit- ed States 34 Industrial Expansion of the United States or converted into butter and cheese, are now chief interests to Eastern farmers. The present distribution of agricultural products in the United States is roughly indicated by the accompanying map. § 19. Among all of the products of the country corn still holds first place. Its relative importance in comparison with other agricultural staples is shown by the following table, based on statistics published by the United States Department of Agriculture : Average Annual Average Annual Price Crop of Total Crop i896-igoo 1896-1900 Corn, . 2,058,850,000 bu. $585,000,000 Hay, 58,600,000 tons 409,000,000 Wheat, . 540,500,000 bu. 355,000,000 Cotton, 9,940,000 bales 313,000,000 Oats, 748,460,000 bu. 174,700,000 Potatoes, . 209,650,000 bu. 84,300,000 Corn As the map indicates, the principal corn-producing states constitute a compact area, the " corn belt." In 1896 seven of these states — Iowa, Nebraska, Illinois, Kansas, Missouri, In- diana, and Ohio — produced more than two-thirds of the coun- try's crop. Since that year the agriculture of these states has become more diversified, and corn-growing has progressed in other sections, but they still produce more than one-half of the total crop, and depend in large measure upon it for their prosperity. Hay Hay, the second crop in importance, is produced in every part of the United States, and cannot be said to be localised in any particular region. The same is true of potatoes, and, in less degree, of oats. Wheat The production of wheat is also widespread, but the states of the Northwest, Minnesota and the Dakotas, are so depend- ent on this crop that they are usually described as the " wheat belt." The average annual crops of the years 1896 to 1900 indi- cate the following order for the leading wheat-producing States of the country: Minnesota (61,000,000 bu.). Kansas (53,000,000 bu.). North Dakota (36.000,000 bu.), California (30,000,000 bu.), Ohio (30,000,000 bu.), South Dakota (30,- MAP OF THE 1 Stowing approximately tte Productive Areas ( ^^/ )<^r^. D ^^ iIn I o 07,/ ( 1 ^iif -? ^f'-'^Falir A O R T '. BuitUU ' required to raise one gram of water 1° Centigrade. Nutritive Value of Different Foods Luxury 72 The Consumption of Wealth different kinds of food to ascertain their nutritive value. Such analyses have now been maae of more than two hundred of the dift"erent foods in ordinary use in the United States.* Eco- nomical consumption is secured when the cheapest combina- tion of foods containing the required ingredients and both palatable and digestible for the given consumer, is selected. No general rules can be laid down because of differences in the tastes and incomes of dift'erent consumers, but it is inter- esting to note the relation in which the food values of different foods stand to their cost. Professor Atwater has drawn up a tablet giving the quantity of each of several different kinds of food which might have been purchased for ten cents on a given day in New York City, and the amount of nutrition which each contained. From this it appears that from the point of view of protein contents the most economical foods were prepara- tions of wheat, corn, beans, oatmeal, beef for stewing, and salt cod, while from the point of view of potential heat energy the most economical were wheat flour, cornmeal, oatmeal, potatoes, beans, salt pork, and sugar. The table seems, on the whole, to bear out the common impression that a vegetable diet is much more economical than a diet consisting largely of meat, and that the cereals, wheat, corn, beans, and oats, are the most eco- nomical of the vegetables. Science has, until recently, done very little to aid the ordinary man to direct his consumption wisely and economically, although every investigation into the consuming habits of the poorer classes reveals the fact that, small as are their incomes, a considerable part is wasted because the most economical foods, clothing, etc., are not selected. The importance of this phase of domestic economics is now fully appreciated and there is every indication that rapid progress is being made, especially in the larger cities, towards making consumption economical. § 43. Closely related to the question of economy in consump- tion is the question of luxury. As wealth is now distributed, the majority of families in every com.munity must be eco- nomical in order to secure with their limited incomes the neces- saries and ordinary comforts of life. Contrasted with them *Cf. Atwater, Farmer's Bulletin, No. 14.2. f Ibid., p. 40. Luxury 73 are the smaller number of families whose incomes are large enough to permit the enjoyment of luxuries. The question whether under such circumstances expenditure for luxuries is defensible is a question of morals rather than of economics, but the economist may well be called upon to decide which ol the possible uses of surplus income available for luxuries is calculated to contribute most largely to the general well-being. To give precision to the discussion, luxuries may be defined as all economic goods which are not necessaries. The latter term includes not merely the food, clothing, and shelter neces- sary to life, but the entire complex of goods which each indus- trial class finds necessary to its industrial efficiency. The deci- sion as to what these goods are is not to be made by reference to any absolute standard, but through study of each class affected. For example, manual labourers in the United States would certainly include tobacco among the necessaries of life and the economist should include it also in discussing their problems, for the simple reason that the average manual labourer would continue to buy tobacco even though his earn- ings were too small to allow him to buy in addition goods indis- pensable to his industrial efficiency. Tobacco is to him a " con- ventional necessary." A formal definition of economic neces- saries would thus be : the things absolutely essential to the in- dustrial efficiency of the average family in the class considered, together with the things that are preferred above the absolute necessaries by the member of the family who directs its con- sumption. It is obvious from the above definition that failure on the Neces- part of any family to secure the necessaries of life is injurious, ^,^,"f^/°'' ,.,,,, . AH before not only to it, but to the whole community. Under-consump- Luxuries tion means under-nutrition and loss in industrial efficiency. If ^°'' ^"^ permitted to continue it must inevitably undermine the stand- ards which make a family self-supporting and self-sufficient and reduce its members to dependency. The general interest requires, therefore, acceptance of the maxim : the consumption of luxuries should be deferred until all are provided with neces- saries. This is a moral principle that commends itself to all civilised communities and finds indirect expression in positive law. The obstacle to its practical application is the difficulty 74 The Consumption of Wealth The Point of View- Fallacies Respecting i.uxury of supplementing the incomes of independent families, when those incomes are insufficient, without undermining their in- dependence or permanently lowering their earning power. Among the measures that have been taken to surmount this obstacle are different plans of industrial insurance, by means of which the families of workingmen are assured necessaries in times of illness, and the erection of government employment establishments in which those in search of work may earn necessaries while they are looking for other positions. In the United States, in times of ordinary prosperity, all but the very lowest in the industrial scale have not only sufficient income to provide for necessaries, but some surplus income. Assuming that necessaries are assured to everyone, the question arises as to the use to which surplus income may most econom- ically be put. According to strict utilitarian doctrine — which is another name for economic morality — the happiness of any one person is just as important quantity for quantity and quality for quality as the happiness of any other, and hence surplus incomes should be used so as to add equally to the happiness of all. This suggests that no one is justified in spending income for a luxury for himself or his family which will afford less happiness than would the same income spent for a luxury for someone else or for some other family. The difficulty is that independent, self-respecting people do not want luxuries bought with other people's money. If the pleasures connected with economic goods are to be equalised it must be in some round- about way. Without trying to exhaust the subject a few words may be said about each of the ways in which surplus incomes are usually employed. Notwithstanding the denunciation of moralists it is still true that surplus incomes are largely expended on luxuries for the gratification of the spender himself, his family, or his imme- diate friends. In justification it is often urged by superficial observers that such expenditures " make work " for others and hence benefit them indirectly if not directly. This argument can be presented with a good deal of plausibility so long as only the one use of the income under consideration is thought of. A wealthy man gives an elaborate ball. In connection with it he employs decorators, caterers, waiters, etc. Those whom he Fallacies Respecting Luxury 75 invites employ dressmakers, hairdressers, etc., in their prepa- rations for the event. The expenditure on the ball thus causes an active demand for laljour of various kinds, which, but for the ball, would not have been required. Those who secure em- ployment certainly regard such an entertainment in the light of a blessing. But consider other uses to which the money spent upon the ball might have been devoted. Suppose that it had been given to a wisely administered charitable society for use in improving the condition of the poor. In such an event it would have been spent also largely for food, clothing, and per- sonal service, " making work " for numerous individuals who might otherwise have sought in vain for remunerative employ- ment. So far as its effect on the labour market as a whole is concerned it would certainly convey as much benefit in the second case as in the first. Similar results would follow its expenditure in any other rational way. Even if it were not spent at all, but allowed to accumulate as a deposit in a bank, there is reason to think that it would " make work " for quite as many people as when used for the ball. Banks do not keep their funds in their vaults, but lend them out at interest to busi- ness men who employ them in connection with their businesses. This usually means buying materials, hiring workmen, etc., and has as favourable an effect on the labour market as luxur- ious expenditure. Unless, therefore, the transient pleasure of a few people who are already satiated with balls and similar diversions is to be esteemed above the lasting improvement of a great many people whose lives are all too bare of sunshine, the " make-work " argument can hardly be held to justify selfish luxury. The truth is that any rational mode of using income stimulates certain branches of industry and is to that extent beneficial to the small class of producers concerned. Money income represents an unassigned share in society's lim- ited store of economic goods. If that share is taken and con- sumed in a form that affords little happiness, society is so much the worse oft' than if it had been taken in a form that afforded much happiness. But, it should be added, there are luxuries and luxuries. Defensible Those who have large incomes to administer may contribute ^^^^V much to social progress by setting standards of rational enjoy- 76 The Consumption of Wealth ment for others to imitate. The rich man who wishes to live in a grand way does the community Httle good if he buries him- self like a hermit in an ugly palace. If, on the contrary, he builds a beautiful house to which a large and democratic circle of friends is welcome, he may do quite as much good as he could by giving his income in charity. Saving vs. § 44. A third use which many economists still urge as the Spending 1 . . 1 • 1 1 • , . . , . best to which surplus m'come may be put, is saving and invest- ment. In contrast to purely selfish luxury, saving deserves all of the praise it has received. Wise investment adds to society's material equipment of tools, machinery, buildings, etc., for the production of economic goods. Hence it lightens the toil necessary to the realisation of a certain productive result. Even more important is the fact that, through saving, a family may make itself economically independent, not in order that it may turn its attention from useful industry, but that it may devote itself to the work that most needs to be done even though the world has not yet learned to appreciate it and re- munerate it in proportion to its importance. It may be doubted whether, under present conditions, saving beyond what is necessary to assure economic independence ben- efits the world as much as would wise spending for some social object. Great wealth is almost if not quite as demoralising as great poverty, and the man who really desires to contribute to social improvement will put a check upon his accumulations and give his time and thought to spending such income as he does not require for his own family in ways that will benefit others. If he continues to save he must finally, in drafting his will, face the problem of the best use of wealth. Passing on to his heirs more than is necessary to insure them economic independence is merely evading an issue which each should face squarely for himself. Statistics of § 45. It is much easier to ascertain how men earn their in- tion comes and how much their incomes are, than how they spend them. In fact few families have very exact knowledge on the latter point themselves. They know how much they pay for house rent, perhaps how much they spend for coal and gas. but few keep accurate accounts of their expenditures for food, clothing, and the incidentals that are an important element in Consumption in the United States 77 all but the humblest budgets. Nevertheless several useful in- vestigations into statistics of consumption have been made and certain general relations have been established. About the middle of the last century inquiries were made in Belgium and Saxony into the expenditures of different families, and upon them two economists, Ducpetiaux and Engel, based the follow- ing table showing the proportional expenditures of different classes for different purposes in the two countries : Table of Expt 'ndifnr/% of a Salf-supporting Middle-class Well-to-do Labourer's Family Family Family in in in Belgium Saxony Saxony Saxony Food, . . tl%' (^2%^ 555?" 502;" Clothing, Rent, . .15 . 10 12 12 :: i«'* Fuel and light. • 5 J 5j 5 . 5 , Tools, etc., . • 4 Education, . . 2 2 3-5 5-5 Taxation, . I Z 2 3 Care of health. . I 1 2 3 Personal service, i z 2.5 3-5 This table does little more than to confirm general observa- tion, but when it is considered how often general observation leads to false conclusions even such confirmation is of value. Wage-earners spend nearly all of their incomes in providing for the satisfaction of their merely physical wants. They have little left for the higher needs of their natures, and if these are to be cared for it must be through community action realising itself in free public schools, free playgrounds and parks, free concerts, free lectures, etc. People in more comfortable cir- cumstances spend relatively less for food and relatively more for education and personal service. Expenditures for cloth- ing and rent show no diminution, probably because clothes and houses are regarded as marks of social position and .the desire for social esteem is so strong that a large part of surplus in- come is devoted to keeping up appearances. A more recent investigation into statistics of consumption Consump- was made bv tlie United States Department of Labour to ascer- \}?^. "i_,the . ■ ' L nited tarn the nnportance of different kinds of commodities in the States 78 The Consumption of Wealth everyday life of representative families. The results of this inquiry are summarised in the following table : ExpetiditJires of Representative Aniericati Families* Percentage of Expenditure for ' Fuel and All Other Family Income Food Rent Clothing Lighting Purposes Under $200 49.6 15-5 12.8 8.1 14.0 $ 200-300 44-3 14-7 14-3 7 6 19.1 300-400 45.6 I5-0 14. 1 7 18.3 400-500 45-1 15-3 14.4 6 6 18.6 500-600 43-8 15.2 15-3 6 6 I9.I 600-700 41.2 15-5 15-9 5 9 21.5 700-800 38.9 15.6 16.3 5 3 239 800-900 3S.1 16.1 15. 1 5 3 25-4 900-1000 34-3 14.9 16.8 4 7 293 lOOO-IIOO 34.7 15. 1 17.5 4 5 28.2 iioa-1200 30.7 12.2 16.5 3 9 36.7 1200 and over 28.6 12.6 15-7 3 40.1 All sizes 41. 1 15. 1 15-3 5 9 22.6 Family- Budgets This table is based on a study of as many as 2562 family budgets and is even more suggestive than the former because of its more careful classification of expenditures according to the family income. It indicates the same general relations. Expenditures for food diminish relatively as the family income grows, and the difference is made up by a relative increase in the expenditures for the satisfaction of other than merely physical wants. Expenditures for rent bear a fairly constant relation to the total income, while expenditures for clothing show a tendency to increase slightly. Other interesting inquiries into family expenditures recently made are referred to at the end of the chapter. That pub- lished under the title Family Budgets gives an account of the expenditures of typical working-class families in England, and is interesting because it emphasises the differences to be found in the consuming habits of families even in the same industrial and social class. This indicates that a very large number of budgets must be compared to prevent individual differences from giving a false bias to the investigation. There is perhaps no branch of economics so much in need ♦ Seventh Annual Report of the Department of Labour, 1891, p. 864 Conclusion 79 of development as that dealing with the statistics of consump- tion. A first step towards fuller knowledge in this department of the subject would be to induce representative families to keep accounts in accordance with some simple plan, so that in- formation might be obtained upon which to base statistical comparisons. Residents in Social Settlements may do useful work in this field by supplying their neighbours with handy account-books and directing them in keeping records of their expenditures. Such records would be valuable for compari- son with other calculations, and also the habit of keeping them would be found a help in determining how income might be best employed. § 46. The subject of consumption may be looked at eco- Two nomically in two different ways. The more familiar way is to Consump^- regard it as the goal of economic activity and to show how the tion desire for goods causes them to have value and price and in- duces people to engage in industrial pursuits. Though per- fectly valid as far as it goes, this aspect of consumption must not be exaggerated. The other w-ay of looking at it is as a means of restoring energy. The consumption of goods neces- sary to efficiency is not merely an end ; it is a means to further production. Human beings are not mere goods-consuming automatons. They enjoy activity for its own sake, and the more highly developed they are, the more they are likely to look upon goods as means to the forms of activity they prefer, rather than as ends in themselves. It follows that desire for goods is only one, if the most important, of the motives which control the economic man. Desire for activity is another motive which in individual instances quite outweighs the de- sire for goods. At the present stage of human and social development the Conclusion former of the above ways of regarding consumption is believed to be the more accurate and helpful to an understanding of eco- nomic phenomena. The latter is, however, applicable already to many individuals and classes and must be kept in view in connection with all problems looking to the future. Economic phenomena are related not as cause and effect simply, but in a continuous circle of causation. Men produce, that is, expend energy, in order that they may consume ; but they consume. 8o The Consumption of Wealth that is, store up energy, in order that they may again plunge into the activities of production. The ideal round is one in which the pleasures of production are as definite and real as the pleasures of consumption. Unfortunately the conditions of production are still so arduous for the mass of men that work is usually entered upon unwillingly and only under the stimulus of the prospect of pay. In the thought of the average man consumption, or the desire to consume, thus stands as the motive for production. In the following chapters the point of view of the average man is accepted, and economic phenomena are explained by reference to it. The other point of view which finds work a joy, and goods merely aids to further work, receives attention in the closing chapter on Economic Progress. REFERENCES FOR COLLATERAL READING *Patien, The Consumption of Wealth, and Dynamic Economics ; Hearn, Plutology ; ^Marshall, Principles of Economics, Book III.; Ely, Outlines of Economics, Book II., Part IV.; Mayo-Smith, Statistics and Economics, Book I., Chap. II.; *Atwater, Farmer's Bulletin, No. 142, published by the U. S. Department of Agri- culture ; Sixth and Seventh Annual Reports of the United States Department of Laboiir, 1890 and 1891 ; Family Budgets collected by the Economic Club of London, 1891-1S94; *Rowntree, Poverty, a Study of Town Life, Chaps. VI., VII., and VIII.; * Fetter. Prin- ciples of Economics, Chaps. 4 and 40. CHAPTER V VALUE AND PRICE § 47. As already explained, the term value is used in eco- nomics in two different senses, one subjective or pertaining to the relation between men and goods, and the other objective or pertaining to the relation between goods and goods. We will begin this chapter with an analysis of the principles which govern values in use, or values in the first sense, and consider then the relation between such values and the ratios at w'hich goods exchange for each other, or values in the second sense. As a first illustration, consider the mental processes by wdiich The Valua- a man living in isolation, like Robinson Crusoe on his island, crusoe values some of his possessions, as, for example, twenty car- tridges he was able to save from the wreck together with his gun. These different cartridges may be put to uses as diverse as that of protecting their possessor from the attacks of hos- tile savages and that of supplying his table with small birds or squirrels. Each has a utility determined by the intensity of the want which it is to satisfy. In all probability Crusoe will decide to put aside a few cartridges with which to repel attack. He will wish to employ the others in the ways that will con- tribute most to his well-being. If there are deer upon the island it will be foolish for him to shoot his ammunition away at small game. Let us suppose that he makes up his mind to put aside six of the twenty cartridges and to use all the rest for deer shooting. If the herd is tame and he is a good shot, he may reasonably count on killing a deer with each cartridge, so the fourteen shells may represent in his calculations four- teen deer to be killed from time to time as he may require them. These will, as already explained, have an importance to him diminishing as the time to elapse before they are to be con- sumed is extended.* At the head of the list stands the deer * Chapter IV., Section 36. 