Capital and profits

Front matter

ctoss Hhsnt

CoipghtN _

COPYRIGHT DEPOSIT.

Introduction

T^EW subjects today demand our more careful A study than capital and profits. For no method of industrial reconstruction can succeed which fails to give to capital and profits their true place and function. Civilization itself will stand or fall according to the view which we take of this important factor. And yet not only have most people today very hazy ideas of the nature, function and necessity of capital and profits, but it is in relation to this factor that the most fatal errors in all proposals of industrial reconstruction are made.

The object of this book is to make plain the true function of capital and profits and thereby enable the people to reconstruct their industrial system and not fall into worse evils than those from which they fly.

This book also distinguishes between the great movement called socialism and the economic teachings of Marx or Marxism, which unfortunately have infected the whole socialist party but must not, therefore, be regarded as a necessary element of true socialism. A sane and enlightened socialism is doubtlessly bound to come; but the Marxist economics, in the minds of many, is equally bound to go.

CHAPTER I Capital and Profits— The Two Views

THE time is rapidly approaching when intelligent men must work out a definite plan of industrial reconstruction that will command the support of thoughtful minds. For present industrial and economic conditions are intolerable and demand a change.

When American history began, the industrial policy which our fathers deliberately adopted was that of pure industrial individualism and anarchism. Each man was thrown upon his own feet and told to fight his own battle as best he could. The struggle for bread was made to be a fierce free-fight-for-all in which the best man was expected to come out on top.*

But this policy of individualism and anarchism has given birth to a system that is feudalistic and despotic. From amidst the strife of individuals and groups, a strong financial oligarchy has rapidly emerged and risen to power, and today a few strong men hold supreme irresponsible control over the

* For a clear explanation of the origin, development and character of our present industrial system, see Reid's Effective Industrial Reform, Part I — The Hazard Company.

whole industrial world. And this creates a condition of menace and danger which cannot be tolerated by a free and enlightened people.

The great problem that is confronting all minds, therefore, is how to overthrow this huge system of oppression and iniquity that has fastened itself upon us? What is the new principle which we must adopt and what is the concrete plan, the social machinery, by which to put that principle into actual operation?

But before this two-fold problem can be solved, it is imperative that we obtain a correct view of the nature and function of capital and profits and their place in our industrial and economic life.

The capital invested in our country's industries is commonly supposed to earn its legitimate income as well as labor. The earnings of capital are paid in the form of profits, as interest or dividends or rents; the earnings of labor, in the form of wages or salaries. And men and women who have believed in honest work for honest pay, and have had, therefore, no desire to oppress or rob their fellowmen, have hitherto saved and invested their savings in their country's industries for the express purpose of earning an income from them.

Now the first question which is to be discussed in this book is — Are these dividends which are earned by invested capital legitimate? Is it right for the worker to invest his savings in his country's industries and earn an income from them, or have we been all along mistaken in this matter and must we, for the sake of justice, when we come to reconstruct our industrial system, abolish all interest, dividends and rents from our economic life?

Two distinct and directly antagonistic views are held today in relation to this question concerning the legitimacy of capital and profits. And there is no hope of solving the problem of industrial reconstruction until we settle, once for all, which of these two antagonistic views is true.

The first of these views is identified with Karl Marx, the father of modern socialism, and, therefore, may be called the Marxist view. It is held today practically by the whole socialist party. The second is that which is coming to be taught substantially in all our schools and colleges today, and may be called the modern scientific view.

The Marxist view, briefly stated, affirms that labor produces everything; that capital produces nothing; and that, therefore, all profits, including rents, interest and dividends, are nothing but the plunder which capital exacts from labor, and, therefore, should be abolished. It affirms that this profit-taking is the very root of present industrial wrongs; and that, therefore, the evils of our present industrial system cannot be remedied until we are willing to abolish all rents, interest and dividends forever. Marxism, therefore, condemns all dividends paid to invested capital, all interest paid on money loaned, and all income received from the rental of real estate, as being sheer robbery. And Marxism is ever seeking so to reconstruct our industrial system that all dividends, interest and rents, however derived, shall be forevermore impossible.

How Marx arrived at this conclusion concerning capital and profits is easily explained.

Marx made, it may be said, a great discovery. He saw for the first time, in all its clearness, that the chief cause of the poverty and degradation of the laboring classes lay in the fact that they were systematically oppressed and plundered by the capitalist class, which under the plea of profits, robbed the worker of the larger part of the product of his labor. Marx's whole career consisted in one long effort to expose the injustice which modern capitalism commits against labor and to arouse the workers for its overthrow.

This was the grand purpose of his book — Capital — which has been justly called the bible of modern socialism. This book contains, indeed, the most powerful and, in its essential affirmations, the most just arraignment of modern capitalism that can be conceived. It was, indeed, an epoch-making book. It called the attention of the worker and the world, for the first time in human history, to the existence of an all-powerful system of oppression and plunder, which the people had not been aware of before. And he made the workers see that, though the modern capitalist class had no armies immediately behind its back, yet in its control of the economic necessities of life, it possessed a power to oppress greater than that of the ancient Caesars, and through its control of all the wealth and capital of the country it was able to control also even governments and armies.

For this work of exposing capitalist oppression and arousing the workers against it, Marx deserves all praise.

But in the intensity of Marx's arraignment of modern capitalism, he failed to distinguish between what we may call a just and an unjust capitalism, and he failed to see the place which a just capitalism must occupy in our economic life. To him, capital was always the instrument of plunder. To one who reads and re-reads his books and abridgments of them, he gives the impression on every page that to him capital is always predaceous. And the fundamental assumption which underlies every argument is, that labor produces everything, that capital produces nothing and that, therefore, all profits including rents, interest and dividends, are nothing but the plunder which capital exacts from labor.

The position of modern economic science concerning the nature and function of capital is just the opposite of Marx and his disciples. Modern economics affirms that capital, though it is the product of labor is, nevertheless, itself productive; that it earns a real profit or increase, over and above the labor employed in its creation and use, and that this profit should justly go to the worker whose labor created it or justly acquired it.

In short, modern economic science is coming to distinguish between a just and an unjust capitalism. It admits that modern capital robs labor; and that Marx is right when he says that the tendency of capitalism, under the present system,- is to rob the worker of his whole surplus earnings, above the bare cost of his support. Nevertheless, it affirms that there is such a thing as a just profit which should go to capital. And because a part of the so-called earnings of capital is robbery, we must not, therefore, conclude that all is robbery. For capital earns a just profit, even as labor earns a just wage. Furthermore, economic science affirms that capital occupies an essential place in our economic life. Whatever, therefore, be the cause of present industrial wrongs, economic science affirms that that cause does not necessarily lie in the mere fact of profit-taking.

These two views, it can be seen, are directly antagonistic to each other. They cannot both be true. And they vitally affect the very foundations of our industrial and economic life. For the one — the modern scientific view — defends, while the other seeks to destroy what has been a fundamental factor in the economic life of man ever since the world began.

For from the beginning of the world down to the present time, men have gone into business and invested their savings or capital for an income. And this has been one of the chief incentives to industry and one of the fundamental factors of human progress and civilization. Men have manufactured tools, cultivated land, opened up mines, harnessed the forces of water and wind, of steam and electricity, and have built boats and sawmills and factories; they have laid railroads and built up marts of trade. And they have done these things, not merely to make labor more productive, but in order to earn an income from their invested capital.

And while it has always been admitted that there was such a thing as an unjust profit and that business men, owing to the individualistic and competitive character of our present business life, have often used this profit-taking as a means of robbery, yet it has always been assumed that there was such a thing as a just profit which is earned by the use of capital and that this just profit should go to the investor.

Furthermore, in all ages and in the United States today, there are multitudes of men and women — workers, teachers, preachers, doctors, lawyers, widows and others who, though not engaging directly in business themselves, nevertheless, save a part of their earnings and invest those savings in the industries of the country. And by the earnings of these savings, they secure leisure and prepare for sickness and old age. And this has been one of the essential factors in every thrifty life. Multitudes of widows and orphaned children are kept from want by the earnings of the invested savings of the once living husband and father.

Down to the present time, therefore, this process of investing one's savings or capital, for the earning of a just income has been viewed not only as perfectly legitimate, but as a virtue of a very high order. Thrifty parents and teachers have taught their young people to save and invest their savings for a future income. It was the man who refused to do this and thereby failed to prepare for leisure and old age that was regarded as criminally negligent, while the man who looked ahead and saved was regarded as the truly thrifty and commendable person.