8x 82 Value and Price to be killed to furnish a steak for to-morrow's dinner, at the foot the last deer to be shot some three or four months hence. The latter seems of such slight importance at present that Crusoe may well hesitate between saving a shell for it and try- ing his hand on some of the smaller game on the island. There is thus a series of utilities corresponding to the differ- ent cartridges descending from the immense utilities of the cartridges that may save Crusoe's life to the small utility of that which is to supply his next quarter's venison. Under these circumstances what is the value to him of a single car- tridge ? If it were possible we might expect him to assign dif- ferent values to the different cartridges, but since they are all exactly alike this would be an absurdity. He must have one valuation that applies indifferently to each one of them. Will this value of a single cartridge be gauged by its ability to pre- serve his life or its ability to kill a deer for him three months hence ? Value To decide the above question it is only necessary to consider in L se Depends on what Crusoe would lose if a cartridge were taken away. Marginal Clearly this loss would not put his life in jeopardy, as he would continue as before to save the half-dozen with which to protect himself. As surely it would not deprive him of to- morrow's dinner. As a rational man he will shift it to the point where it will be felt least and forego, since he must forego something, the prospect of the fourteenth deer. It is, there- fore, his estimate of the utility of this least useful deer that gauges for him the value of a single cartridge. This is what he loses if a single cartridge is lost ; this is what he gains by having twenty cartridges instead of nineteen. It, accordingly, measures the importance or value in use of a cartridge to him. Generalising from this illustration and calling the least utility of a single unit of a commodity under given conditions of supply its marginal utility, we may formulate as a general law the principle that men value units of commodities in proportion to their marginal iitilities. Value, in the first sense, is thus man's estimate of marginal utility. Valuations In the above statem.ent it is the value of a single unit of a Units of commodity that is referred to rather than that of the com- Commodity modity as a whole, and this corresponds to man's habitual mode Valuations Refer to Units of Commodity 83 of making valuations. When iron is said to be less valuable than gold it is meant that a pound of iron is less important to man than a pound of gold. Every change in the supply of an economic good of course changes its marginal utility and therefore its value. This fact makes the value of a single unit multiplied by the available supply of units quite misleading as an index of total importance. Tv^'enty times the small valua- tion Crusoe put on a single cartridge would by no means represent the value to him of the twenty cartridges, some of which were as precious as life itself. In the same way, multi- plying the slight value of a pound of iron by the number of pounds in existence would give a total representing very in- acfcquately the importance of iron to man. If an approximate notion of the importance of the total supply of a commodity is sought, the only way to proceed is to add together the utilities of all of the different units used by man. Such a calculation would show, of course, that such free goods as air and water are more important than even the most costly economic goods. In the above illustration an ability to gauge the utilities of Valuation different units of a good is assumed which would rarely be met °/^ Crusoe ... . , ,.? T- ^ -1 1- • 1 1 • Approxi- with m practical life, bven a Crusoe with unlimited leisure mate only for the niceties of economic calculation would have to content himself with comparative rather than absolute estimates of the Mtilities of his different cartridges. He could say with con- fidence that the utilities of those necessary to protect his life were greater than of those to supply his table. He could also arrange the latter in a scale of diminishing utility depending on the game to be shot and the remoteness of the time when it was to be needed. His determination of the marginal utility which measures the value of a single unit would be only ap- proximate, however. It would be the utility of a fourteenth deer, not because he can tell just what that utility is, but be- cause he knows that its utility is on the one hand less than that of the thirteenth deer to be shot with the next to the last car- tridge, and on the other greater than anything else which he could secure with the fourteenth cartridge. Thus in all cal- culations of value the determination of marginal utility is com- parative rather than absolute. § 48. In the preceding section Crusoe's valuation of a com- 84 Value and Price Marginal modity which he could not reproduce upon his island was con- Value sidered. Much more frequent must have been his valuations of the goods which he could produce. Consider, for example, how he would value the arrows which he must whittle out laboriously as a means to procuring small game. Besides the utility of these arrows there would be in his mind vivid asso- ciations connected with the cost of making them. In fact until he became quite expert with the bow and could tell quite accu- rately what an arrow was worth to him in game, he probably valued his arrows in accordance with the labour they cost him. One arrow was worth perhaps an hour's labour. But an hour's labour, from the point of view of the sensations that ac- company it, may mean anything from the pleasurable activity of the first hour after a refreshing night's sleep, to the painful drudgery of the last hour of the day when all of the faculties are crying out for repose. According to which of these stand- ards is the importance of an hour's labour gauged ? As on in- quiring before which utility determines value, so now on in- quiring which disutility of those which stand for the different hours of work throughout the day determines cost, we must consider what Crusoe would gain if an hour's toil were spared him. Obviously, he would gain most by stopping work an hour earlier. It is the last hour of the day that involves most disagreeable effort or that has the greatest disutility. If an hour is to be cut off from the working day it is from this try- ing last hour that one would wish to be relieved. It stands in the mind for the cost of an hour's work, and in valuing an arrow according to its cost it is to it that Crusoe's thoughts would revert. If we call the disutility of this last hour the marginal disutility we may say that the value of a good, judged from the point of viezv of cost, is determined by the marginal disutility of the labour time necessary to its production. jMen who, like Robinson Crusoe, produce for themselves the things which they consume, may value their possessions either by reference to their marginal utilities or to the marginal disutili- ties of the labour involved in their production. It is hardly necessary to add that in practice the determination of the cost of an hour's labour is comparative rather than absolute, just as is the determination of the utility of the resulting good. Total Utility 55 Since the disutility of each hour's work is compensated by the utility of the product resulting from it, the tendency of the economic man is to continue his labour until the disutility it entails is just balanced by the utility it affords. Every addi- tion to his labour increases its disutility, every addition to the product, according- to the familiar principle, diminishes its utility. At some point disutility will cease to be fully com- pensated for in utility, and at that point labour must stop if an economic loss is to be averted. § 49. The contrast between pleasures and sacrifices indi- The cated in the above analysis of value may be illustrated graphi- beuveen cally. Let distances along the line OX in the following figures Utility and represent either units of commodity or hours of labour, and '^^^' ' ^ distances along the perpendicular line OY represent the utilities of these different units of commodity or the disutilities of the hours of labour. Erecting side by side on the line OX and parallel to the line OY narrow parallelograms representing the diminishing utilities of the successive units of commodity re- sulting from a day's work, we have the following figure : O 1 2 4 5 Fig. I. 6 •X The area of all these parallelograms taken together repre- sents the total utility of all of the products of the day's labour, 86 Value and Price and it will involve no very serious error to represent this total area as bounded by a curve extending from the Y axis to the parallel line representing the marginal utility produced during the day, as follows : Y A Total Utility Fig. 2. c ■X In a similar way narrow parallelograms representing the increasing disutilities of successive hours of work during the day may be erected side by side on the line OX and parallel to the line OY, giving the following figure: Q u o 4 5 G 8 ■X Fig. 3. Relation between Utility and Disutility 87 As before, this may be simplified by combining the narrow parallelog-rams into an irregular area bounded by a curve, as in Figure 4 : Y Fig. 4 If the exact equilibrium between marginal utility and mar- ginal disutility, which is the goal of economic conduct, is real- ised, the lines BC in Figures 2 and 4 are of the same length, and the figures may be superimposed as follows : Fig. 5. 88 Value and Price Surplus Utility Marginal Utility and Value in Industrial Society Different Goods Valued by Different Classes The " surplus utility " area, A B D, in this figure represents the pleasure an isolated producer derives from the consump- tion of the fruits of his toil over and above that which com- pensates him for his sacrifices in production. From the point of view of economics, the existence of this surplus is what makes life worth living-, § 50. The valuations of a Crusoe are necessarily crude and inaccurate because he has only his own judgment and experi- ence to rely upon. In industrial society the valuations of each individual are supplemented and corrected by the valuations of other individuals. Judgments in regard to the importance or marginal utilities of differemt goods are collective or social and for this reason are more precise than they can be for men in isolation. The simplest case of social valuation is presented in connec- tion with a commodity like wheat flour, which serves a variety of uses in every household and the want for which on the part of the normal family is quite elastic. According to the familiar principle of diminishing utility each family's con- sumption of wheat flour may be arranged in a scale in which the high utilities of the more important units will come first and the low utilities of the less important units last. At the very end will stand the marginal utility of the least important unit consumed. As all families consume mmierous units of wheat flour, and as this consumption is carried in most families not to the point of satiety, but only to the point at which the sacrifice involved in paying for additional units is not fully compensated by their utilities, all families value a unit of such flour approximately in proportion to its marginal utility to themselves. In this case all consumers contribute something towards the determination of the social valuation upon which depends the relative importance of a unit of wheat flour in comparison with units of other goods. Some readers may be inclined to question the correctness of the statement that few families carry their consumption of such a common article as wheat flour to the point of satiety. Certainly in the choice of their own food the rich do not hesi- tate, under present conditions, to use all the wheat flour in various forms for which they feel the slightest desire. It is Different Goods Valued by Different Classes 89 in their purchases for their servants, if anywhere, that their consumption of such an article stops short of the point of satiety. In the case of an even cheaper commodity, Uke salt, the consumption of perhaps the majority of families in a modern community is unquestionably carried to the point of satiety. Such a commodity is not an object of painstaking economy to the well-to-do, but virtually a free good. Its mar- ginal utility to the average family is a negligible quantity be- cause it is consumed as a matter of course down to the point of satiety. The value of such an article is determined by its marginal utility not to the well-to-do, but to the very poor, to whom even the small price of a bag of salt is a burden, and to those who use it in connection with industrial purposes {e g., in the salt-fish industry, in removing ice from the tracks of street railways, etc.). The value ascribed to it in these con- nections determines its importance in comparison with other commodities. In the same class as salt are matches and the other cheap articles which are consumed daily by rich and poor alike. Such articles are no longer objects of economy to the well-to-do, who pay for them what market conditions re- quire and would continue to buy the same quantities, that is, all they have any possible use for, even if the prices they had to pay were doubled or trebled. In such cases values, or the comparative importance of units of different goods, are deter- mined by the marginal utilities of single units of such goods, not to each individual consumer, but to consumers generally. Well-to-do consumers exert no influence because they con- sume all that they wish without reference to what they must pay for such goods. This leaves the task of valuation to con- sumers who are less well off and to others who use the articles as materials for further production. A second characteristic of valuations in industrial society Valuation rests on the fact that most goods are not simple utilities, but even of Sin L It r -I- • A • f , 1 r , ■ R^e Goods bundles oi utilities. A suit of clothes, for example, is not Complex merely a protection from cold and damp. The modern man pays for this utility in his clothes, but he pays much more for the comfort and elegance of the fit, the social distinction at- taching to the fineness of the goods, etc. Since valuation con- sists in ascribing importance to goods in proportion to their go Value and Price marginal utilities, it involves as many separate steps as there are separate utilities in the goods to be valued. Social valua- tion differs from that of a Crusoe in that these separate steps are taken by different classes in the community. In the case of clothes the well-to-do class which patronises fashionable tailors takes the warmth and comfort of its garments for granted. These utilities are required also by the less pros- perous classes in the ready-made clothes which they buy and are valued in this connection, or even, as regards warmth, by the still poorer classes who buy second-hand clothes. The patrons of fashionable tailors give their thought to deciding as to the marginal utility to them of the style of cut and dis- tinction of finish. Perhaps the best illustration of this point is presented in the valuation of watches of different grades. Nearly everyone wants one fairly accurate pocket timepiece and few have use for more than one. The money equivalent of the marginal utility of this primary quality in a watch is very great to the well-to-do classes, and if the value of this quality were fixed by them it would be represented by many dollars. But the conditions of production are now such that fairly good timekeepers are brought within the reach of all. The marginal utility which determines the value of this quality is therefore that to people in very moderate circumstances. The watches of the well-to-do have in addition to this primary requisite, durability, beauty, power to give social distinction to their owners, extreme accuracy as timekeepers, etc. It is these qualities that the well-to-do value according to their mar- ginal utilities to themselves rather than the primary quality common to all honest watches. The value of a watch is the sum of the values assigned to each one of its qualities by the classes to which these qualities stand as marginal utilities. As a timepiece it is valued by the people who can just afford to have a timepiece, as a durable timepiece it is valued by b higher class in the economic scale, as a durable timepiece en- cased in silver it is valued by those just able to have silver watches, as a gold-cased watch it is valued by people in still better circumstances, etc. In each instance the value ascribed to the quality added just before is carried over to make a part of the value of the watch to which still another quality has Valuation a Social Process 91 been added. The value assigned to this last quality is added to the values previously determined to make the value of the whole watch. Thus the value of any good which is made up of a bundle of qualities is the result of a social rather than of an individual calculation of marginal utilities. The three illustrations that have been given are typical of Valuation the valuations that are made in industrial society. Use value ^,^'^^^^1 is still man's estimate of marginal utility. Not every man's estimate, however, determines it, because in industrial society the valuations of individuals are influenced by those of other individuals with whom they come in contact. The value of each good depends upon its marginal utility to the group of consumers to whom it is an object of economy. If it is com- posite its value is the sum of the marginal utilities of its dif- ferent qualities to the groups to which these qualities are objects of economy. Value in industrial society is thus the result of social valuation. It is not so much man's estimate, as society's estimate of marginal utility. § 51. In the economic calculations of a Crusoe, as we have Marginal seen, marginal disutilitv serves quite as readily as marginal ^°^} ^^^ ■ ^ ^ ft. Value m utuity as a gauge of the value of reproducible goods. Dis- Industrial iitility or cost of production includes all of the painful and dis- So^'^^y agreeable sensations that men experience in connection with production. Each such sensation stands for a sacrifice and unless the results of production fully compensate all those who have made sacrifices it has entailed loss in well-being. So long as attention is confined to the production of a Crusoe the painfulness of prolonged efifort may stand by itself for these sacrifices, but for industrial society with its subdivision of functions a more precise analysis is necessary. In addition to the painfulness of efifort is another sacrifice which we may describe as postponing consumption or waiting. This is in- volved more or less in all branches of production. The work- man who labours only eight hours a day may not prolong his effort to a point where it is painful, but he is sure before the day is over to feel that he is making a great sacrifice in con- tinuing at his bench when he might be out in the street or at home with his family. Postponing consumption even until the whistle blows is one of his costs of production. But under 92 Value and Price present conditions the postponement required is much longer than this. Modern production is indirect or roundabout. Materials, tools, machines, etc., are produced as aids to the production of consumable goods, and on the average a long period of waiting must intervene between the first steps in pro- duction and its issue in goods which are ready for consump- tion. The postponement of consumption which this entails is little appreciated by workmen. They experience the painful- ness of effort and they must perforce abstain from consump- tion during their working hours, but the conditions of their employment, as a rule, insure them their wages by the week or the month irrespective of the stage of completion of the goods which they help to produce ; and the conditions of their lives, as a rule, cause them to spend these wages for consumable goods as soon or nearly as soon as they earn them. Postpon- ing consumption so that production may be carried on in a roundabout way is the function of capitalists. It is their wealth which is tied up in the form of the tools, machines^ buildings, etc., indispensable to efficient production, and the sacrifices v.'hich they make in permitting their incomes to take these forms rather than the form of consumable goods which the)' could immediately enjoy are as properly included in the costs of production as the sacrifices of workmen. Complica- Nor is the division of the sacrifices connected with produc- Calculation tion between workmen and capitalists the only complication to of Social i)Q considered in an analysis of costs. Production is co- operative and many men unite their efforts to effect the crea- tion of even the simplest good. It follows that the cost of production of each good is a sum of sacrifices to which many different individuals have contributed. Workmen of different grades and different capitalists, each contributing only a part of the capital used, have a share in it. Moreover, since cost is at bottom a question of individual feeling, its amount depends quite as much on the character and circumstances of the pro- ducer as upon the productive act which he performs. As a rule those doing the same sort of work are sufficiently alike to make general statements in regard to the cost of that work admissible, but there are many productive services which are rendered by individuals belonging to quite different classes Cost Complications in Calculation of Social Cost 93 and whose costs are accordingly quite different. The most common causes of differences in costs are differences in weahh. Every increase in income brings with it the pos- sibiHty of increased enjoyment from consumption. The man who has only what he earns from day to day and who earns only enough to supply him with the requisites to decent living has little to tempt him from his work. If his daily round of tasks is painless it involves a minimum of sacrifice, as he has little to turn to outside of the factory. Give the same man an income from investments equal to what he earns by his work and the sacrifice involved in that work is increased. Increase his income from investments until he has enough to live on luxuriously without work- ing at all, and he is more likely than not to find the labour, which before was not felt to be a burden, so irksome and un- pleasant that he will give it up entirely. The character of the work has not changed, but the circumstances of the man have, and as a result there is a multiplication of cost. In the higher grades of employment where men with independent means work at the same tasks wath men who have no other sources of income, differences in costs are so common as to make general statements about costs hazardous. The most impor- tant instance of such differences is in connection with the service of postponing consumption, or waiting, rendered by the capitalist class. This class is composed of all sorts and condi- tions of men from millionaires to dollar-a-day labourers. Society values the services they render by reference not to the sacrifices that are involved for them individually in the accumu- lation of capital, but to the amount of capital they accumulate. The wage-earner's meagre savings assist production no more and are no more important dollar for dollar than the inherited millions of the idle rich. Where the same productive services involve different degrees of sacrifice for different producers, it is the sacrifice to marginal producers, or those whose sacrifice is greatest, that must be counted in the cost of production. This must be compensated by the utility of the product or it will not be incurred any more than will an uncompensated last hour's labour be performed by an isolated producer. The calculation of the cost of production in industrial society is 94 Value and Price Valuation of Comple- mentary Goods thus a very complex process, and any balancing of marginal cost or disutility against marginal utility must be roundabout and difficult of analysis. The above discussion of the relation between cost and value in industrial society is intended rather to suggest than to solve difficulties. It touches upon some of the most intricate prob- lems of advanced economics and cannot be pursued further w^ithout the fuller knowledge of industrial relations which the following chapters attempt to supply. On the basis of this knowledge the topic is taken up again in Chapter XVI. and some conclusions are suggested which, it is hoped, may en- courage a more profound study of the subject. § 52. A special case of valuation of the greatest importance is that of complementary goods. Many wants are satisfied not by one good but by a complementary group of goods, the ab- sence of any element in wdiich would be fatal to the result. In such a case the whole group is valued as a unit in accord- ance with the principles just explained; and the valuation of each good in the group is the result of a separate calcula- tion. An illustration is furnished by Crusoe's gun and cartridges. Without the cartridges the gun is valueless, without the gun the cartridges are of no use. In this case if Crusoe wishes to put a value on either he must ascribe to it all of the impor- tance that belongs to both. In industrial society comple- mentary goods have, as a rule, independent uses to which they may be applied. In the case of a gun and cartridges, the latter, at least, or their component parts, may be turned to other purposes. This opportunity for independent use "fur- nishes grounds for independent valuation and makes it pos- sible to calculate by a process of subtraction the value of the good which is useful only in the complementary group. The value of the whole group is measured by its marginal utility. The values of the elements in the group which serve other pur- poses are determined by their marginal utilities in these inde- pendent uses. The dift"erence between the value of the whole group and the sum of these independent values is properly as- cribed to the element or elements which are of use only in the group. If the group is made up of several elements, the Valuation of Complementary Goods 95 process of valuation may be exceedingly complex in practice, but the considerations involved are readily understood. The most familiar complementary groups that men have Factors in occasion to value are those made up of producers' goods. As are Comple production is now carried on every step in the productive mentary process involves the co-operation of several complementary ^^ ^ factors. The value of each group of factors is derived from that of the consumable goods which it is helping to produce. The latter satisfy wants directly and may be valued by refer- ence to the intensities of these wants. Groups of producers' goods do not satisfy wants directly and owe the importance or value ascribed to them to the part they play in the production of consumable goods. Although a derived value, the valua- tion of complementary groups of producers' goods obeys the same principles that apply to groups of consumable goods. The value of the whole group is calculated by reference to the value of the consumable goods to result from it. The values of different elements in the group are determined as far as possible by reference to the independent uses to which they may be put. The value of the whole less the values assigned independently to the elements for which there are other uses is the value to be ascribed to the element or elements that have no independent uses. In practice these calculations are often very complex and could hardly be made at all but for the inter- mediation of money, the common medium in which they are all expressed by the business community. §53. As already explained.