But to the amazement of every intelligent person who becomes acquainted with Marxism for the first time, Marxism affirms that this whole process of investing one's savings for an income is illegitimate. It is a process, says Marxism, of pure robbery. Hence, whether a man invests money in a saw-mill for a profit, or a worker deposits his savings in a savings bank for a three or four per cent dividend, in either case, the supposed earnings are just simply robbery, the robbery, — says Marx, — which capital exacts from labor. A man may put his money in a savings bank for safe-keeping, but, says Marxism, he has no right to receive a cent of dividends on that money. And a man may put money into a saw-mill in order to provide himself with machinery to work with, but unless he runs the mill himself he has no right to receive a cent of profit from his invested capital in the mill. And Marxist socialism affirms its purpose, in our reconstructed industries, to sweep all investment of savings for the earning of dividends from our whole economic life. If Marxism should be rigidly introduced, the only source of income allowed to any man would be the simple earnings of his labor.

The teaching of Marxism, therefore, concerning capital and profits, is radically different from the accepted view. And it seeks to revolutionize, and, if adopted, will sweep away one of the most important foundations of our present economic life. The

Marxist view of capital and profits should not, therefore, be permitted to prevail without careful consideration. And, before we reconstruct our industrial system, we should carefully decide whether we shall, or shall not, adopt the Marxist view.

Above all, we should not permit the people to adopt the Marxist position without their clearly knowing what they are doing and why they do it. It is a fact, of which most people are ignorant, that practically every scheme of industrial reconstruction proposed today, unconsciously or deliberately adopts the Marxist position, and will sweep away all individual investment of capital for an income.

It is a startling fact, of which many are not aware that practically every scheme of public ownership, proposed by persons, who are outside of the Socialist party and have no connection with that party, unconsciously adopts the Marxist position and will abolish this whole factor of the investment of one's savings for an income from all human life.

To illustrate. The proposition is widely made today that we turn our railroads and other industries over to the government to be run like the United States mail. But those who propose such a method of public ownership never seem to reflect that such a scheme, if adopted, would annihilate all possibility of the individual investment of one's savings for an income. They do not see that such a scheme would force every person to enter upon a hand to mouth existence in which each person's sole income would be the earnings of his labor, and when the worker stopped work his whole income would cease. And yet such would be the actual result of adopting a form of public ownership corresponding to that of the United States mail, as it can be readily seen.

For the method of securing the capital necessary to carry on the United States mailing service is radically different from that employed in the privately owned industries. In the privately owned industries the capital is individually subscribed and on this capital dividends are paid. The private corporation, therefore, provides a place for the investment of individual savings and the earning of an income from them. But the business of the United States mail offers no such opportunity. On the contrary it makes such investment of savings an impossibility. For the capital invested in the United States mail is not individually subscribed. It is raised by indirect taxation or by taking it out of the business " as we go along."

The result is that while the United States mail offers work to its employes at a supposed just wage or salary, and provides a service to the public at a supposed just price, yet it provides no opportunity for any one to invest his or her savings in the business for the earning of an income from them.

If, therefore, the same method of public ownership were applied to our whole industrial system, that is, to every plant, the result would inevitably follow that all individual investment of savings in our country's industries for an income would be abolished.

Now such a change in our economic processes would be simply revolutionary and yet nobody seems to be aware of the tremendously revolutionary character of the results which such a change will effect. Indeed, those who propose these revolutionary schemes of industrial reconstruction, do so in apparently entire unconsciousness of their revolutionary character. And they eliminate this important factor of the investment of individual savings for an income, not because they have studied Marx, — for they evidently know nothing about him — nor from any conviction deliberately formed; but from sheer economic blundering, from the fact that they have never seriously investigated the great factors that enter into our economic life. They have not even asked, apparently, what those factors are.

But this is not all. What these immature reformers will do from sheer economic incompetence and blundering, the whole Socialist party proposes to effect from deliberate conviction. For it is a fact, of which all persons are not yet fully aware, that the whole socialist party, consciously and enthusiastically adopts the Marxist view of capital and profits. It affirms, with Marx, that all profits, whether in the form of rents, interest or dividends, are sheer robbery. And it avows its determination to abolish all profits and all investment of savings for an income, from our whole economic life. The Socialist party proposes, therefore, not only to secure the public ownership of our industries, but to revolutionize our economic principles and methods, and annihilate all possibility of investing one's savings for an income.

Thus, the economic teachings of Karl Marx have taken possession of the whole Socialist party and are maintained by all its members with almost fanatical determination. The dogma that profits are nothing but the robbery which capital exacts from labor and, therefore, must be abolished, is assumed by every good socialist as almost a self-evident truth. It is taught or assumed in all socialist literature. It is taught in every socialist school, it falls from the lips of every socialist orator. No accredited socialist agent is permitted to sell literature that opposes this Marxist view. And all socialist writers, hitherto, have avowed that the coming of the Socialist party into power means the abolition of all profits on capital. " The socialist regime," — says Spargo, a prominent socialist writer and speaker, — " will abolish profit." (Spargo's Socialism, page 160.)