^ the calculations in reference to Values in marginal utilities upon which values in use depend are com- y ? ^■ parative rather than absolute. They attain precision only Exchange when there are a number of different goods to be valued and the consumer is given a choice between additional units of one or the other of them. In such cases marginal utilities must be carefully balanced against each other if an unwise selection is to be avoided. The typical consumer of industrial society is an individual with numerous and varied wants having access to markets in which numerous and varied goods capable of satisfying these wants arc ofifered for sale, but limited in his means so that many of his wants must go unsatisfied. Suc- cessive units of each particular good offered for sale obey the 96 Value and Price Values in Exchange Expressed as Prices Exchange Values • Cannot Increase or Decrease as a whole law of diminishing utility. In order to get the largest return from the expenditure of his limited means the consumer must consider the law of variety. He must not buy an additional unit of one good when a unit of some other good which may be had at the same price has greater utility. In general he should carry his purchases of units of different goods which he desires down to the point at which the returns in utility for his last units of expenditure are approximately the same all along the line. Only under these conditions is he getting the largest possible return in utility for his expenditures. Econo- mists sometimes speak of the marginal utilities of all of the goods which a person consumes as determining the location of his margin of consumption. This margin should be as even as possible to insure the maximum return in satisfaction to the consumer with limited means. The balancing against each other of the marginal utilities of different goods is one of the chief factors which deter- mine the ratios at which such goods exchange for each other, or exchange values. The practice of exchanging goods for money is now so universal that exchange values are habitually written with a sum of money as an intermediate term. Busi- ness men do not compare commodities by saying that so much of one exchanges for so much of the other, but by noting their prices. They do not say, for example, that a bushel of wheat is the equivalent of two bushels of corn, but that the price of wheat is one dollar a bushel and of corn fifty cents. In con- formity with this practice the discussion of the circumstances determining exchange values which follows is couched in terms of prices. The first principle in reference to exchange values that must be emphasised is that as ratios they can neither rise nor fall as a whole. Values in use, determined as they are by marginal utilities, may increase, but values in exchange cannot. A change in the exchange value of a particular good always and necessarily involves complementary changes in the exchange values of other goods. For example, if the exchange value of a bushel of wheat increases from x to 2.v, the exchange value of X has diminished from one bushel of wheat to one-half a bushel of wheat. Exchange values as a whole cannot be said The Value of Money 97 to have changed at all. It is equally important to note that the exchange vakie of money, in which prices are expressed, may increase or decrease hke the exchange value of any other individual good. When the exchange value of money in- creases prices fall, when it decreases prices rise. As prices arc the barometer which guides business men in all their transac- tions it is of the greatest importance that that commodity should be selected to serve as money which is least likely to tiuctuate in its exchange value. § =;4. The value of a unit of monev or of a dollar, like the_The Value — ----- - q£ j^ionev value of anything else, is man's estimate of its marginal utility. This is identical with the marginal utilities of the goods a dol- lar will buy. Each man has a certain money income to ex- pend and a certain scale of wants to satisfy. His efifort is to get the largest possible return for his outlay. To accomplish this he must consider the prices of things quite as much as their utilities. His first dollar should go for that combina- tion of goods having the greatest utility, his second for a some- . what less needed combination, and so on, each dollar adding somewhat less to his store of utilities than its predecessor. The marginal utilities of the goods purchased with his last available dollar measure the value of a dollar. It is these goods that the additional dollar adds to his store ; take the dol- lar away and it is these goods that he will forego. They measure the importance or value of a single dollar in his scale of living. Few people, even among those who regularly spend their Influences entire incomes in the satisfaction of their wants, estimate the '-^nectinglt value of a dollar as rigidly as the above analysis implies, and yet everyone has as a result of his business experience a pretty accurate notion of the value of the monetary unit. If parents sometimes complain that their children are without such a conception, it is a proof simply that conditions have changed since they were young and that the value of a dollar to their children is actually less than to themselves. In the minds of educated men the value of a dollar includes not merely the utilities of consumable goods, but leisure for enjoyment, social esteem and influence, the perpetuation of the family name and family traditions, everything, in short, which command over 98 Value and Price The Deter- mination of Prices Buyers' Calcula- tions dollars may secure and which seems to them desirable. It is probably true also that some people worship dollars in a quite irrational way for their own sake, though misers who have no ulterior motive beyond hoarding up money are more com- mon in fiction than in real life. For convenience of analysis it will be assumed in the fol- lowing chapters that the exchange value of money, that is, the quantity of commodities generally which it can command in the markets of the. country, is invariable. This is not quite true in practice, as is fully explained in Chapter XIX., but it is so nearly true over short periods of time that no serious error is involved in the assumption. § 55. The circumstances that at last analysis determine the money prices of goods and services are exceedingly complex. To understand them it is necessary to comprehend every phe- nomenon of economic life. Nevertheless the actual process by which money prices are fixed is comparatively simple. Buyers and sellers come together each with definite notions as to what the prices should be, and the prices finally fixed are the result of their bargaining. On the side of buyers the following calculations are com- monly made : ( i ) They decide in regard to the values in use of the dififerent goods offered for sale, and if they think of get- ting more than a single unit of each good they consider the values of additional units. In this connection, as already ex- plained, marginal utilities are decisive. (2) They decide as to the prices that they are willing to pay. As regards most of the goods purchased there is no hesitation. Experience has taught that at the prices at which they may ordinarily be pur- chased they afford the greatest return in satisfaction to be de- rived from the expenditure necessary to such purchase. Thus the normal family purchases flour, sugar, and the other staples, that enter into the consumption of every household as a matter of course. Deliberation begins only after these necessaries are secured, and the question is how to get the largest return for the sum that remains to be expended. Buyers vary greatly in the intelligence they show in disposing of their surplus in- comes. Some expend them regularly for goods which they do not really want, but which attract by their novelty. Less Four Possible Cases 99 impulsive buyers have in mind several different goods which they would like to have. These are arranged in their minds in a rough scale which enables them to decide promptly which of two goods they would prefer at the same price, or whether at different prices the dearer good is worth, in their scale of consumption, the difference. In all of these calculations the value they ascribe to the monetary unit is quite as important in directing their purchases as the values they ascribe to the goods bought. The calculations of sellers are usually somewhat more accu- Sellers'Cal- rate than those of buyers, (i) They know pretty closely how '^"^^^^''^^ much the goods they have to sell have cost them in money. This we will refer to in future as the expense of production. Since they are in business for profit, sellers look upon the ex- pense of producing a unit of commodity as a minimum price, less than which they cannot afford to take except under unusual circumstances. (2) They have accurate information in regard to the current prices of goods and on the basis of this knowledge decide what prices they ought to obtain. At this point sellers are influenced by standards made for them by market and other social conditions, just as buyers are in- fluenced to a certain extent by the standards of others in cal- culating the values in use of different goods. There are four possible situations in which buyers and Four sellers may come together. The simplest is that in which one Cases • buyer bargains with one seller to secure a commodity which 0"^ Buyer that seller alone offers for sale. The buyer has made up his Seller mind what price he will pay rather than not get the commodity, but as an economic man he wishes to pay as much less as is consistent with his sense of fair dealing. On the seller's side is a definite idea of the lowest price he can afford to accept, but his business interest calls for the highest price he can get. If the buyer's maximum price does not exceed the seller's minimum price it is obvious that no exchange can take place. If it does, then the market price must lie somewhere between these limits. Just where depends upon the relative skill of the two parties in bargaining. A second and more common situation is that in which sev- Seveial , • • 1 11 , , , r , Ruversand eral buvers bargam with one seller who has a monopolv of the One Seller loo Value and Price good which all the buyers want. This situation admits of a variety of accompanying circumstances : ( i ) The monopolist seller may have only one unit of the desired good, as is often the case with dealers in antiques. In such a case the buyer who is prepared to pay the highest price will get the coveted object at a price between that offered by the next highest bidder and his own maximum price unless, indeed, the latter is less than the dealer is willing to accept. How this works out in practice is so frequently illustrated at auctions that there is no need to enlarge upon it. (2) The monopolist seller may have several units of the desired good and these may be incapable of reproduction. In this case he may pursue the plan of getting as much as he can for each unit as it is sold, as is usual at auctions, or of marking each with the highest price which he thinks he can get for all of them, as is usual with " one-price " dealers in antiques. If he pursues the first course the result will be similar to that in the first case. Each successive unit will go to the competitor who was just outbid by the more eager buyer who got the one before. In this case the prices received for different units will vary widely and if all are sold at one time will show a tendency to decline. If the seller pursues the latter course and uses good judgment in marking his wares he will fix on the price wdiich is just equal to the maximum which the buyer whose purchase is necessary to the sale of the entire supply is willing to pay. un- less, of course, this is below the price which he is himself willing to accept, when some of the supply must remain on his hands. (3) The monopolist seller may have several units of the desired good and may be in a position to produce as many more units as he considers it profitable to put upon the market. This is the common case of monopoly and is so important that special chapters are devoted to it. At this point it will suffice to submit the fairly obvious propositions that anywhere be- low the limit fixed by the maximum price which the most eager buyer is willing to pay, the monopolist may fix the price by regulating the supply, and that, in so regulating the supply, he will try to fix the price that will aft'ord him the largest monopoly profit over and above his expenses of production. A third situation is presented when one buyer bargains with Two-sided Competition loi several competing sellers. Perhaps the most common case of One Buyer this kind is when a single city family goes in the summer to sellers live in a country district where all other families produce for themselves all of the milk, butter, eggs, chickens, etc., which they require. Under such circumstances, if competition is permitted to work out its full effects, the new family may get the country products it requires for the lowest prices the most eager sellers competent to supply all its needs are willing to accept. More frequently comjjetition is restrained by custom and the buyer has a choice between goods of different quality rather than between different prices for the same goods. This third case of '* buyers' monopoly " has resulted at times from the formation of the trusts discussed in Chapter XXV. When all of the manufacturers who use a particular kind of raw material combine, producers of the raw material are placed at a great disadvantage in bargaining. They may be forced to accept a price which is so low as to drive all but the most capable of them out of business. § 56. The last and most common situation is that in which Two-sided there are several buyers and several sellers, between whom more ^j^q ^^ ^* or less active competition and bargaining are carried on. In highly organised industrial centres this competition shows itself more clearly on the side of sellers than upon that of buyers, and in fact in most branches of trade sellers have adopted the plan of marking prices, leaving it to buyers to ac- cept them or reject them as they see fit. This arrangement does not dispense with buyers' competition as an active force in the determination of prices, since this is one of the chief factors that sellers consider in deciding what they shall ask for their wares, but it makes the whole process more complicated. In order to bring out the various influences at work under An conditions of two-sided competition, we will examine the case ^^^ration of an auction sale in w^hich an auctioneer has identical goods, bicycles we will say, belonging to different sellers and is in- structed to sell as many of them as he can at the highest price he can get, each seller naming the minimum price which he is willing to accept for his wheel. Assume that there are six wheels and that the sellers' minimum prices are $20, ^22, $24, 102 Value and Price $25, %2y, and $30, respectively. Among the many would-be buyers at the auction the six who are prepared to pay the highest prices for wheels have in mind as their maximum prices $40, $35, %t^2, $30, $28, and $25, respectively. Each buyer understands the conditions of the sale and, as one wheel is like another to him, will be inclined to hold back in his bid- ding with a view to buying at a low price. All six of them are willing to pay $25, but at this price only four of the wheels can be purchased, and fear of not getting any wheel at all will lead one of them to bid $26. At this price five would be will- ing to buy, but only four wheels are salable. One buyer must bid more or lose his chance to buy, so '$2y will be offered. At this price five wheels may be sold to the five buyers willing to take them, but if the auctioneer is properly mindful of the interests of his customers he will try to get still more. If he succeeds in forcing the bid up to $28 there will still be five buyers for the five wheels he is authorised to sell. Any price between $27 and $28 will effect the sale of his five wheels, and since the sixth buyer will pay only $25, while the sixth seller will not take less than $30, only five wheels can change hands under the given conditions. The price between $27 and $28 is therefore the one most satisfactory to buyers and sellers as a whole, and the one which competition, restrained by the self-interest of competitors, tends to establish. The Actual Artificial though the above illustration is, it comes close to 1; ractice . ... representing the forces which determine competitive prices generally. Rival sellers do not entrust their goods to an auctioneer, but they act jointly very much as he acted in the assumed case. Each has a minimum price determined by his expenses of production. All wish the largest number of sales at the highest attainable price. Their tendency as individuals is to put up the price. As competitors they tend to lower it to enlarge the volume of their sales. If competition is active between a number of sellers with varying expenses of produc- tion, the price is likely to be fixed at a point which aiTords profits to several, just pays the expenses of production of others, and drives others out of business because it does not cover their expenses of production. The part which buyers play in bringing about this result is to seek constantly for The One-price System 103 the cheapest market. Their competition is rarely actually excited, as was assumed at the bicycle auction, but its poten- tial force is indicated to sellers by the rapidity with which their goods are sold at the prices which they fix. The more attentive buyers are to their interests in getting goods at the lowest prices, the more likely are sellers to meet price-reduc- tions promptly, so that there will be substantially one price for each particular good at any one time throughout the whole market. The price will be lower than many buyers stood will- ing to pay, it will just about suit the ideas of others, while still others will find it too high. In assuming that two-sided competition will tend to estab- The lish one uniform price instead of a variety of prices for identi- Svstem'^^ cal units of the goods sold, w^e are simply stating a fact of common observation in highly organised markets. Experi- ence has taught both buyers and sellers the advantage of agree- ing upon the one price at which a maximum number of sales may be effected, and all the machinery of competition, pub- lished price lists, clearly marked prices on goods offered for sale, etc., is designed to bring this about. Only in communi- ties in a backward condition industrially, as in Italy for example, do any large number of sellers at retail continue to make the determination of the price at which each good shall be sold a matter for a special bargain. The time that is wasted in consequence in useless higgling is convincing proof of the superiority of the one-price system. In the wholesale trade special bargains between the wholesale dealer and his influen- tial customers are more common and skill in bargaining is an important requisite to success. The price limits within which such bargaining is confined are, however, narrow, and the wholesaler is always restrained from making too great conces- sions by the fear that he may alienate his other customers. Generalising on what has been said, we may conclude that two-sided competition and bargaining between buyers and sellers tend to establish one price or a narrow range of prices for each good and that this corresponds to the money equiva- lent of the marginal utility of the good to the buyer who is just induced to buy and to the expense of production of the seller whose supply is necessary along with the supplies of sellers I04 Value and Price Market Prices Normal Prices bummary who produce more cheaply to satisfy the demand of the market. § 57. A study of the four possible modes of price formation indicates that the money equivalents of the marginal utilities of the goods offered for sale to those whom we may style the marginal buyers, that is, buyers who are just induced to buy, always have an important influence upon prices. In case there is only a limited number of units of the good in existence or its production is controlled by a monopoly, these marginal utili- ties, which are themselves influenced by the number of units offered for sale, or by supply, determine the price. In the case of freely reproducible goods the money equivalents of their marginal utilities to marginal buyers are one of the determi- nants of prices, while the expenses of production to marginal sellers are the other. In this case no very definite conclusion can be reached in regard to prices until the circumstances de- termining the normal expenses of production have been considered. In the foregoing analysis market prices have alone been re- ferred to. In connection with most goods there is behind the fluctuating market price a normal price to which the former tends to conform. This is because the conditions of produc- tion are more stable than the market conditions under which goods are bought and sold, and serve constantly to recall prices from the more or less violent fluctuations of the market. For the present, normal prices may be defined simply as the prices about which market prices tend to fluctuate. In the case of freely reproducible goods normal prices correspond to the nor- mal expenses of production of representative firms. The nor- mal prices of goods produced under conditions of monopoly are, on the other hand, the money prices which are calculated, in the long run, to afford the largest profit to the producer or combination of producers which enjoys the monopoly. In both cases the term, " normal," designates the price which economic forces tend to establish under the given conditions. The justification and practical usefulness of the conception will be made to appear in subsequent chapters. § 58. This chapter has attempted to explain how the values and prices of goods are determined. It has been shown that Summary 105 an isolated individual tends to value his possessions in pro- portion to their marginal utilities and that the latter depend partly upon his scale of wants and partly upon his supply of units of the good valued. A substitute basis for valuation in cases where the goods are produced as well as used was found in marginal cost, or disutility. The rational ordering of life causes the marginal utility, which is one measure of value, to just equal and offset the marginal disutility, which is the other. Only when this is the case, as was pointed out, can an economic equilibrium be realised. In industrial society complications are encountered. Although still referred to marginal utility, value was found to result from the joint calculations of differ- ent groups of people rather than from the calculations of single individuals. It was finally characterised as society's estimate of marginal utility. The complications on the side of cost were found to be even more serious. The costs incurred as production is carried on in society are divided up among a number of co-operating producers. No one producer, conse- quently, is able to judge what the total cost of production is. Even if the cost could be readily measured there is no direct opportunity to compare it with utility, as men usually produce for others rather than for themselves. Valuations based on marginal costs apply, therefore, to different goods from those that are valued by reference to their marginal utilities. Finally, it was shown that the costs of production are borne by men in very different circumstances, so that very different costs enter into the production of identical goods and services. As these have the same values, costs to men at the margin are alone influential in their determination. No attempt was made to clear up these difficulties, but it was intimated that in spite of them cost does influence value even in industrial society. The discussion of value concluded with some con- siderations bearing on the valuation of complementary goods. Attention was then directed to the nature of price and to the circumstances determining the value of money. The four possible situations under which prices may be determined were described and discussed and finally the distinction between market and normal prices was explained. As has been indicated at every point in this chapter, one Conclusion io6 Value and Price factor in the determination of the values and prices of goods is the available supply. In general, in accordance with the law of demand, an increase in the supply of a good means a fall in its marginal utility, or value in use, and a corresponding fall in its price. Conversely a decrease in supply means a rise in value and price. Ordinarily the amount of the supply of a good depends upon the conditions of production. In a some- what less direct but no less vital way it depends also upon the conditions of distribution. It is for this reason that the treat- ment of value and price in this chapter is left incomplete until the subjects of production and distribution have been con- sidered. REFERENCES FOR COLLATERAL READING * Marshall, Principles of Economics, Book V.; * Pier son. Principles of Economics, Part I., Chap. I.; Clark, Philosophy of Wealth, Chaps. V. and VI.; Smart, Introduction to the Theory of Value; *Bdhm- Bawerk, Positive Theory of Capital, Book III.; * Fetter, Principles of Economics, Chap. 5; *Carver, The Distribution of Wealth, Chap. I. CHAPTER VI PRODUCTION: LAND AND NATURAL FORCES § 59. Production has already been defined as the creation Production of utihties. That man cannot create matter is a famihar truth, defined All that he can do is to rearrange particles of matter so as to create form utilities ; or move goods from one part of the world to another so as to create place utilities; or preserve goods from one period to another so as to create time utilities; or, finally, transfer goods from the ownership of one individual to that of another so as to create possession utilities. Any activity which contributes to the creation of utilities in either of these ways is production. A school of French economists of the eighteenth century, the Manufac- ■.^. . 1 1 1- f .1 i • 1^ • turin^ and Physiocrats, gave currency to the belief that agriculture is pro- Trading as ductive in a special and peculiar sense. They even went so far Productive . r ■ , ,-1 .^ as Aencul- as to characterise manufacturing and mercantile pursuits as ^^^.q "^ sterile or unproductive. Adam Smith took vigorous exception to the latter view, but he, too, speaks of nature as " labouring along with man " in farming, and implies, erroneously, that man has little outside help in his other occupations. Completer knowledge of the real nature of production has emancipated most minds from these misconceptions. They reappear from time to time, however, in criticisms of the activity of merchants, who are said to create nothing, but to live, like parasites, by buying things for less and selling them for more than they are worth. The obvious reply to such attacks is that mer- chants create time, place, and possession utilities and that human well-being depends as much upon these as upon form utilities. Convincing proof of the value of the services of merchants is furnished to city people when they go to live in the country in the summer and have to depend for the goods they require upon a distant and ill-stocked country store. The growing prevalence among country people of the 107 io8 Production : Land and Natural Forces Factors in Produc- tion: Na- ture and Man Capital The Productive- ness of Land practice of coming to town to do their shopping indicates, on the other hand, their practical appreciation of what the mer- chant does for the community. If there is just ground for complaint, it is not because merchants fail to render useful service, but because the organisation of wholesale and retail trade is less economical than it might be. In this department of business the results of unregulated competition are less clearly beneficial than in, perhaps, any other. § 60. As already implied, there are two essential factors in all productive processes : nature and man. Nature figures in production as an aggregate of materials and blind forces. Act- ing in conformity with invariable laws, she destroys as readily as she creates. Moreover, her productive services are always- gratuitous to him who has the intelligence to command them. Man, on the contrary, appears as a being with conscious pur- pose. He also destroys, not ruthlessly, however, as nature seenrs to do, but in order to satisfy his wants. In production man is the directing, active agent, nature the obedient, passive agency. Man marshals the materials and productive forces which nature supplies in the ways that experience has taught him to be best, and he alone enjoys the fruits of productive enterprise. Man and nature are the primary factors in production ; secondary or derived from them is capital, the products of past industry used as aids to further production. After what has been said of the revolution which followed the introduction of power machinery and other forms of capital there is little need to emphasise the importance of this third factor in produc- tion. To capital is chiefly due the efficiency of contemporary productive methods, as contrasted with those of one hundred and fifty years ago, and also the division of the working popu- lation into employers and employees. These truths are so familiar to everyone that it is not so much the importance of capital as the fact that it is itself dependent upon man that requires emphasis. § 61. As the term is com.monly used in economics, '' land " designates not only the surface of the earth and the materials above and beneath it, but also bodies of water and what they contain. The principal ways in which land, in this sense, assists in production may be enumerated as follows: (i) It. Progress in Production 109 affords support for man and the buildings, etc., he erects upon it; (2) its extension permits the movement of men and goods from place to place; (3) its geographical features, mountains, valleys, rivers, bays, etc., aid in many ways; (4) it supplies the materials, mineral, vegetable, and animal, from which all commodities are made; (5) each portion of it enjoys its share of summer's heat and winter's cold, air, sunshine, and rain, u^ithout which no form of life could long continue on the earth. Properly speaking some of these endowments of land, such as heat and sunlight, are forces rather than materials. The principal other natural forces which aid in production, as at present carried on, are the force of gravity, the vital forces that cause the growth of plants and animals, the expansive force of steam, and electrical force. Land and natural forces have been available for human use Progress in for one hundred thousand years or more, but only in recent times has man begun to appreciate and utilise them at all fully. His early discoveries of fire and its uses, of methods of navi- gating by water and of the metals, and his first domestication of animals and cultivation of plants, followed each other at long intervals and were the results, there is reason to suppose, of happy accident rather than of deliberate study and experi- ment. Only in the last two centuries has systematic progress been made in the task of understanding nature and directing her forces toward human ends. The results already achieved in analysing materials into their elements and gauging accu- rately their importance for different uses^ in generating and controlling steam and electricity, and in finding new employ- ments for these and other natural forces, seem to justify ex- tremely optimistic anticipations in regard to the future of the race upon the earth. They have served in large measure to shift the attention of economists from the problems of produc- tion, which seem in process of such happy solution, to the problems of distribution, which become more rather than less complex as general wealth increases. There is the more excuse for this shifting of interest because different phases of production are beginning to be dealt with in special treatises. " Economic geography " is a description of the part which land and natural forces play in production. no Production: Land and Natural Forces Different Character- istics of Dift'erent Pieces of Land " Economic geology " treats more especially of rocks and minerals in relation to human well-being. Similarly, treatises on agriculture, on mining, and on different kinds of manu- facturing, describe the technique of modern production in its different branches. It remains for a treatise on economics merely to emphasise the more general aspects of the part that nature plays in production. § 62. It is a familiar fact that dift'erent areas of land are unequally fitted to aid production in the ways that have been described. ]\Iost obvious are diff'erences in geographical features. There is but one New York Harbour on the Ameri- can Continent, and its superiority in all essential respects to other harbours causes every square foot adjacent to it to be eagerly utilised in the promotion of a vast commerce. Simi- larly, there is but one source of water power like that supplied at Niagara Falls by the Niagara River and there are no other fresh water courses comparable with the Great Lakes and the Mississippi and its tributaries. Though less unique other geo- graphical features are important and influence in large meas- ure the forms of industrial activity that flourish in the regions in which they are found. Differences in mineral resources are quite as marked. Geological changes, most of which antedated the appearance of man upon the earth, deposited beds of iron ore in one locality, strata of coal in another, veins of gold and silver, copper and lead in still others, and in others layers of barren rock. The influence which these mineral de- posits exert on the kinds of industry that are to be carried on in different sections and on their prosperity is too familiar to be dwelt upon. Differences in soils, climate, rainfall, and the other conditions affecting agriculture are equally in evidence and, as was indicated in the chapter on the Industrial Expan- sion of the United States, play their part in shaping a nation's industries. Although most of the characteristics of different pieces of land are, economically speaking, unalterable, others admit of considerable modification. However admirable a harbour may be as fashioned by nature it can nearly always be improved by man. Important as were the Great Lakes as a natural water course their usefulness has been much increased by the con- Old and New Countries 1 1 1 struction of the Erie, Welland, and Sault Stc. Marie canals. Even more marked are the changes which man may make in preparing soils for agricultural use. Besides clearing land from forests and from stones and draining off surplus water, he can often change comparatively poor to very good soil by means of fertilisers. As the English economist, Professor Marshall, has suggested, the various qualities that fit a piece of land for the cultivation of a particular crop or series of crops may be compared to the links of a chain, and as the strength of a chain depends upon that of its weakest link, so the fertility of a piece of land depends upon the quality in respect to which it is most deficient. In the same way that the strength of a chain may sometimes be increased many fold by repairing an imperfect link, so land may often be raised to a much higher plane in the scale of fertility, if its one serious defect is remedied. In new countries where land is abundant and labour and Old capital are scarce and dear, the tendency is to rely mainly on countries the natural qualities of different soils and to make little use of Contrasted fertilisers. As a country becomes more populous and land is in greater demand, fertilisers are more freely used and the tend- ency is for each piece of land to be supplied artificially with the qualities in which nature has left it deficient. In this way continuous cultivation tends to obliterate the differences which originally distinguished different soils in the same general region and raise them towards one uniform standard of excel- lence. This makes it difficult if not impossible in an old coun- try to determine to what extent the fertile properties of a given piece of land are due to nature and to what extent to man. In the United States it is probably still true of agricultural land that it owes the principal characteristics that fit it for produc- tion to nature. This is even more the case, of course, with its mineral and forest lands. § 63. If attention be confined to some particular product. Differences such as iron, coal, wheat, corn, or wool, and a study be made "^ p'roc-uc^-^ of the conditions under which it is produced in a country like tion Due to the United States, it will be found that some of the supply jn La^nd*^^^ comes from areas where the natural conditions are very favour- able to such production, that other portions come from areas 112 Production: Land and Natural Forces where the natural conditions are less favourable, and still others from areas so situated that the production is barely profitable. To illustrate by reference to iron : some of the ore is of such richness and is so easily mined that each year's output affords a profit to mine owners and operators so large that in a short time it amounts to a princely fortune. Other ore is less rich and mined under greater difficulties, but still pays a hand- some profit over all the expenses of its production. Still other ore barely repays the expense entailed in putting it on the market. It may be, and often is, the case in mining that still other ore is taken out of the ground and sold at an actual loss to those engaged in the business, the loss being made good for a time out of the capital of such business men in the hope that the ore will improve with depth, or that it will command a higher price, or that something will occur to make the enter- prise a success. In addition to this poorest ore mined there are known to be vast bodies of ore of even inferior grades which might be mined and would be mined if market condi- tions were to change so as to make it profitable. In iron min- ing and other branches of mining there are thus different pro- ducers incurring quite different expenses of production, rang- ing from those whose expenses are low to those whose ex- penses are barely covered or even not quite covered by the price. The more fortunate receive in the current price a con- siderable margin over their expenses of production, which is to be explained, economically, as due to the superior natural re- sources which they exploit. Farming A similar situation is found in farming and may be illus- trated by reference to the cultivation of wheat. The expense entailed in producing wheat on the bonanza wheat farms of the Dakotas, even including the transportation charge to the dis- tant market, is very considerably less than the expense of pro- ducing wheat for the same market in Michigan, owing to dif- ferences in the favourableness of soil and climate in the two sections. Some wheat farmers realise regularly year after year a considerable margin above the expenses of production in the current price, others realise a smaller margin, others barely pay expenses, while, in some years, still others incur a loss and have cause to regret that they did not allow their land to lie Law of Diniinishino- Returns 1 13 idle. In addition to the land used for wheat there is still other land that is even poorer for this purpose, but that could and would be used to swell the country's wheat crop in case market conditions chang^ed so as to make this profitable. In wheat farminj];' and other branches of farming- there are thus con- siderable differences in the expenses of production incurred by different farmers, and since all obtain approximately the same prices for the same products in the central market, allowing of course for variations in quality, these dift'erences cause some to reap large profits, some to reap smaller profits, some to just meet their expenses, and some, perhaps, actually to lose on the year's industry. Here again superior natural advantages are the source of the higher profits which some realise. An exactly similar situation is encountered in branches of Manufac- manufacturing which utilise water power, the supply of which "'■^"S is limited. Those who control superior sources of water power obtain their power more cheaply than their competitors using inferior power. So long as all manufacturers sell their products for the same market prices those controlling the superior powers must reap an extra profit traceable to this natural superiority. From these typical illustrations it appears that land and Conclusion natural forces assist different producers for the same market unequally. Since they all receive the same prices and since these must be high enough to cover the expenses of produc- tion of the men who produce at the greatest disadvantage but whose supplies are necessary to satisfy the demand of the market, those producing under more favourable conditions must reap a profit due to these conditions. This special form of profit, wdiich in the aggregate represents an important share of the wealth annually produced, is known in economics as rent and will receive further consideration in the chapter on that topic. §64, But, it may be asked, if nature assists production so The Law of imequallv in dift'erent localities, whv is not the whole supnlv of P'""ni^!'- . - '' ' ■ ingReturns each particular commodity produced in that one spot which is best adapted for the purpose? The mere statement of this question suggests the answer. All of the iron ore needed in the United States is not produced from the richest iron mine. 114 Production: Land and Natural Forces because that mine does not contain enough ore to satisfy a hun- dredth part of the demand. All of the wheat required is not produced from that one acre best suited to wheat culture, be- cause it could not produce a millionth part of the wheat needed. Equally inadequate is the water power even of Niagara to generate the force needed to keep all the manufacturing machinery in the country in motion. Thus if all the ore in the best mine, if all the wheat the best acre could be made to pro- duce, and if all the power of Niagara were made available in a single year, it would still be necessary to have recourse to many other mines, acres, and sources of water power to satisfy the demand for these things. Statement In practice, as is well known, it does not pay to extract all the ore from ev^ i the richest mine at too rapid a rate, nor to cultivate too carefully even the best acre of land, nor to utilise too fully even the finest water power. In each of these cases the producers encounter what is known in economics as the laio of diminishing returns. Briefly stated this law is that after a certain point has been passed in the cultivation of an acre of land or the exploitation of a mine, increased applica- tions of labour and capital yield less than proportionate returns in product, it being understood, of course, that no important change is made in the method of cultivation or exploitation. To illustrate by reference to wheat farming: A given acre of land may be cultivated in numberless dififerent ways, each more elaborate than the preceding and each giving rise in a normal year to a somewhat larger crop. It may be ploughed once, twice, three, or even four times, and each ploughing will add somewhat to its preparedness to receive the seed. It may be harrowed correspondingly. The use of fertilisers familiar in the region offers a wide range of possible variation, each having some perceptible effect on the year's crop. While the crop is maturing a great number of different pi"ecautions may be taken to protect it from the ravages of bir>^s, insects, storms, etc. It may be irrigated, or great pain: may be taken to drain off quickly an excess of rainfall. It may even, as is said to have been tried on the Island of Guernsey, be covered with glass at the period when it is most liable to injury. In these and hun- dreds of other ways labour and capital may be applied w^ithout The Margin of Cultivation 1 15 exhausting the productive capabihties of the land. Some of these possible improvements in the method of cultivation be- yond the roughest scratching over of the soil may and prob- ably will yield more than proportionate returns in the wheat crop, but after a certain point has been passed all experience confirms the law tliat further improvements aftord less than proportionate returns. Unless this were true, indeed, there would be little occasion for dividing up rural families and sending some of the sons to take up new land. Every addi- tional hand on the old farm would add his proportion to the joint produce and a farm of a hundred acres would support a score of families as well as one. To give precision to the statement of the law of diminishing The Exten returns it is customary to distinguish between the " extensive " i|7tensive and the " intensive " margins of cultivation. If, for example. Margins of the demand for wheat increases so as to induce the production ^ ''^^^ ^°° of a larger crop, the additional supply may come from either or both of two sources. Wheat farmers in the settled portions of the country may make their farming more intensive, that is, apply more labour and capital to the cultivation of each acre and in this way add to their crops. Others may be induced to take up new land and prepare it hastily for " extensive farm- ing." If both results follow the prospect of a somewhat higher price for wheat, as they would if farmers were always alert to their own interests and ready to adapt their methods to chang- ing market conditions, there will be two situations in which the expenses of producing wheat are just covered by the price. The wheat grown on the poorest land hastily ploughed and planted, or on " the extensive margin of cultivation " will barely repay the expenses of production. So also will the ad- ditional wheat raised by the application of additional labour and capital on the " intensive margin of cultivation." The pro- ducer at either margin may in such a case be properly described as the marginal producer whose expenses of production are just covered by the price of the product. The fact that his additional wheat just about pays for itself will not, of course, prevent the farmer at the intensive margin from realising a rent on that wheat which he continues to produce at smaller proportionate expense. ii6 Production: Land and Natural Forces Other Dif- ferences in Lands An Illustration In the mining industry there will not be the same tendency to hasten the exploitation of each mine up to the point at which the price just covers the expense of getting out the most ex- pensive ore, because the bed of ore is, even while still under ground, a store of wealth to the mine owner. Uusally, after he has demonstrated the value of the deposit he will prefer to mine it in the most economical way without much attention to price fluctuations. In mining, therefore, it is at the extensive margin of exploitation, that is, in connection with the poorest mines, rather than at the intensive margin, that the expenses of production that influence price are to be found. § 65. In the preceding sections the natural differences be- tween different pieces of land have been discussed as though they alone determined the importance of land to man. That this is far from being the case is illustrated on every hand. Each year sees large tracts of land in the United States enhanced in value simply because of changes in market conditions or im- provements in the means of transporting products to the market. To some extent the growth of markets is itself determined by natural conditions, but it will be simpler to regard it as the result of social changes. A few illustrations will indicate how important such social changes are in determining the value of land and the amount of the extra profit or rent which fa- vourably situated land affords. Contrast, for example, the iron and coal deposits of China with those of the United States. Well-informed geologists assert that, from the point of view of natural richness, those of China are scarcely if at all inferior to those of America. From every other point of view the latter have been and will be for many years the superior. This is because the tool and machine using habits of Americans, their steel railroads, steel cars, steel steamships, etc., represent an enormous demand for these com- modities and make the exploitation of such deposits exceed- ingly profitable. There are indications that China is about to enter upon an industrial revolution similar to that through which Japan has passed in the last generation and that as time goes on changed social conditions will cause coal and iron to be appreciated there somewhat as they have been for a cen- tury in the Western World. Such a revolution will, of course, Suburban vs. Country Plots 117 cause an immense increase in the value of the now practically worthless iron and coal deposits of the country and enable the fortunate owners of the richer of those deposits to reap large profits or " rents " from their exploitation. Next, contrast an acre of agricultural land on the outskirts Suburban of a large city with an equally fertile acre many miles from ^^u^trv any centre of population. The first point to be observed is the Plots ot different uses to which the two pieces of land will be put. The contrasted back-country acre will be sown with some staple crop, such as wheat, corn, or cotton, since it alone will repay the expenses of transportation to the distant market. To it labour and capital will be applied probably only up to the point where the tendency to diminishing returns shows itself, because, in the given situa- tion it will pay better to apply additional labour and capital to new land than to press cultivation beyond this point. The suburban acre, on the other hand, will be sown with the most delicate and perishable vegetables in demand in a city market. Labour and capital in the form of fertilisers, etc., will be ap- plied far beyond the point of diminishing returns because the quantity of land near the city which can be utilised for truck farming is exceedingly limited and city prices for green vege- tables are so high that very intensive cultivation is profitable. From the point of view of profit the back-country farmer may be on the very margin of extensive cultivation, that is, his ex- penses, increased largely by the freight he must pay to get his crop to market, may just about equal the price he receives for his crop. The suburban farmer, the native fertility of whose land was assumed to be the same, is sure to reap a high rent from his business. The final " doses " of labour and capital he applies to his land may be just paid for in the price he gets for the additional produce that results from them. It is to his interest to continue his cultivation so long as it is remunerative. But all earlier applications of labour and capital will be more than covered by the price received for what they added to the product. As a whole his acre will show at the end of the year a high rent over expenses, ascribable tb its nearness to the market or to social rather than to natural conditions. A still more striking contrast is presented by a comparison of city real estate, priced by the front foot, with agricultural land, ii8 Production: Land and Natural Forces City and Country- Plots of Land Contrasted Conclusion priced by the acre. Next to man's need for food and clothing comes his need for a shelter or for a home. The former may be produced at great distances and brought to him from day to day in the small quantities that he requires. The latter must be available in its entirety all the time, and it must not be so far away from his place of business as to make his daily trips back and forth unduly irksome. This accounts for the fact that when land begins to be thought of for building pur- poses its importance is at once greatly enhanced in human esti- mation. The more concentrated the activities of a city and the larger its population, the greater will be the demand for each piece of land favourably situated for building. Thus as a place changes from a country four-corners to a village, then to a town, and then to a city, the values of building sites within its limits tend to rise, although with many fluctuations as re- gards particular quarters, and the rents which their utilisation affords to increase correspondingly. The invention of the bicycle, the trolley-car, and other conveniences for passing quickly and easily from one's place of business to one's home may check this tendency somewhat, and if these improve- ments follow each other rapidly may check it entirely or set up a counter tendency, but during the last quarter of a cen- tury the increase in the value of city real estate and of the rents that such property affords has been a phenomenon com- mon to all civilised countries. How far this may go in par- ticular instances is Illustrated by the fact that a lot sold in the heart of London recently for a price ./hich would make an acre of imimproved land in that locality W'Orth $2,300,000. In some sections of New York City land is equally vakiable. In these cases also the increased value and correspondingly en- larged annual return are ascribable to social rather than natural conditions. Generalising on these illustrations, we may conclude that dif- ferences in situation in respect to markets and other social con- ditions are quite as influential as natural dift'erences in deter- mining the importance of different pieces of land and the rents they afford. When these social conditions are created by the forethought, enterprise, and labour of some particular indi- vidual or group of individuals, as when, for example, a suburb The Rent of Land 1 19 is deliberately planned and brought into being by a syndicate of real-estate operators, we have a case similar to that presented by the modification of the character of the land by drainage or fertilisation, in which it is very hard to distinguish man's pur- posive share in the result from the share of an unconsciously evolving community. These difficulties receive fuller con- sideration in the chapters on Distribution. § 66. In this chapter attention has been called to the