It can be seen, then, that practically every method of industrial reconstruction proposed today, unconsciously or deliberately adopts the Marxist view and will eliminate all investment of savings for an income from our economic life.

The time has come, therefore, when this whole subject of capital and profits must be carefully investigated. If it be true that this question concerning capital and profits has been overlooked in the past by those who seek to reconstruct our industrial system, it must be overlooked by them no longer. Above all, we must not, through sheer economic incompetence and blundering, permit ourselves to fall into economic error and adopt such changes in our industrial system as shall prove disastrous to our economic welfare.

The disciples of Marx have hitherto regarded the position taken by their great leader as impregnable; and they challenge a criticism of his views. The time has come when this challenge must be met and all socialists and all others interested in industrial reconstruction, should come to inquire most seriously, whether the Marxist view is correct or not. For while Marx was right in his general arraignment of modern capitalism and in his general teaching regarding the class struggle, yet it can be shown that he was wrong in his conception of the nature and use of a legitimate capital. And the socialist party will never be able to reconstruct our industrial system, even if it should come into power, until the members of that party free their minds of the false view of capital and profits which is embodied in all the writings of Karl Marx, their great leader. And every method of industrial reconstruction which consciously or unconsciously falls into the Marxist error and eliminates the factor of capital and profits from our economic life will fail.

CHAPTER II What is Capital?

THE beginning of the Marxist error concerning capital and profits lies in Marx's wrong conception and wrong definition of capital. For Marx's definition of capital and its use is one-sided and misleading and from this error all his subsequent errors spring.

The Marxist definition of capital.— Marx practically identified capital with mere money (or commodities) employed solely to make a profit; and this profit he implied is always unjust.

In the fourth and fifth chapters of Capital he defines " merchants' " capital as money employed in buying and selling for a profit; and he implies that the profit thus made is always unjust, — a proposition which is not true. Thus — to paraphrase Marx's own illustration — when a man buys two thousand pounds of cotton for five hundred dollars and sells it for five hundred and fifty, he makes a profit of fifty dollars in the deal. But says Marx, since the cotton was worth no more when he sold it than when he bought it, the profit of fifty dollars is an unjust profit. He bought and sold the cotton not for use but for profit. Now, says Marx, when a man takes money and employs it to buy and sell commodities not for use but for profit, the money so used is capital — " merchants' " capital. And the man who so uses it is a capitalist, and to use money in this way for profit is one form of capitalism. " Money which begets money, — such is the description of capital," — says Marx, — " from the mouths of its first interpreters, the merchantilists." " Buying in order to sell, or more accurately, buying in order to sell dearer, appears certainly to be a form peculiar to one kind of capital alone, merchants' capital." — (Marx's Capital, Vol. I, page 173.)

Having thus defined the nature of " merchants " capital as money used to buy and sell commodities for a profit, Marx proceeds in chapters six, seven and eight, to show what industrial capital is. For industrial capital is, according to Marx, money used to hire labor for the purpose of making a profit out of the worker by paying him less than his labor is worth. Thus a manufacturer of cotton yarn hires a man to make yarn in his factory. Now the cost of supporting a working man is, we will say, says Marx, only eighty cents a day, and this is all that the capitalist pays the worker for his day's work. But a man's work is able to produce twice the cost of his support, or one dollar and sixty cents a day. The capitalist makes, therefore, a profit, and an unjust profit, of eighty cents a day from each worker. Thus the capitalist robs the worker of the " surplus value " of his work, that is, of the surplus earnings above the bare cost of his support. Now says, or implies, Karl Marx, money thus used in order to employ labor and make a profit by robbing the worker of this " surplus value " of his labor is industrial capital. And money is industrial capital only when so used.

Thus Marx divides all capital into two great divisions, of which there are several subdivisions. The two great divisions are " merchants' " capital, and " industrial " capital. The former is money used to buy and sell commodities for a profit — which Marx assumes to be always unjust; and the latter is money used in buying and exploiting the workers' labor-power for a profit, which is also always unjust. Both uses of capital are therefore, according to Marx, forms of robbery, and all profits are robbery.