natural Summary differences between different pieces of land, to the law of diminishing returns which restrains men from trying to derive more than a certain product from each piece of land, and to the special profit or rent which arises in consequence of the fact that lands of dift'erent qualities are employed to supply the same commodities in the same markets. It has just been shown that differences in situation in relation to markets are equally potent in determining rents. In discussing rents it has been assumed that the man who The Rent uses the land is also the land owner. In European coun- Land tries and to an increasing extent in the United States this is not the case. Land ownership is coming to be more and more divorced from land utilisation and as a result the extra profit ascribable to the superiority of particular pieces of land is clearly distinguishable from other forms of profit going to the cultivator or occupier. It must be paid as " rent " to the land owner, or the latter will prefer to cultivate or occupy the land capable of aft'ording such profit himself. In future this share of wealth will always be referred to as " rent " to distinguish it from other shares to which the designation " profits " more properly belongs. REFERENCES FOR COLLATERAL READING * Marskall, Principles of Economics, Book IV.. Chaps. I., II., and III.; Walker, Political Economy, Part II., Chap. I., and • Land and Its Rent; Nicholson, Principles of Political Economy, Vol. I., Book I., Chaps. II. and IV. CHAPTER VII PRODUCTION : LABOUR AND CAPITAL Labour as a Factor in Production Qualities Influencing Productive- ness of • Labourer § 67. Of co-equal importance with nature as a factor in pro- duction is man. His contribution to the productive result de- pends partly upon his capacity as an individual and partly upon the way in which his efforts are applied, that is, whether to direct or to capitalistic processes of production, or whether independently or in co-operation with the organised efforts of others. Each one of these circumstances merits separate con- sideration. The principal qualities which determine an individual's capacity as a producer are the following: (i) health, (2) physical strength and endurance, (3) intelligence, (4) judg- ment, (5) ambition, (6) energy, (7) perseverance, (8) imagi- nation, (9) mechanical ingenuity, and (10) technical knowl- edge. The importance of health and physical strength, espe- cially to those doing manual work, is obvious. Intelligence and judgment are important adjuncts to the man with pick and shovel ; they are indispensable to men in the higher grades of industry. Ambition, energy, and perseverance are quali- ties that characterise all the world's greatest men, and without which other qualities are of little value. Imagination is im- portant because to it are traceable all great industrial inven- tions and discoveries. Mechanical ingenuity, though less important to the mass of men than formerly, when fewer tasks were performed by automatic machinery, is still a valuable quality. Technical knowledge, on the other hand, gains each year in importance as the ways of doing things that are found to be most efficient increase in complexity. It is evident that the importance of these different qualities depends upon the kind of work to be done and that industrial progress tends to lessen the importance of some while it increases that of others. § 68. The above qualities, like other human characteristics- 120 Health and Strength 12 1 are either inherited or acquired. Whatever their origin in Qualities special cases the same general conditions, acting either on sue- inhedted^ cessive generations or on living men, account for their presence, or Acquired Having in mind especiall}' the inlluences at^ecting the Ger- manic race, to which a large proportion of the most advanced peoples of the present day belong (Americans, English, Ger- mans, etc. ) , we may say a few words in regard to each quality. The conditions influencing health and strength are well Health and understood. Fresh air and exercise, good food, adequate pro- tection from dampness and sudden changes in temperature, and the avoidance of all kinds of excesses, are the principal requi- sites. Of these good food is perhaps the most important. The human body resembles a machine, and the amount of work it can do depends very largely on the quality and quantity of the fuel, that is, the food, with which it is supplied. Up to the time of the industrial revolution Germanic peoples enjoyed many of the above conditions and the physique of the race was consequently well developed. The introduction of machinery has served to concentrate the populations of ad- vanced countries to an ever-increasing extent in cities and to substitute for open-air work, work indoors in shops and fac- tories. There has been reason to fear that this might perma- nently impair the health and vigour of those very peoples which have led in the race for industrial ascendency, not only because of its direct effect, but also because the monotony of such labour fosters dissipation. To counteract these evil tend- encies vigorous measures have been resorted to, notably in England and German}-, where sanitation and factory acts have been passed by the government and where coffee-houses, work- ingmen's clubs, etc., as substitutes for the saloon, have been created through the efforts of private individuals. A great deal of attention is being given, especially in those countries which maintain large standing armies, to the question of de- termining what diets are best for people doing different kinds of work, and model kitchens are being organised in the poorer quarters of cities to teach people to appreciate nutritious and properly prepared foods. Eft'orts to improve the tenement houses in which the populations of the larger cities live are also being put forth and with some success. Finally mention 122 Production: Labour and Capital should be made of the pubhc baths, the playgrounds for chil- dren, and the open-air gymnasiums which are being erected in those cities in Europe and America which are most progressive in caring for their inhabitants. As is shown by mortality statistics, these efforts are beginning to bear fruit in the im- proved health of present-day city populations, but much yet remains to be done for both city and country people. There is no form of philanthropic activity which is more certain to benefit mankind than that designed to improve the conditions under which the mass of men live and work. Restored health and vigour are blessings in themselves, but equally important is the fact that they make for more efficient production and enable their possessors not only to hold what they have gained, but to steadily add to their advantages through their increased earn- ing power. Every improvement that can be made in home and factory surroundings without undermining the independence and self-respect of the population is thus a certain means of " helping people to help themselves." Intelligence The development of intelligence and judgment depends Judgment largely upon education, and here too undoubted progress has been made. In place of the formal and traditional methods that have prevailed in the schools, methods having direct reference to the organic development of children are begin- ning to be introduced. Moreover, the proportion of children who go to school is on the increase, and the expenditures that modern states make for public education are growing. Never- theless there is still much to criticise in current educational practices and in the short-sightedness of democratic states in not contributing even more liberally to the support of educa- tion. In it lies the hope of the future, since through its agency the standards of each generation of children are elevated. These higher standards may be passed on to the next genera- tion of children to be raised still further in the schools, and so the process may be repeated with steady progress as its neces- sary consequence. If improving educational advantages are added to steadily improving home suroundings, the advance of the race cannot fail to be rapid. Ambition, energy, and perseverance depend partly upon a people's range of wants in comparison with the means to their Ambition and Knowledge 123 satisfaction, and partly on the probability which the situation Ambition, presents that effort and enterprise will be crowned with sue- f^^^^^^^ cess. These qualities are conspicuously lacking among a severance people which has developed few wants and whose means of livelihood are so limited by natural conditions that even the greatest efforts cannot result in a large command over economic goods. They are as conspicuously present among a people with numerous and varied wants to which are open a great variety of promising ways of acquiring wealth. This contrast is well illustrated by the difference between the peasantry of Europe and the plain people of America. Poverty of resources and the restrictions of a class organisation of society tend to stifle the ambitions of the former as markedly as wealth of re- sources and absence of rigid class barriers tend to stimulate those of the latter. The most desirable situation for the fos- tering of these qualities is evidently one in which different scales of living prevail side by side and in which at the same time a fair degree of equality of opportunity is preserved. The dangfer in a countrv like the United States is that an aris- tocracy of wealth niay grow up to monopolise the easiest means for acquiring further wealth and to hold the mass of the people down to working for mere wages. Under such circumstances different scales of living would foster not ambition but merely envy and bitterness in the minds of those who have little pros- pect of improving their condition. This danger must be kept in view in connection with the question of the limitations that it may be desirable to impose upon monopolies and the rights of property. The conditions favourable to the growth of imagination, imagina- mechanical ingenuitv. and technical knowledge call for no ex- *^°"' ^"se- * - . ^ nuitv, and tended discussion. Imagination is still little understood. It Knowledge seems to be fostered by variety of surroundings and experi- ences, and by attention to unsolved problems which contain an element of mystery. Perhaps the most that is to be hoped for from present educational methods is that they will permit some part of the imagination which seems to be natural to childhood and youth to be carried on into manhood. Manual training, to which more and more attention is being given in the United States and abroad, is, of course, directly productive of 124 Production: Labour and Capital mechanical ingenuity. Perhaps the greatest progress made in connection with any of the enumerated quahties is to be found in the field of technical knowledge. Technical schools, courses in colleges and universities, correspondence and evening classes, and journals unite to bring the knowledge necessary to efficient production within the reach of all, aspiring enough to desire it. This progress has gone so far already that there seems to be more danger that technical education will be begun too early than that too little attention will be given to it. In addition to these admirable facilities for disseminating knowl- edge already acquired, more and more attention is being de- voted to the acquisition of new knowledge. Every State in the United States has at least one privately or publicly en- dowed university intended to encourage scientific research. To supplement these are the national institutions dedicated ex- clusively to research work, the Smithsonian, and the recently founded Carnegie Institute. Moreover, many individuals are devoting their lives and their fortunes to experiments directed towards discovering improved methods of satisfying human wants. Taking all of these things into account we may pre- dict with confidence continued progress in the technique of production. Evolution Co-operating with the conditions favourable to the develop- Production rn^nt of individual capacity that have been enumerated are the silent forces of evolution. Although interfered with by the growth of benevolent instincts and agencies which intervene to preserve many of the unfit from destruction, these forces aid powerfully in the process by which each people surrounded by a favourable environment becomes fitted to make fullest use of that environment. Weak and incapable lines of heredity are cut ofif in each generation and the field is left to the stronger and more capable. In prosperous communities the weeding- out process affects not merely the underdeveloped and underfed, but the overdeveloped and overfed. Dissipation is as common a cause of premature death and failure to continue the line of heredity as starvation. Evolution thus operates not only to enable each succeeding generation to get a larger return for its efforts, but to educate it to a wiser use of its material advan- tages. The surviving type of successful man is less and less Capitalistic Production 125 self-indulgent and more and more philanthropic in his instincts and habits as generation follows generation. From this it re- sults that progress itself causes more and more attention to be devoted to the conditions leading to progress and hence tends to be a cumulative process. § C9. Given a certain standard of individual capacity on the Capitalistic part of a labouring population, its productiveness depends next ^° "^ ^^^ upon the extent to which its methods are capitalistic. By capitalistic production is meant production which attains its ends, not by the direct and immediate creation of consumable goods, but indirectly through the creation first of tools, machines, and other material aids to production and the crea- tion subsequently with the help of these capital goods, of the consumable goods desired. Capitalistic production is thus roundabout instead of direct, and involves a longer interval of time between its inception and its completion. It can be adopted only by men who arc willing to forego immediate gratifications and permit their incomes to assume the interme- diate form of capital goods so that in the end a larger output of consumable goods may result. Such conduct involves abstinence from present consumption, saving income or pro- ductive powers instead of using them to minister to immediate consumption, and zvaifiiig until the longer productive process shall be completed. " Abstinence," as the term is here em- ployed, denotes simply not doing something that ordinarily it would be pleasant to do. It need not necessarily involve any element of pain or sacrifice, because the purpose accomplished through it may be even pleasanter than the things abstained from. Usually, however, abstaining from present consump- tion docs involve some sacrifice for the psychological reason already explained.* The superiority of capitalistic over direct production and the Advan- reasons for it will appear clearlv from a few illustrations. One tages of r 1 1 r r^' , • • • 1 1 Capitalistic Of the most urgent needs of Crusoe on his sea-girt island was Production fresh water. Having found a spring he might satisfy this need by scooping up the water with his hands. This would be direct production. Or he might make a cup of bark in which he could dip out, by stooping once, all of the water he could * Chapter IV., Section 36. 126 Production: Labour and Capital drink. Such a cup would be a capital good and the process would be capitalistic production. It would multiply largely the return resulting from the ettort of stooping. Or he might fashion a larger vessel in addition to his cup with which he could dip out at one time all of the water he required for a whole day. This would be more highly capitalistic produc- tion. Its advantage would be that it would enable him to stock his hut with all the water he required by making but one trip a day to the spring. Or, finally, if the spring happened to be at a higher level than his hut, he might construct a trough of hollowed logs capable of conducting the water from its source to his very door. This would be much more highly capitalistic production than any of the other processes, but its return would be correspondingly larger. The force of gravity would now relieve Crusoe entirely from the task of carrying the water, and all that he would need to do to secure an abundant supply would be to keep his trough in repair. These illustrations are typical of the advantages of capital- istic production. It enables man to apply his own efforts more effectively, as when he uses tools or implements, or to command the assistance of natural forces which without the aid of capital goods would be beyond his control. The forces of gravity, steam, and electricity can be utilised eft'ectively only in connec- tion with the forms of capital appropriate to them. For these reasons a given expenditure of effort in capitalistic production is usually more fruitful of results than the same expenditure in direct production, and the more highly capitalistic or prolonged the process the larger, generally, the return in consumable goods for each unit of effort expended. Capital § 70. Business men are in the habit of speaking not of Capital " capital goods," but of " capital." By this they mean some- times capital goods themselves, but more often these goods measured in terms of money. Capital goods wear out and need to be replaced. Individually they come into being, are used, and are then discarded. But capital, as the business man understands it, is more permanent. It is the complex of capi- tal goods used in connection with each branch of production measured in terms of money. To the extent that prices are stable and that the efficiency of production is maintained the Varieties of Capital Goods 127 money equivalent of this complex of capital goods changes little if at all. Each year's inventory shows about the same aggregate, although each year the particular capital goods em- braced in the inventory are different from those of the year before. § 71. In comparing different methods of capitalistic produc- Fixed and tion two factors must be considered : the average amount of Jr^irculaiing capital required for each process and the average time that Goods elapses in each case before this capital is completely used up or converted into consumable goods. For example, compare two branches of manufacturing in one of which the entire equip- ment of capital goods has to be renewed on an average once a year, while in the other the equipment requires renewal only once every two years. If each factory requires exactly the same amount of capital from day to day the first will require for continuous production twice as large a replacement fund as the second because its capital goods wear out twice as fast. Economists give precision to the contrast indicated in the illus- tration by distinguishing between fixed and circulating capital goods. Fixed goods are those which endure for some little time without replacement. Circulating goods are those, like coal, which are destroyed in a single use. It is obvious that these are relative terms and that capital goods present all pos- sible gradations of fixity. Capital goods differ also in the extent to which they are Specialised specialised or free, or in their mobility. Raw materials such as Capital ^ coal, iron, etc., are as a rule very mobile. They may be de- Goods voted at will to any one of a dozen different productive uses. On the other hand, machines, buildings, etc., are highly special- ised and either cannot be diverted to any other use than that for which they were originally designed or not without a great loss in value. Pennanent improvements in land are of course quite immobile and an unwise creation of this type of capital goods may result in complete loss without possibility of recovery. Some writers assert that of all forms of capital, money is ^^oney the most mobile, having in mind the ease with wdiich it may be exchanged for other goods. This important quality is not mobility, but exchangeability. From the point of view of Fixed Capital Increasing Labour Subject to Law of Di- minishing Returns 128 Production: Labour and Capital mobility, money is a highly specialised capital good. This is particularly true of paper money, which becomes practically valueless when deprived of its monetary quality. With the industrial progress of the world the proportion of fixed and specialised capital goods shows a tendency to in- crease. This results in lessened mobility for capital goods as a whole and is one of the causes of the prolonged periods of depression which invariably follow business crises imder present conditions. § ^2. In discussing the part which land and natural forces play in production, it was pointed out that they yield dimin- ished returns to human industry after a certain point has been passed in their utilisation. A similar law of diminishing re- turns applies to labour and capital. This may be shown by assuming one factor fixed while the other increases. Con- sider for example the case of a Crusoe so abundantly supplied with land of the best quality that he has no experience of les- sened returns from that quarter. Assume him to be cast upon his island with a very limited stock of capital goods, but with full knowledge of the superiority of capitalistic production and with sufficient resolution to provide himself with other capital goods as rapidly as his situation permits. He will have in mind a list of the capital goods which he requires, arranged probably in the order of their importance. A cup, a pail, a bow and some arrows, a boat, etc., will be some of the things he will plan to make. For a time the capital goods he fashions will be of so nearly equal importance in aiding him to produce consumable goods that he will be conscious of no tendency to diminishing returns. After a while, however, when his rough equipment of capital goods is fairly complete, he will have to weigh in his mind the advantages of adding duplicate goods of some kinds or of substituting better-made goods for others already in his possession. At this point his expenditure of effort in making capital goods and his patience in waiting until these efforts bear fruit in consumable products will be less richly rewarded than before. One bow added enormously to his ability to provide himself with food, a second of a little dif- ferent kind will add also to the ease and certainty with which he can secure game, but in a lessened degree. A third bow The Law of Diminishing Returns 129 could perhaps be used advantageously, but the added game ascribable to it would probably barely reward the effort involved in its production. In this case the producfiveness of Crusoe's labour is increased by each successive addition to his capital, but, after a certain point has been passed, this increase is at a diminishing rate. The position of an industrial society as regards the use of capital goods is not materially different from that of an isolated producer. If the number of its workmen is stationary, while their equipment of capital is being constantly added to, the productiveness of its industry may increase for an indefi- nite period with every addition to its capital, but this increase will be at a diminishing rate. The fixed labour force may be thought of as analogous to a limited supply of land. In each case the addition of successive increments of capital adds to the size of the product, but, after a certain point has been passed, the addition is only at a diminishing rate. The inven- tion of new and more efficient forms of capital goods may post- pone the period when the law of diminishing returns will begin to operate as regards either land or labour, but this in no wise lessens its importance as one of the far-reaching tendencies of which economics must take account. That the same law applies to capital becomes evident when Also Capital it is considered what would result if its supply were fixed while successive additions were being made to the working population. With every increase in the number of workmen, it would be necessary to utilise the available tools, machines, etc., more intensively. For a time this might be done without any tendency towards diminishing returns, but this could not be the case indefinitely. Sooner or later, as bare-handed work- men continued to be added, the fixed fund of capital would show diminishing returns just as did the fixed labour force when the conditions were reversed. That diminishing returns must after a time result from either situation is really a corollary from the principle that the most effective co-operation between labour and capital is only realised when they stand in the right quantitative relation to one another. If after this relation has been established, capital goods increase while the number of workmen remains fixed, or Methods of Accumu- lating Capital Saving and Investing Borrowing and Investing 130 Production: Labour and Capital workmen increase while capital goods remain unchanged, the co-operation between them must be rendered less effective, or, what is the same thing, diminishing returns must be accepted as the reward of such co-operation. If both factors increase together there will be no occasion for any reduction in the return so long as new land equal in quality to the old is avail- able. It is therefore not the increase in the factor whose sup- ply is being added to alone that causes the diminution, but that increase coupled with the lack of response on the part of the other factor. § J2i- The only method by which Crusoe could acquire new capital was by applying his own efforts to its creation. He must produce it as well as save it. In industrial society the production of capital goods is effected like the production of consumable goods usually through the agency of business managers who produce for the market. The " saving " which inspires this production is performed by a different set of people conveniently designated as capitalists. A few illustrations will serve to show how the savings of capitalists help to bring capital goods into existence : I. A farmer who wishes to enlarge his barn saves part of the money he receives for his crop and uses it to buy lumber and to hire masons and carpenters to make the desired im- provement. In this case by buying lumber he encourages the production of more lumber, or virtually hires lumbermen, saw- mill hands, etc., to produce this kind of capital good, just as he subsequently hires men to convert it into a new wing to his bam. He turns over to others his command over society's wealth, which they use to satisfy their wants. In return he re- ceives the addition to his barn, a new capital good added to society's productive equipment. II. Very often the farmer who wants a larger barn is un- willing or unable to save enough to pay for it himself. If l»e is a man of enterprise he is not likely to be deterred by this cir- cumstance from taking steps to obtain it. Having a valuable farm to pledge as security, he is in a favourable position to bor- row. He may apply to a well-to-do neighbour who has saved the money needed out of his income and is looking for a chance to invest it. In this case the neighbour does tlie saving and Borrowing' and Investing 131 thereby makes possible the buildins? of the addition ; the farmer decides how the saved income shall be invested in a concrete form of capital, taking all the risk of the venture and insuring the lender against loss by pledging or mortgaging his farm. The actual creation of the addition results as before from the labour of woodchoppers, mill hands, and carpenters, who are paid for their services as they render them. III. Instead of applying to a neighbour the modern farmer Borrowing who wishes to borrow money is more likely to apply to a bank, '^"'^ ^° ^ an institution which receives on deposit individual savings and lends them together with its own capital and its credit to cus- tomers. In this third and most typical case, the saving of in- come is performed by the depositors of the bank, who know nothing about the ultimate disposition of their savings. The lending is performed by trained men who give all their time and thought to this business, the bank ofificers, and the invest- ing or conversion of the purchasing power into capital goods is done as before by the farmer. In these ways and in others too similar to require separate Borrowing description the accumulation of capital goods results from sav- '^"^ Alwivs for ing. Not all saving, however, leads to an increase of capital, investment The deposits in a bank may be loaned to someone who wishes to spend them for consumable goods. In such a case, what depositors abstain from spending, borrowers spend, and the community's stock of capital remains as it was before. In order to cause an increase in capital, saving must be supple- mented by investing, unless, indeed, it takes the fonn of hoard- ing, which is unusual in modern communities. In the above illustrations " money " or " income " is spoken ^^P'|^' of as the thing " saved." Money is, of course, merely the Money medium by means of which control over one kind of wealth ^^""'^^ which the individual does not want is exchanged for control over another kind which he docs want. What is really saved in every case is the capital goods themselves which are brought into existence directly or indirectly by the investment. Thus in the examples the addition to the barn is saved and added to society's capital equipment. Often investment is thought of, especially in cities, as buying real estate, or stocks or bonds. Such purchases are invest- Buying Stocks and BondsDoes not Add to Capital Kinds of Capital Goods Land and Capital 132 Production: Labour and Capital ments from the point of view of the individual, but to the com- munity as a whole they represent simply transfers of owner- ship over capital goods already in existence. The investment proper appears when the purchasing power exchanged for stocks or bonds is used for the development of some new or for the better equipment of some old enterprise. Just as money deposited in a bank may never lead to any real addition to capital, so money invested in stocks or bonds may finally be spent for consumable goods and leave no trace behind. § 74. Capital goods may be defined as products of past in- dustry used as means not to the direct satisfaction of wants (consumption goods), but to further production. They include all the intermediate products which figure in roundabout or capitalistic production. The principal kinds of capital goods are: ( 1 ) Permanent improvements in the physical environment, in the form of drainage systems, canal excavations, tunnels, roadbeds, etc. (2) Buildings of all kinds except those serving no indus- trial purpose. (3) The rolling stock of railways, vehicles, etc., not used merely for pleasure. (4) Tools and machinery. (5) Farm and draft animals. (6) Seed, raw materials, and partially finished goods in process of production. (7) Finished goods in the hands of dealers. (8) Money. In connection with " permanent improvements " a difficulty is encountered that has caused no little confusion. Land as a gift of nature is not regarded as a capital good. But perma- nent improvements in land become for practical purposes por- tions of the land itself. Thus in old countries most land is partly a gift of nature and partly a capital good and it is often impossible to distinguish between the two. A simple way out of this difficulty is to describe land also as a capital good, and this is done by the business community and by some econo- mists. To the writer simplicity so secured seems bought at too high a price, since it involves a disregard of the distinction, be- Dealers' Stocks are Capital 133 lieved to be fundamental, between man's part in production and nature's part. A better plan seems to be to accept the difficulty as inevitable and to recognise that in distinguishing between what is and what is not capital, economists have the same sort of task as confronts biologists in distinguishing between what is animal and what is vegetable. As regards most things classification in both instances is easy. Along the same line is the temptation to include as capital Acquired goods, skill and training that have been acquired as the results capital °° of " investments in education." From one point of view such acquired aptitudes for production should be included. Their origin, so far as motives are concerned, is similar to that of other capital goods. IMoreover, like other capital goods they are aids to further production. Yet economists generally de- cide against such inclusion because they deem it important to distinguish sharply between man and the material aids he uses in production. On the whole it seems best to adhere, in the present treatise, to this plan of classification. Objection is sometimes made to the inclusion of " finished Dealers' goods in the hands of dealers " in the list of capital goods. Capital But this follows logically from the principle (which has already been defended) that trade is a branch of production. An im- portant requisite to the efficiency of production is a regular and continuous ministering to the w^ants of consumers. J\Iost eco- nomic goods must be forthcoming regularly from day to day or at particular periods in order to possess high utility. To secure this result the business organisation of society must provide, first, for the carrying over of stocks of goods, such as agricultural products that mature only periodically but that are needed continuously, and, second, for the carrying of sufficient supplies of goods that mature continuously, to insure a con- tinuous stream of commodities from producers to consumers, no matter how far they may be removed from each other. Thus wheat protluction is efficient in proportion to the care with w^hich the crop harvested during the summer months is handled so as to meet the community's need for bread during the entire year. All of the conveniences, such as elevators, warehouses, etc., which oontribute to this end, as well as the stored wheat itself, are capital goods. In the same way if it Money Progress in (Capitalistic Production ; Tlie Middle A.tres The Growth of Commerce Influence of the Industrial Revolution 134 Production: Labour and Capital takes, on the average, thirty days to transport bananas from the growers in Central America to consumers in American cities it is indispensable to the efficient production of this fruit that a stock equal at least to thirty days' consumption be kept regu- larly in transit either in the warehouses of shippers, on the ocean, in the warehouses of wholesale dealers, or ripening in the shops of retail venders. Such a stock is a part of the com- munity's capital goods. The last kind of capital good enumerated, " money," is too important to be dismissed with a few words and is therefore treated in separate chapters. § 75. The development of capitalistic production to anything like its present proportions is of comparatively recent date. During the Middle Ages the capital goods used were so few and crude that each producer supplied himself with his needed equipment without great difficulty. Instead of commanding interest the accumulated wealth of the rich had often to be stored and a fee paid for its safe-keeping. As commerce developed there was an increasing demand for capital in the form of vessels and goods with wdiich to stock them, and merchants, like Antonio in The Merchant of Venice, were often able to turn other people's accumulations to very profitable account. The use of tools and machinery in agri- culture and manufacturing made little advance, however, be- fore the period of the industrial revolution. During all these centuries the chief service of saving with a view to the future was in connection with the preservation of flocks and herds and the husbanding of the food supply and seed from one harvest to the next and from years of abundance to the lean years that were sure sooner or later to follow. Since the beginning of the last century capitalistic produc- tion has advanced in the Western World by leaps and bounds. In place of simple hand tools and foot and horse-power machines, complex machines to be driven by water, steam, or electrical power have come into use. These have been multi- plied so rapidly that the average capital equipment of the modern producer is easily a hundredfold larger than that of the mediaeval workman. Enormous investments have been made also in improved transportation facilities and in buildings for Coiiclusion 135 the safe housing of machinery, operatives, and goods. As a result of this progress in capitahstic production and of the contemporaneous discovery and invention of new and more efficient kinds of capital goods, the productiveness of human industry has been immensely increased, A large part of this increased return goes as interest to those who allow their wealth to remain in the form of capital in preference to con- verting it into consumable goods for the gratification of their immediate wants. The part that remains as the wages of labour has also grown, however, so all classes have derived material benefit from the change. § 76. In this chapter the circumstances determining indi- Summary vidual capacity and the nature and results of capitalistic production have been considered. It has been shown that the latter involves " abstinence," " saving," and " waiting," in addition to the mere mechanical production of capital goods, and it has been implied that these are the grounds for the pay- ment of interest to those who embark their wealth in indus- trial enterprises. The different kinds of capital goods have been distinguished, and finally the progress of capitalistic pro- duction has been traced and its advantages indicated. Since capitalistic processes add so largely to the productive- Conclusion ness of industry, the development of thrift, or a willingness to forego present gratifications for the sake of the future, is an im- portant condition to further progress. What is most needed is not a general development of thrift, for many individuals are already inclined to carry saving to the point of parsimony, but a development of it, or of the prudence and forethought on which it depends, among the working classes. Accustomed for generations to live from hand to mouth, wage-earners are only just beginning to appreciate how much the accumulation of property may contribute to their well-being. Its principal advantage for them, individually, is that it will serve to carry them over periods of unemployment without that loss in effi- ciency that is the most pitiful result of enforced idleness for men who have nothing to fall back upon. For the whole com- munity the aggregate savings of a thrifty labouring popula- tion would cause a groat increase in its equipment of capital goods, and a corresponding improvement in its industrial 136 Production: Labour and Capital processes. On both accounts the development of providence and forethought among the masses is earnestly to be desired. Equally important are improvements in the conditions of wage- earners which will encourage them to save by rendering spend- ing up to the full limit of their incomes less imperatively necessary. REFERENCES FOR COLLATERAL READING Walker, VoViWcaX Economy, Part II., Chaps. II. and III.; ^Marshall, Principles of Economics, Book IV., Chaps. VII., VIII., and IX.; *Bohm-Bawerk, The Positive Theory of Capital, Books I. and II.; *Clark, The Distribution of Wealth, Chaps. IX., X., and XL; Nicholso7i, Principles of Political Economy, Vol. I., Book I., Chaps. V. and VI.; *Ptersoti, Principles of Economics, Vol. I., Part I., Chap. IV.; * Fetter, Principles of Economics. Chaps. 9, 20, and 22; *Carver. The Distribution of Wealth, Chap. II. CHAPTER VIII PRODUCTION: CO-OPERATION AND BUSINESS ORGANISATION § yy. Important as is an individual's capacity as a condition Co-opera determining his productive efficiency, the way in which he j'°J^ ^" co-operates with his fellows is even more essential. Alone, a man can do little more than keep himself alive even in the most favourable environment. Working in co-operation with others he so multiplies the results of his toil that he may, if other conditions be favourable, provide himself with comforts and luxuries as well as with necessaries. Three varieties of co-operation may be distinguished : ( i ) Varieties Simple co-operation, that is, the simple working together of operation several for the attainment of a common purpose, as when sev- eral unite to move a stone or raise a mast. (2) The division of employments, by which each gives his entire time to some one branch of production, such as farming, boat-building, or shoe- making, and exchanges his products for the products of others. This is commonly described as the simple division of labour. It is an indirect form of co-operation in that in realising it men work together not at the same but at different tasks, expecting to share their unlike products by means of exchange. (3) The subdivision of tasks in each employment, as when in shoe- making one makes the soles, another the uppers, another com- bines them, etc. This may be conveniently designated as the complex division of labour and is the characteristic of the fac- tory system. As co-operation it also is indirect. Progress in indirect co-operation, or the division of labour, Depena- depends upon the development of markets and other facilities ^"'^^ °? ^^ for exchange. For example, a man cannot be a shoemaker on Devel- unless shoes are in demand by people willing and able to pay ^l'"^5"5 °^ for them. Much less can a shoe factory be organised, with its elaborate subdivision of tasks and large output, unless shoes 137 The Influenceof Improved. Transpor- tation Facilities 138 Production: Co-operation and Organisation can be sold at remunerative prices. From this it may be in- ferred that every improvement tending to widen the market for goods is favourable to a further extension of the division of labour. The truth of this conclusion is abundantlv illustrated by the history of the last one hundred years. Before the era of steam railways and steam vessels the market for most products was necessarily restricted to limited areas near the source of supply because of the high cost of transportation. Each region had to produce for itself its bulkier food articles, building materials, and implements, and could import from or export to other regions only those products which were light and costly. Under these circum- stances the division of labour could be little practised. Coun- try districts afforded employment to a blacksmith, a carpenter, and a few other specialists. A few cities grew up where those goods which could pay the relatively high costs of transporta- tion were manufactured. But the majority of the people were forced by the conditions to give their attention to agriculture as the only means by which they could earn a living. Steam and, more recently, electrical transportation have changed this situation. At present the cost of carriage offers no serious obstacle to the shipment of even cheap and bulky articles, such as wheat and coal, half-way round the world. For most goods, in place of a merely local market, there are now general markets ranging in magnitude from that afforded by a large city to that of the whole world. Perishable goods, services, and goods for which there is only a local demand, must still be produced on a small scale to satisfy local requirements, but the proportion of these goods to the whole mass of prod- ucts is constantly diminishing. Even fruit and fresh meat have ceased to be perishable in the sense that they wnll not bear trans- portation to distant markets. Accompanying this widening of markets there has been a concentration of special industries in special localities and of business management in fewer and fewer hands. In this way full advantage has been taken of opportunities for extending the division of labour, with the result that the volume of goods produced has enormously increased. § 78. Capacity to co-operate depends upon certain well- The Advantages of Co-operation 139 defined qualities as much as does individual capacity to pro- Qualities duce. Of these qualities the principal are: (i) honesty, (2) to Effective steadiness, (3) a spirit of conciliation, (4) ready obedience to Co-opera- superiors, and (5) organising ability. The first four are neces- sary to the mass of men and will be considered here, the last is necessary chiefly to those who assume the task of industrial leadership and will be considered in a subsequent section. Honesty is indispensable to mutual trust, and co-operation cannot be carried far unless men trust one another. Steadiness is necessary, because without it a complex division of labour would be wasteful rather than economical. When tasks are subdivided the performance of each successive one depends upon the performance of the preceding. Unless all or nearly all the workmen in a factory are present at the same hours each day the whole process is disturbed. A spirit of conciliation is necessary because working together involves being together, and this entails constant friction unless each is willing to make concessions. Finally, ready obedience to superiors is essential to the success of a complex division of labour, because this in- volves planning by one set of people and execution by another. These qualities are fostered by the very division of labour to Such which they are necessary. In other words, those peoples who Developed have been accustomed to the division of labour longest have by Co-nper- them most highly developed, while those who have only known ^ ^^° ^^ isolated production are usually lacking in some if not in all of them. From this it results that the introduction of a division of labour into a new region is particularly difficult, while its extension after it has once been established becomes increas- ingly easy. The disciplinary value of a complex division of labour is clearly shown by the contrast between an industrial and an agricultural population. The former is steadier and more social, w^hile the latter is more independent and self- reliant. § 79. Considering the three forms of co-operation with The Ad- reference to the services which they render to production the ^'^ntages following distinct advantages may be claimed for them : operation (i) Men working together, as in the building of the pyramids, can do things which men working singly could not possibly do. The Disad- vantages of Co- operation 140 Production: Co-operation and Organisation (2) By simplifying the work of each man, a division of labour shortens the time needed to master a trade. In place of the seven years' apprenticeship once necessary, modern methods of production call for but a few months' special training for most positions. (3) The division of labour ofifers a varied field for indus- trial activity and thus enables each man with special aptitude or talent to devote his entire time to the work for which he is best fitted. (4) By reducing the labour of each man to a few simple motions the complex division of labour is favourable to the acquisition of great dexterity. Hand and eye come to act almost automatically and with a quickness and accuracy unat- tainable by a man constantly varying his task. (5) The same simplification and concentration of effort is favourable to the progress of invention. When work is so subdivided that each hand makes but two or three simple motions, the time is ripe for the invention of a machine to take the place of labour. Thus the goal towards which the division of labour is ever tending is the invention of labour-saving machinery. (6) Co-operation permits the most economical use of land and natural forces. Each section may be devoted to the pro- duction of that particular good for which it is best fitted just as each man may devote his time to his chosen specialty. This is called the territorial division of labour and is increasingly important as improvements are made in methods of transport- ing goods from the place of production to that of consumption. § 80. Against these advantages of co-operation must be weighed one decided disadvantage. Specialisation is narrow- ing. If it requires a man to work long hours with his muscles it is likely to cut him ofif from opportunities to develop his mind. On the other hand, if it limits him to an intellectual pur- suit it is likely to deprive him of the vigorous exercise needed by his muscular system. Specialisation is inimical to that all- round development of character and capacity which is the natural consequence of varied interests and varied pursuits. Carried to excess it unfits men for the enjoyment of that very wealth which it helps them in such large measure to secure. Other Considerations 141 Even from the point of view of production, however, excessive specialisation does not always result in increased productive power. In a world in which goods and processes are con- stantly changing special proficiency in any given line of work may at any time be superseded. When it is acquired at the expense of general development it often leaves its possessor actually worse off than he would have been without it. No group among the unemployed is so hopeless as the highly skilled artisans for whose skill the industrial world has ceased to have a use. In giving full weight to this disadvantage it must not be Other Con- overlooked that co-operation, especially as it is developed in ^' ^^^ '"^^^ connection with the factory system, serves to bring specialists together and give them the benefit of social intercourse which the isolated producer sadly misses. Those who labour in fac- tories describe the social aspects of their work as in large measure compensating them for the monotony of their simple tasks. If increased leisure could be added to the interchange of ideas which the factory permits, the evils of specialisation would be, if not entirely eradicated, at least reduced to a minimum. §81. It is not easy to show in a statistical way how much Methods the world owes to progress in co-operation and the division of °,^ Gauging labour. An important incident of this progress has been, as vantages alreadv suggested, the invention of machinerv to take the place °^ ^°: • ' . ,. , , • , ' operatioa of specialised labourers, and in those cases where the division of labour has been carried furthest machinery now plays such a large part that it is iinpossible to decide what share of the productive result should be credited, historically, to each. One of the best ways to get an impression of the industrial results of the division of labour is to compare the work of a hand shoemaker, which may still be observed in many parts of the United States, with that performed in a well-organised shoe factory. According to an investigation made by the United States Department of Labour, the number of distinct processes into which the manufacture of men's brogan shoes is now divided is eighty-four. Many of these are performed by automatic machines. It is calculated that the iMcKay ma- chine for attaching the soles of shoes to the uppers turns out Statistics of Pin- making in 1776 and To-day Progress Greatest in Manu- facturing Business Organisa- tion 142 Production : Co-operation and Organisation in one hour and thirty-eight minutes one hundred pairs, which it would take ninety-eight hours to sew, and twenty-five hours even to peg, by hand. From 1855 to 1895 the efficiency of labour is said to have been multiplied five-fold in the shoe industry in the United States through the introduction of a division of labour and of improved machinery. In Adam Smith's day the best illustration of the division of labour that came under his observation was that used in the manufacture of pins. He showed that through the division of labour the average product of pins to each hand employed in a pin factory was 5000 per day and contrasted this with the one crude pin a day which a single artisan might perhaps turn out if he had to do the whole work by himself. At present pins are manufactured by automatic machinery and 1,200,000 per workman per day is said to be the output of a well-equipped factory. The progress in screw making is even more remark- able. According to estimates made by the Department of Labour 10,000 screws are now made by an expenditure of 16.7 minutes of human labour in comparison with 1250 hours for- merly required to produce the same number. In this case the increase in the efficiency of labour is 4491 fold. Similar examples of progress due partly to the division of labour and partly to the introduction of labour-saving ma- chinery might be multiplied for every branch of manufacturing. The subject has been exhaustively treated in a special report * issued by the Department of Labour and this may be consulted for other striking illustrations of improvement. On the whole it is not too much to say that the efficiency of labour in manu- facturing has been increased many hundred fold by the aban- donment of isolated production and hand processes in favour of the division of labour and machinery. In other branches of production progress has been less remarkable for the simple reason that they are less well adapted to these improve- ments. § 82. Business organisation has been carried to such a point in modern communities that few persons now produce for them- selves the things that they require. Even in country districts the typical farmer is no longer the pioneer raising food and * Report of 1898 on Hand and Macliine Labour. Qualities of a Good Entrepreneur 143 materials for his family, but the producer for the market who looks to the market for most of the things that he needs. We have called this development " progress in co-operation," but it is evident that the resulting co-operation is not deliberately planned by those who participate in it. It arises spontaneously as each one follows his own interest without thought of his neighbour. As a country district emerges from the pioneer stage, different men discover that it pays them better to be specialists and to produce for the market than to produce for themselves. Thus a simple division of labour is introduced to supplement the simple co-operation that prevails even among birds and animals. The complex division of labour follows in due course because of its superior effectiveness, and in this way, as time goes on, co-operative production displaces isolated and individual production.