All Marxists, — and that means practically the whole socialist party — agree with this definition of capital and the origin of the capitalists' profits. Furthermore, the profits of both forms of capital are traced back to labor, since, say all Marxists, labor produces all things. " From the surplus of the laborer's product over their necessary cost of subsistence," says John Spargo, a prominent Marxian socialist, — " the capitalists derive their profits. This is the Marxian theory of surplus-value in a nutshell. Rents, interest, and profit, the three great divisions of capitalist income into which this surplus-value is divided, are thus traced back to the fundamental exploitation of labor." — (Spargo's Socialism, page 205.)

Such is a true exposition of Marx's conception and definition of capital. Marx's method of reasoning is most labored and his meaning hard to grasp.

He takes twelve pages to express what a more skillful reasoner would say in twelve lines. His terminology is ancient and outrageously perplexing. In the same sentence, he will employ the term " value " in three different senses. With him, this word sometimes stands for cost, sometimes for price, and sometimes for utility. It is only by going through each page with pencil in hand and carefully translating each term into comprehensible English that his meaning becomes clear. Not one socialist in a thousand, it may be presumed, ever reads him. And it is only by reading and re-reading his book with pencil in hand that one learns what he is trying to say. But difficult though it be to understand Marx, yet the foregoing pages give the true exposition of his conception and definition of capital, and this appears to be the idea of capital which lies back in the mind of all thorough-going Marxists, and all members of the Socialist party.

Assuming that the foregoing exposition is correct, it can be perceived that capital, according to Marx, is primarily money, and it is money used, not for service, but for the making of a profit, which he assumes to be always robbery. And a capitalist in his mind, is one who employs money for this specific purpose. And " capitalism," a term much used by Marxists, means the employment of money not for useful service, but either in buying or selling commodities to make a profit, or in the employment of labor for the purpose of robbing the worker of the " surplus value " of his labor, that is, its value, above the mere cost of his support. Capital, therefore, according to Marx, is always predaceous; capitalism is always a disguised form of robbery, and all profits are disguised plunder.

Is Marx's conception of capital and profits correct ?

While it must be admitted that the extortion of unjust profits is a characteristic of modern capitalism and that this is the crime of the age which it is the mission of the present generation to abolish, nevertheless, in this definition Marx has given a one-sided, and, therefore, incorrect and misleading definition of capital and overlooked its true use and function. And this is the beginning of his error.

What, then is capital ? Two agents are employed by man in the supply of human needs. The first is man's own power to work, the second is the productive power of agents outside of man, which man uses such as land, horses and machinery.

Now the name which economic science applies to man's power to work is labor or labor power. The name which it applies to all those agents which man uses, outside of man, is capital. And these two agents must be carefully distinguished, if we are to do any correct economic thinking.

To illustrate. Here is a farmer plowing his field. The whole energy of body and mind which he employs in holding the plow and driving the team is labor or labor power. But the horses, the plow and the harness, are all forms of capital. For they are the agents outside of the man which the man uses in the plowing of the field. The land is also a form of capital.

For he uses it in human service, as a source of income. For when he shall have plowed it and sown it with seed, the forces of soil, rain and sun will go to work and produce the harvest. The farmers' house and barns, and even the clothing which he wears, are also for the same reason forms of capital.

Certain economists have endeavored to restrict the application of the term capital to those material agents that are employed in " production " only. Thus the money which a man might employ in building and running a saw-mill would be capital; but the money which he uses in buying, furnishing and running his house, say they, is not capital; for it is not used by him directly in production. Now while it is important for a man to distinguish between the cost of running his business and the cost of running his house, nevertheless, the restriction of the term capital to the former alone is fallacious, confusing and misleading.

For capital may be, indeed, correctly denned as wealth viewed as the agent of production, or more correctly, as the source of income. But all wealth, properly viewed is, directly or indirectly, a source of income. This income may accrue in the form of money or it may come in the form of some direct and useful service. But in either case it is a real income and it is the equivalent of an income in the form of money.

Take for example the house in which a man lives. That house performs for him a real service. It is, therefore, to him a real source of income. If he did not possess that house, he would have to pay rent to somebody else if he would enjoy the same comforts. The house is, therefore, a real source of income — an income equivalent to the rental which he would have to pay for another house of the same character. So also even the automobile which the man owns and uses for pleasure is capital. For it is a real source of income to the owner. For if he did not own that automobile, he would be obliged to pay rental to another man, if he would enjoy the same pleasures. The automobile, therefore, brings him in a real income, which is the equivalent of the rental which he would otherwise have to pay to another man. The boy who begins life owning only the clothes on his back and one dollar in his pocket, has, strictly speaking so much capital to begin life with. He is so much better off than the boy who does not own the clothes on his back. And if he owns a house and lot besides, he has in reality that much more of capital to begin life with.