* The success of industrial co-operation depends in large The En- measure upon the ability of business managers, or enfrepre- ^repreneur neiirs. These are the men who act as directors of industrial undertakings. They decide what shall be produced and how it shall be produced. They hire labourers and determine what they shall do. They borrow money and convert it into par- ticular forms of capital goods or exchange it for land. Finally, they assume the risks of the businesses in which they are en- gaged, undertaking to pay wages, interest, and rent, whether or not the results are satisfactory. The qualities needed by an entrepreneur are not unlike those Qualities required by a military leader. He must have energy and enter- ^ ^ , p prise. He must be a good judge of men and of conditions, trepreneur He must have confidence in himself and be able to inspire con- fidence and a feeling of loyalty in others. Above all he must have organising ability, that is, the faculty of combining men and things in the most effective way for the realisation of a desired result. A community that is well supplied with leaders having these qualities is sure to have its industrial forces turned to good account. Its labourers will be assigned the * To distinguish this spontaneous or competitive co-operation from the co-partnership of workmen in the management of industrial enterprises, to which the term " co-operation " is frequently applied, the latter is referred to in this work as " labour co-partnership." 144 Production: Co-operation and Organisation special tasks for which they are best fitted so far as conditions permit, and its capital will take the form of the capital goods that are found to be most efficient. Invention and discovery will be highly appreciated and progress in the technique of production will be rapid. Even a few capable entrepreneurs may secure these important results for a community. They serve the public not only by organising efficiently the special branches of industry which they direct, but by setting standards which less able men are only too glad to copy. Thus it is not uncom- mon in the United States to find whole towns which are literally " run " by one or two men. The same men acting in combi- nation are coming more and more to control the important in- dustries of the whole country, and this gives them an influence for good or evil that can scarcely be exaggerated. The greater the power of these directors of the community's industries, the greater the importance that must be ascribed to personal quali- ties in determining the direction of industrial development. This importance of personality as a factor in modern business was strikingly illustrated in the spring of 1900 when several English investors took out insurance policies on the life of America's leading financier, to protect themselves in case the latter's death intervened to prevent the consummation of cer- tain gigantic financial projects of which he was the originator and guiding spirit. The § 8^. The simplest form of business organisation is that in trepreneui- which a single entrepreneur controls the whole enterprise. He System ^lay do everything for himself and use only his own capital, as do usually doctors, lawyers, cobblers, etc., or he may employ hired workmen and borrowed capital. In the United States many businesses employing thousands of men and using mil- lions of capital have grown up under the responsible manage- ment of single individuals. The advantages of such a one- man organisation are obvious. Its disadvantages are that one man, however able, cannot be equally competent to direct all departments of a large and complex business and that the capital that one man can command is small in comparison with that which may be secured by a number of men associated together. These disadvantages are partially overcome in a second form Advantag-es of the Corporation 145 of business organisation, the partnership. A partnership is an The Part- association of two or more indiv^iduals who are jointly and ^ severally responsible for the management of the enterprise in which they are embarked. On forming a partnership * the partners become individually liable for all of the obligations of the firm and agree that any contract entered into by either partner in the firm's name shall be binding on all. This form of organisation is well fitted for businesses calling for a diver- sity of talents and requiring no more capital than a small num- ber of men may command. Until the last fifty years it was the common form of organisation for businesses that had outgrown individual control. Recently it has given way quite largely to the corporation, the third important form of business organisation. A corporation is an association of individuals known as The Cor- stockholders who are empowered by legal charter to elect P'^^^^'o^ annually a board of directors and through it to act as one per- son in the conduct of the specified business. Corporations enjoy, usually, perpetual life. They may sue or be sued, incur debts, enter into contracts — in short, do everything necessary to the conduct of business, within the limits prescribed by their charters of incorporation, as though they were individuals. The liability of the stockholders in corporations is limited usually in the United States to the capital actually paid in or pledged in return for stock. Sometimes, as in the case of the national banks, stockholders are further liable for a sum equal to the par value of the stock they own, but this liability is never unlimited as is that of legally constituted partners. § 84. The advantages of the corporation for business pur- Advan- poses are : ( i ) It continues even though its promoters die or thf^Co^- retire from business. (2) It draws its capital in large or small poration quantities from widely different sources and may command any amount, however great, for an enterprise in which in- vestors have confidence. (3) It may profit by the intermittent attention of directors whose ability and experience make their services of the greatest value, but who could not be induced to * Limited-liability partnerships are not included in this description because they have become an unusual type. Its Disad- vantages : Diffused Responsi- bility 146 Production: Co-operation and Organisation assume the risks incidental to partnerships. (4) It is flexible, permitting a complete change of management whenever the stockholders deem this expedient, through the simple process of an election at an annual meeting. These considerations and others of less importance have caused the corporate form of organisation to be adopted for a great variety of enterprises. It is probably within the truth to say that two-fifths of the business of the United States is now controlled by corporations and there is every indication that the proportion is increasing. This makes important the recognition of certain drawbacks attaching to the corporate form of organisation. Chief among these is the fact that re- sponsibility for the management of corporations is dififused. In one-man businesses and partnerships the men who organise and manage the enterprises are the ones most vitally interested in their success. In corporations the stockholders, who usually furnish all or the greater part of the capital required and have to bear the loss if things go wrong, entrust their interests to the board of directors. The board of directors in turn deputes the actual management of the business to a salaried president or manager who may not, and often does not, have any further interest in the business than that his reputa- tion depends to som^e extent upon the honesty and wisdom with which he manages it. The entrepreneur function is thus divided in the corporation between three parties no one of whom has the same vital interest in the business that the single entrepreneur or partner feels in businesses conducted on the other plans. Moreover, few directors or managers have not, at times, private mterests in conflict with the corporate interests they are supposed to promote. This diffusion of re- sponsibility and of interest causes corporate management to be often wasteful and sometimes corrupt. The salaries paid are frequently higher than they need be to secure the required grade of labour, appointments are often determined by personal rather than by business considerations, and inflated prices are often paid for materials in consequence of the fact that par- ticular directors are interested in their production. More com- mon than these clear violations of trust are misrepresentations in regard to the affairs of the corporation intended to influence Disregard of Public Interest 147 the stock market and to enable those interested to carry through some deal for their own benefit. A second abuse is connected with the borrowing power oi Misuse of corporations. When this power is used to secure money by i>o\^er means of a sale of bonds the law gives to bondholders no voice in the management of the corporation so long as the interest is paid and the principal is not defaulted. The larger the pro- portion of the capital required for any enterprise that is secured through the sale of bonds, the smaller is the interest in the business of the stockholders, who nevertheless continue to con- trol it. It has often happened in connection with railway cor- porations in the United States that the entire capital has been secured by selling bonds and that the stock has represented simply a bonus paid to the promoters of the company. This is a situation fraught with danger, as American experience has abundantly proved. To give a fictitious value to their stock promoters are only too apt to pay dividends out of earnings that should be expended for renewals and replacements. Before the corporation is reduced to bankruptcy they can usually sell their holdings to unsuspecting investors and retire, leaving to the latter the task of reorganising the business. A third set of evils has reference to the general or public Disregard interest in corporations. Individuals in their pursuit of gain '/'^^(.g"^^*^ are controlled by the moral standards of their business asso- ciates. Corporations have no moral standards. Their di- rectors are willing to wink at practices on the part of the officials they appoint to which they would not themselves stoop. Corporate officials, moreover, do not hesitate to do things in the name and under cover of their corporations which they would be ashamed to perform openly for themselves. In the United States corporations have been guilty of buying leg- islatures, corrupting judges, bribing juries, entering into agree- ments with political parties insuring them certain privileges in return for campaign contributions, and in fact of every sin in the political calendar. It is owing largely to them that the tone not only of business but of political morality is so much below the standards of private life. This third group of evils is at the basis of the " corporation problem." As this is a Practical Aspects of Cor- poration Problem 148 Production: Co-operation and Organisation phase of the more important " trust problem " its fuller discus- sion is postponed to the chapter on Trusts. The stockholders of corporations might from what has been said be expected to manifest an active interest in their manage- ment, and this is true of large stockholders who are likely to be at the same time directors. Small stockholders, however, are very often surprisingly indifferent so long as dividends are regularly paid and nothing occurs to excite their suspicion that the business is being improperly managed. When a corporate enterprise is first launched its stock is likely to be subscribed in large blocks by the men most interested in it and most san- guine of its success. Some shares may go to the general pub- lic, but usually a controlling interest is retained by the men who have most to lose if the business fails. During the first year or two the stockholders and the active directors are thus apt to be identical or so nearly so that risk and responsibility go together. Among the directors there is likely to be a guiding spirit who performs all the essential functions of the entrepre- neur except that others share with him the risks of the enter- prise and the minor details of management. After a corpora- tion is firmly established on a paying basis the same conditions may and often do continue, but it is quite as likely that the organisers will gradually dispose of their interests to investors so that they may have their capital free for the promotion of other enterprises. When this occurs the stock is gradually diffused throughout the community until the largest holdings represent far from a majority of the outstanding shares and the control of the corporation has virtually passed out of the hands of the few into the hands of the many. Under these condi- tions the control of the busmess depends not on the actual in- vestment of capital in it, but on control over the votes of widely scattered and uninformed stockholders. The situation is still favourable to the ascendency of some one man of great organ- ising ability and much depends upon the moral qualities that such a man brings to his position. If he is self-seeking and unscrupulous he may pack the board of directors with followers of the same stamp and deliberately wreck the enterprise for his own aggrandisement. If, on the other hand, he is honestly anxious to promote the interests of the company, and brings Large- vs. Small-scale Production 149 ability to his task, he will put in as directors the best men he can get and build up an organisation whose efficiency will com- pare favourably with that of businesses owned and controlled by single entrepreneurs or partners. At each stage in cor- porate development the tendency thus appears to be toward control by one man or a small group of men, however widely the stock may be distributed. Successful corporations are as much one-man or few-men enterprises, as regards their actual management, as firms composed of partners. The chief dififer- ence is that corporate entrepreneurs incur but a small part of the actual risk of loss that partners incur and must be held to the efficient performance of their duties, if at all, by higher standards of honesty and faithfulness to trust than are de- manded in the latter form of organisation. In spite of the many abuses connected with corporate finance in the United States the rapid extension of the corporate form of organisa- tion is believed to be proof of parallel progress in business morality. If directors of corporations were not as a class honest and upright men, few large corporations would be formed, for the simple reason that few people would be willing to invest their capital in such hazardous enterprises. § 85. Different branches of production vary greatly as re- Large- gards the size of the business unit which is best adapted to J^f^jf"^^^^' them. In farming in the United States the small farm of from Production twenty to two hundred acres seems to be displacing the larger farm of five hundred acres and upwards. In manufacturing and transportation, on the contrary, large-scale production is becomine: more and more the rule. The striking merit of small- scale production is the undivided attention which it pennits the entrepreneur to give to all of the details of the business. This is particularly important in farming and in artistic and pro- fessional work, where continuous attention to matters of detail is the chief requisite to success. It is less important in manu- facturing and transportation because the operations required in these businesses can be reduced to routine and an efficient check on the work of employees can be maintained by occa- sional attention to what they are doing. In these industries a great variety of contrivances which compel men to register the results of their work as they perform it have been invented, Advan- tages of Large- Scale Production: Division of Labour Expensive Machinery 150 Production: Co-operation and Organisation and these act as mechanical substitutes for " the master's eye." Also where automatic machinery is used, the pace is set for all operatives and they have to fall in with it or incur the risk of being discharged for incompetence. Finally, the system of pay- ing wages in proportion to the pieces turned out, or the piece- wage system, makes the interest of the labourer as great as that of the employer in the efficiency of his work. By these methods and others considered in the chapter on Trusts large- scale producers in manufacturing and transporting industries offset the more careful supervision and attention to details of small-scale producers. . Large-scale producers enjoy besides important positive ad- vantages : ( I ) As was pointed out in connection with the dis- cussion of partnerships and corporations, they can command a variety of different talents and place them in those depart- ments for which they are best fitted. This is another way of saying that they are able to apply the division of labour even to the executive branch of a business and to reap all of the ad- vantages that result from it. For a simple business such as farming, which because of its periodic character offers con- tinuous employment to no specialists, this consideration is of slight moment. For manufacturing and transporting indus- tries which have several departments going all of the time, however, it is very important. (2) Large-scale production permits the economical utilisa- tion of expensive machinery and equipment which the small- scale producer cannot afford, or which it would not pay him to have because his small business would not keep it continu- ously employed. Farmers surmount this difficulty in a measure by owning expensive machines jointly and sending them round from one farm to another as they are required. Manufacturers can hardly do this because their machinery is for the most part stationary. At best it is a poor substitute for undivided ownership and control, as all farmers who have tried it testify. The above consideration applies with special force to the transporting industries. Canal and railroad companies require expensive excavations and roadbeds. In these a large part of their capital is invested, and interest on this capital and expenses Can Spend More on Experiments 151 connected with the maintenance of way constitute a large ele- Advan- ment in their expenses. The amount of traffic that may pass Trans- through a canal or over a railroad is limited only bv the fre- porting .,,.,, r 1 1 , ' f 1 Industries qucncy with which boats or cars may satcly be sent alter each other. Moreover temperature changes, storms, etc., determine the expense of keeping the system in repair much more than the volume of business done. It results from these facts that the expense — as regards capital account — per passenger or per ton of freight carried diminishes steadily as the volume of business grows. The original cost and the outlay for maintenance of way appear as fixed charges and the larger the business done the smaller is the expense per unit as regards these items. If the running expenses per unit are fairly constant, as they are apt to be for a well-managed canal or railroad, the large-scale transportation company has here a marked advantage over its smaller competitor and an advantage which grows as the busi- ness grows until the traffic has become so large that it cannot be handled without numerous accidents. In the light of these two advantages concentration in the transporting industries and in many branches of manufacturing seems a perfectly natural and economically desirable tendency. (3) A third advantage of the large-scale producer is in con- Economy nection with the purchase of materials and the sale of products. e|jppi^'es^ Sellers of materials are willing often to make concessions to large buyers, and in marketing products the large seller may arrange his advertising more economically than his small competitor. (4) Large-scale producers can make a better use of by- Economy products. In the mineral oil and the meat-packing industries I? ' . . r Connection large-scale production has made possible the utilisation of waste v.-ith By- products to an extent undreamed of when these businesses were ^^^ '^^^^ carried on by small firms, and to the advantage of the whole community. (5) A fifth advantage is found in the large expenditures Can Spend which a large-scale producer is able to make on experiments ^j^ £^_ looking to the improvement of the technique of production, periments In businesses which are changing their methods continuously. to be the first to introduce a valuable innovation means often the dift"erence between success and failure. Manv of the manu- 152 Production: Co-operation and Organisation facturing establishments which have been most successful in the United States in recent years, such as the Carnegie Steel Company of Pittsburg, have owed their success in no small degree to their lavish expenditures on industrial experiments and for the installation of new machinery as soon as its superi- ority to that in use has been demonstrated. Business § 86. Large-scale production, it must be clearly understood, prises ^^ ^^ *^° means synonymous with monopoly or exclusive Classified control of a given branch of production. Nevertheless, in those cases in which the advantages of large-scale produc- tion persist, no matter how large the producing unit becomes, monopoly is the goal towards which the business is developing and which it will ultimately attain. This suggests a threefold classification of industrial enterprises : ( i ) businesses in which the small-scale producer has the advantage, as in farming in the United States; (2) businesses in which large-scale production is more economical up to a certain point, beyond which the loss in efficiency resulting from the absence of the direct and per- sonal supervision of the entrepreneur more than offsets the gains from further concentration; (3) monopolies. In this clas- sification the terms " small-scale " and " large-scale " produc- tion are used somewhat vaguely, but they serve fairly well to distinguish those businesses in which competition persists year after year with no sign of abatement, from those in which com- petition has ceased or has become so irregular and spasmodic that it can no longer be depended upon. The Repre- § g?. As special chapters are devoted to monopolies it will sentative , , . , , ,. , . , , . . , , , Firm not be advisable to discuss them further at this point. Although numerous and perhaps multiplying in the United States, monopolies as yet dominate but a small part of the vast field of production. Farming, most branches of mining, lumbering, fishing, manufacturing, trade, banking, and many branches of the transporting industries, are still controlled more or less completely by competition. In each of these industries at any given time there is a certain size of business plant which under average management is most conducive to economical produc- tion. This may be designated as the representative firm. As methods of production change, the size of the representative firm of course changes also, but such changes are gradual and Summary 153 may without serious error be overlooked in connection with the consideration of the broader problems of economics. The representative firms in each branch of business may, as Compared Professor Marshall has suggested, be compared to the full- ii^'aVJr^e^s^,. grown trees of a primaeval forest. Around them and compet- ing with them for customers are overgrown firms that are fall- ing into decay and new firms that are gradually making a place for themselves, just as in the prim?eval forest overgrown and decaying trees and aspiring young saplings struggle with their full-grown brothers for a share of earth and sunlight. And just as the trees of full growth are the dominant feature in a ])rimaeval forest, so representative firms dominate in business. § 88. The contents of this chapter may be summarised as Summary follows : The productiveness of labour is increased by co- operation, which may take the form either of simple co-opera- lion ; a division of employments, or simple division of labour ; or a subdivision of tasks, or complex division of labour. The extension of the division of labour is limited by the develop- ment of markets and of facilities for transportation. As the latter improve, business is concentrated in the most favourable situations and the division of labour is made more minute. Ability to co-operate depends on certain qualities and these are developed most readily by co-operation itself. Co-operation has important advantages, but it has also the disadvantage of encouraging excessive specialisation, which must be neutralised, if deterioration is to be avoided, by added leisure for the work- ing classes. The remarkable increase in the productiveness of labour which has been due to co-operation is illustrated in the shoe, pin, and screw industries. The central figure in business organisation is the entrepre- neur and much depends upon his ability and judgment. Three principal forms of organisation may be distinguished, the single entrepreneur, the partnership, and the corporation. Of these the last already dominates at least two-fifths of the business carried on in the United States, and this lends special interest to a consideration of its advantages and disadvantages. Re- lated to the problem of business organisation is that of small vs. large-scale production. Analysis suggests a threefold clas- sification of business enterprises and leads to the recognition 154 Production: Co-operation and Organisation of the dominant influence of the representative firm in the first two, in which competition is a persistent force. Relation In the next chapter we pass from production to distribution. Production Both parts of economics deal with the same phenomena, that and Dis- jg, with wealth creation throug^h the application of labour aided tnbution , . , , , , , •, ■ i ■ , ■ • , by capital to land, but while m production the creation is the important thing, in distribution the motives which control men and the relation of the parts which different factors play in this creation are important because upon them depends the divi- sion or sharing of the wealth created. As the analysis pro- ceeds it will appear that production and distribution mutually determine each other. REFERENCES FOR COLLATERAL READING *Marshall, Principles of Economics, Book IV., Chaps. VHI.-XIII.; Walker, Political Economy, Part II., Chap. IV. : * Nicholson, Princi- ples of Political Economy. Book I., Chaps. VII. -X.; * Fetter, Princi- ples of Economics, Chap. 29. CHAPTER IX PRODUCTION AND DISTRIBUTION § 89. In the preceding chapters the products of industry Distribution have been referred to sometimes as commodities and services, pirst with sometimes as economic goods, and sometimes as valuable utilities. Money It is these same commodities and services, goods, or utilities, that are the objects of distribution. If the identical goods pro- duced were directly and immediately divided between those who take part in their production, the matter would be com- paratively simple. But such production *' on shares " belongs to a primitive stage of industrial development. Under modern conditions, goods are produced for sale, and it is the money or purchasing power received for them, rather than the goods themselves, that is the first concern of distribution. Con- sider, for example, the case of a typical business establish- ment like a shoe factory. The manager of such an enterprise would never think of compensating his employees or others who have claims upon him with pairs of shoes, the product of his business. Instead, he sells the shoes as they are pro- duced for the best price obtainable, and the money or purchas- ing power he receives for them is what he really divides be- tween those who have claims upon the product. In determining what the product has been, and, therefore. The Re- what is the money return to be divided, it must be remembered pund^is^De- that not all the new commodities and services produced during ducted from a year are to be credited to the year's industry. In connection Return to with nearly every branch of production there is a destruction of ^'^^^'J™'"® commodities and services for which full allowance must be income made in the gross product before the net product, or what has really been added to the wealth of the world, can be calculated. The farmer uses up seed, fertilizers, tools, and farm buildings. The manufacturer destroys raw materials, fuel, machinery, and factories. Even the banker and professional man use up 155 156 Production and Distribution stationery and office furniture. These losses and wastes, which are a necessary part of all production, must be met by the deduction from the gross returns of the year's business of what we may call a replacement fund. Through this fund raw materials and partially finished products destroyed or altered in form are replaced ; buildings, machines, tools, and other things subject to wear and tear are repaired and renewed; and, finally, provision is made for substituting for worn-out ma- chines and other equipment, new capital goods of at least equal efficiency. The deduction to be made from the gross product for the replacement fund is calculated as a sum of money or purchasing power. In our shoe factory, for example, the capi- tal goods used up in the process of production cannot be re- placed literally out of the product. It is not shoes that are needed, but leather, tools, repairs on building and machinery, etc. The expense of making these replacements and repairs is calculated in money and deducted from the gross money re- turn from the year's business. The net money return which is left, and which we shall designate in future as the money income, is the first object of the distributive process. Distribution § go. But if monev or purchasing power is the first thing of Money ,..,,..' " , rr-i 1 , Income distributed, it is onlv as a means to an end. Ihose who take Merely a p^j-^ j[j^ production desire not money, but want-satisfying goods. iVi. GciriSLO ' ^ Distribution To determine what is really distributed, we must inquire what is Income bought with this purchasing power, for this is the real income. If we consider the question with reference to the whole indus- trial community, it is obvious that the money income that is derived from the products of industry must be spent in turn for the products of industry. We may go even further, and say that as regards industrial society as a whole, it is virtually the net product itself that is bought with the price of the net prod- uct, and that is, consequently, the ultimate object of distribu- tion. Certain facts about the present organisation of industry seem to contradict this conclusion, and to these we must give careful consideration before regarding it as established. Durable The first complication has to do with a source of income of tion Goods which nothing has yet been said, that is. with the valuable Contribute utilities that are gradually given off bv durable consumption to RgrI Income goods. The business man distinguishes sharply in his thought . The Net Product 157 between capital goods, the instruments of production, and consumption goods, the instruments of want-satisfaction. He thinks of a man's store or warehouse as contributing to his annual income, but rarely of his house or his furniture as doing the same thing. But if we accept, as we logically must, the view that the fruits of production and the objects of distribution are simply valuable utilities, we are bound to take into account in the distributive process the utilities that come from durable consumption goods. Houses contribute to real income just as much, if not in quite the same way, as warehouses. So do auto- mobiles, steam yachts, and the countless other things in the same class. But if durable consumption goods, themselves the products of the industry of years, or even decades, gone by, con- tribute a portion of the valuable utilities that are purchased with the money income from the year's business, what becomes of the proposition that what is divided up or distributed is virtually the net product of the year's business itself? This is merely a phase of a larger difficulty, to which we shall next proceed, and in answering which w'c sliall suggest the answer to the above question. § 91. Capitalistic production, as already explained, differs The Net from direct production principally in the longer interval that (jonsfsts must elapse between its inception and its completion. As now Mostly of organised production is a prolonged, serial process. Thus the Goods bread that appears on the table to-day was made from flour produced weeks or months ago. This flour was itself made from wheat grown perhaps a year before. Finally, the seed from which this wheat sprang was planted six months earlier. And what is true of bread is true of practically every commod- ity that enters into consumption. Only services which must be enjoyed, if at all, as they are rendered, are consumed as they are produced. It is possible only to guess at the proportion of the valuable utilities embodied in the commodities and serv- ices consumed in an average week which were produced dur- ing that week, but it is safe to say that not more than one- tenth are in this class. Quite nine-tenths are the products of the industry of previous weeks, carried along to the present week as a part of the commimity's capital. Since not more than one-tenth of the utilities currently consumed are products 158 Production and Distribution of current industry, most of the world's workers must be en- gaged at any given time upon commodities that will not be ready for consumption until some future period. That this is the case is at once obvious from a consideration of the limited number of occupations concerned with the rendering of sersnces and with applying the final touches to the commodities that enter into every-day consumption. Retail dealers, deliverers, cooks, bakers, etc., constitute but a fra?ction of the industrial population of any modern community. The Real Opposed to the fact that fully nine-tenths of the products Gooc"s^ °^ °^ current industry are not in consumable form is the equally Ready for certain fact that practically the entire money income is spent tion^""^^' ^°^ goods that are ready for consumption. Of course, some in- come is saved and invested, but the great bulk of it, whether received by wage-earners, employers, or capitalists, is spent, and spending means purchasing finished goods immediately available for the satisfaction of wants. We are thus seemingly brought to the conclusion that it is not, speaking broadly, the products of their own industry that are shared among those who take part in production, but the products of past industry. If we think of the products of industry as pouring into a reser- voir, we must think of real income as being drawn out ©f th(: reservoir on the other side, and as consisting for the most part in any day, week, or month of different goods from those which during that day, week, or month have been produced. Since the contents of the reservoir is a part of the community's accumu- lated fund of capital, we may formulate our conclusion in the proposition that real incomes, the commodities and services for which money incomes are exchanged, come for the most part out of capital, rather than out of the net product. The Picture § c)2. The reconciliation of the proposition just advanced of a Society ... .,,.,, , . ,, . . , , in the State With that previously laid down, that virtually it is the net of Normal product itself that is the final object of the distributive process, can most easily be explained by considering the relation that would exist between the net product, the money income, and the real income in an industrial society stripped so far as pos- sible of all complicating and irrelevant phenomena. To picture such a society let the reader imagine that all improvements in productive processes are for the time being suspended ; that The State of Normal Equilibrium 159 nature assists production without the sHghtest variation from season to season; that each grade of labour is self-renewing and self-perpetuating, while the population as a whole is station- ary ; that the fund of capital is kept intact through exact renewal • by means of the replacement fund ; that the wants of consumers do not change ; and. finally, that competition has perfectly free play. Under these circumstances production, distribution, and consumption would go on very much as they do in actual society, except that in the absence of all change, each would be perfectly adjusted to the others. At every stage of production there would have to be an exact replacement from the previous stage of the cai)ital goods destroyed. Thus, if the week were the unit production period, the week's destruction of tools, machines, and other instruments of production must be just made good by the week's flow of finished capital goods from dealers to the dififerent stages of production. The week's out- put of raw materials must just replace the worked-up materials which manufacturers pass on each week to traders. These latter must just balance the week's transfers of goods from wholesale dealers to retailers, and the latter must in turn just offset the week's sales by retailers to their customers. Under these conditions the net product and the real income In Such a of consumable goods must be identical as regards both the kinds x° t Product and the quantitv of valuable utilities of which each is composed, a^n^ the and the money income must exchange indifferently for either, are'lnter- This must be the case, because it is only on this condition changeable that the exact replacement all along the line necessary to the il- lustration could occur. The only difference between the net product and the real income would be that the former was made up of valuable utilities not yet brought together in those combi- nations desired bv consumers, while the latter consisted of exactly similar valuable utilities combined in finished products. If we describe the situation resulting from the above as- sumptions as that of normal equilibrium, we may conclude that for an industrial society brought to the state of normal equilibrium, our proposition that it is virtually the net product itself that is distributed as real income to those who take part in production is fully justified. Of course, no one of the assumptions upon which the i6o Production and Distribution Actual imagined society rests is fully realised in any actual society, Socie\^"^ and yet there is more in common between it and actual indus- Tends trial societies than might at first be supposed. The dominant Tow^ard^the characteristic of the latter looked at in their entirety is not State of change but permanency and stability of relations. JNIen drop Equ^fbrium °'-^^' ^"^ others inherit their tasks and perform them much as they did themselves. Population is not stationary, but it is so nearly so from year to year that the great majority of the chil- dren born each week virtually take the places of persons who have just died. Goods are worn out and destroyed, but new goods are being produced in a continuous stream, so that the aggregate wealth of society changes little over short periods either as regards its amount or the kinds of goods of which it is composed. In the same way improvements in methods of pro- duction, if all processes are considered, follow each other but slowly. Moreover in every society, no matter how rapidly it is progressing in population, wealth, or the technique of pro- duction, economic forces are constantly working towards the state of normal equilibrium. Net Prod- Pqj. these reasons the proposition that the net product and uet and Real . . Income Ap- the real income are exact duplicates of one another applies with proximately ^^^^ slight modification to actual societies. In the United States Inter- ^ changeable to-day, for example, as in the hypothetical society, the greater United P^^^ '^^ ^^^^ wealth withdrawn each week from dealers' stocks States to constitute the real incomes of sharers in distribution is re- placed in kind and quantity by the net product of the week's in- dustry, in the same way that the water which flows through a mill-race from a pond kept at a certain level is replaced by the water which flows from the mill stream on the other side. As in the latter case we may say that the water which propels the mill wheel during any hour is virtually the water that flows into the mill pond, so we may say in the former that real in- comes come virtually from the net products of industry. In both instances there is the same necessary connection between the inflow and the outflow. The assumption of a state of normal equilibrium is a conve- nient logical device for disentangling normal and permanent influences and their effects from transient influences and the confusing situations to which they give rise. In this con- Graphic Illustration i6i nection it helps to make clear the fact that notwithstandin.i:? all of the complexities of actual industrial relations it is still substantially true that the net product of industry from day to day and week to week is the source of the real incomes of those who take part in production. This is an important clue to aid in the solution of the problem of distribution, and it is the task of the following chapters to follow it to its logical conclusion. § 93. It may help to make the propositions that have been Graphic explained in the preceding sections more intelligible if we at- tjo^ ^f t^e tempt to present them in graphic form. The following figure Foregoing 1 , • 1 . .1 . , , , , Propositions represents the relations between the net product and the real income in an industrial society brought to the state of normal equilibrium : Durable Consumption Goods "- Fig. 6. In this diagram are represented in successive and connected compartments the three great branches of production : the extractive industries,* manufacturing, and transportation and trade. Raw materials, the products of the extractive industries, flow through from left to right, being enriched as they pass along by the addition of form, place, time, and possession utili- ties. On leaving the hands of dealers, they are separated into two great streams, one, the replacement fund, which flows back to repair and renew capital goods worn or destroyed in the proc- * This is the term applied to hunting, fishing, stock-raising, farming, forestry, mining, and quarrying, since they are concerned for the most part with securing materials directly from nature. i62 Production and Distribution ess of production, the other, consumption goods, which begin immediately to satisfy wants. The latter stream is again sub- divided, one branch conveying the second and subordinate replacement fund needed to repair and renew the durable con- sumption goods whose presence is indicated at the top of the diagram and which give ofif a continuous stream of utilities to mingle with those afforded by transient consumption goods, the other and larger branch into which the main consumption goods stream is divided. The net product represented in this diagram consists in part of raw materials, in part of manufac- tured goods, finished and unfinished, and in part of the utilities subsequently added at the stage " transportation and trade." Only a very limited part is sufficiently advanced to be flowing out with the stream of consumption goods to minister directly to human wants. On the other hand it is in this stream of con- sumption goods that the entire real income for which the money income is exchanged is found. Although the identical goods constituting the real income are thus for the most part other than the goods constituting the net product, the latter consists of exactly similar utilities quantitatively and qualitatively as the former. At each point the streams of goods flow on evenly and unbrokenly so that the " transient consumption goods " that are allowed to escape, and which constitute the real income, are exactly replaced by the goods included in the net product. The diagram thus represents movement without change. It depicts the circulation of goods that is going on in actual industrial society with the elemen«^s of change and monopoly eliminated. The § 94. A convenient bridge for passing from the problems ProducdoiT °^ production to the problems of distribution is furnished by the Defined expenses of production. As used in these pages this term in- cludes every item of outlay which producers must normally and regularly incur to put goods on the market and effect their sale and also such compensation as producers normally and regularly require as the condition to their continuing to serve industrial society in the capacity of entrepreneurs. These items are as follows : ( i ) outlays for materials, wear and tear of buildings and machinery, etc., or the replacement fund; (2) premiums paid for the insurance of capital goods; (3) interest Items in the Expense of Production 163 for the use of capital ; (4) wages to labourers of all grades ; (5) rent of land and natural power used in production; (6) taxes; (7) minimum profits to the entrepreneur to remunerate him for his own time and trouble. The first item calls for no further explanation. As a matter The Re- of course every business man deducts a replacement fund from jpund"^^° the price he receives for his products. Premiums for insur- ance, looked at broadly, are merely additional expenses for the replacement of capital and may properly be included in the first item. Insurance companies learn by experience what propor- Insurance tion of the particular kinds of capital goods they insure is likely remiums to be destroyed in a normal year. They charge rates which will enable them to replace losses and at the same time make some profit for themselves. When organised on the mutual plan, as is increasmgly common, their character as agencies for the co-operative replacement of capital goods liable to destruc- tion through accident is clearly apparent as the element of profit is then eliminated and the officials of the company appear as the employees of the insured for whose sole benefit the business is carried on. The item of interest for the use of capital is calculated at a Interest certain rate per cent, per annum for the capital employed. Thus if a business ties up on the average throughout the year capital goods worth $10,000 and the current rate of interest is five per cent., $500 should be charged as expense for interest. This item appears whether in the particular business considered borrowed capital or capital belonging to the firm is used. If the fomier is the case the expense for interest is an actual out- lay, if the latter it is a virtual outlay, since using the capital in the business prevents loaning it at the current rate to some other entrepreneur. The propriety of naming wages as one of the items of ex- Wages pense is obvious. As the term is here used it includes all pay- ments for labour, whether wages in the ordinary sense or sala- ries. It is convenient to go even further and to include in it the seventh item enumerated above, the minimum profit re- ceived by the entrepreneur, on the ground that the latter is merely a zvaf^cs of management and as appropriately included in wages, although paid by the entrepreneur to himself, as is 164 Production and Distribution Rent Taxes Summary Differences in Ex- penses of Production the interest charged for the use of a firm's own capital in- cluded in interest. The amount that should be charged as wages of management or minimum profit is what the entrepre- neur could obtain for his services if he worked for wages or for a salary for a corporation or other employer. Unless he nor- mally obtains this at least from the business he carries on, he will give it up and become a wage-earner or salaried official. The rent of land or natural power was spoken of in Chapter VI. as a profit over and above the expenses of production. To the farmer cultivating his own land it is an item of return rather than an outlay ; but the same reasons that cause econo- mists to include an allowance for interest on a firm's own capital and for wages to the entrepreneur himself among the ex- penses of production, lead them to treat rent also as an expense of production. To the entrepreneur using leased land rent is an expense. If instead he uses land which he himself owns it is virtually an expense because by using it he loses the rent he might have obtained had he leased it to another. As already stated, rent is a variable item to different producers, depending on the quality and situation of the lands they use. It does not appear at all among the necessary outlays of so- called marginal producers. But the land or natural power that can be used free of charge is of poor quality and most producers find rent an important item among their expenses. Taxes are another irregular charge from which many pro- ducers are exempt. Their amount depends upon the arbitrary decision of the taxing power and for this reason and because they do not affect at ail many branches of production we may leave them out of account in our treatment of distribution. Summarising the results of the preceding discussion it ap- pears that the items in the expense of production may be re- duced to four : ( I ) Expense for replacement or maintenance of capital goods, (2) interest, (3) wages, (4) rent. § 95. The expenses of producing commodities of each sort are different for different firms. For new firms just establish- ing business connections and not yet ready to produce on the scale that experience has shown to be most economical, ex- penses are high. They are high also for old firms that are overgrown or for some other reason are falling into decay. The Normal Expenses of Production 165 They are lowest for the representative firms which have at- tained just the size conducive to economical production. Dif- ferences might be expected to arise also from differences in the quality of the land and natural power used and in the abilities of entrepreneurs, but it must be remembered that these are fully covered by the items rent and wages of management in- cluded in the expense of production itself. For example, if two equally able farmers produce wheat for the same market and the first obtains in normal years twenty-five bushels to the acre for a given outlay of labour and capital and the second only twenty bushels for the same outlay, the difference must be due to differences in the fertility of the areas cultivated and should be credited to the better land as rent. If the cultivator did not own the better land or if he decided to lease it to some one else the equivalent of this difference in product might actually be required as the proper rent per acre of the better farm over and above the rent that must be paid for the other. In the same way able entrepreneurs whose careful planning and wise supervision keep down the other expenses of produc- tion require proportionate compensation in higher wages of management. Such men know pretty well what their services are worth and unless their occupation rewards them ade- quately will turn to something else. The expenses of production of the representative firm are the The normal expenses of production, and so long as competition re- Expenses of mains an active force they determine the normal price about Production which, as already explained, the market price of each competi- tively produced commodity tends to oscillate. The market price cannot fall for any length of time below the expenses of production to a representative firm, for under such circum- stances representative firms suffer losses and proceed to curtail production until demand for the diminishing supply of the commo