The industrial republic; a study in industrial economics

Contents

I. Expansion of Political Democracy 1 II. The Labor-Capital Opposition —

Genesis and Growth 16

III. Present Status of the Labor-

Chapter I Expansion Of Political Democracy

AFTER four years of fighting between all the leading nations of the world to determine under what form of government people should live in the future, we would naturally look for an era of peace. Instead of this, we find a state of anarchy and civil war in some of the nations, and a feeling of industrial unrest in others. The focusing of attention on the faults of political government has produced a similar focusing on the faults of industrial management.

The result of this is an alarming state of affairs in Eastern Europe which is gradually spreading westward, and every effort should be made to determine its cause, to see what the points of misunderstanding are between management and men in industry, and to find out at what point the two sides can meet with fairness to both.

As the conditions of civil war prevailing in Eastern Europe and the conditions of general unrest spreading westward are the direct outcome of the World War just finished, a proper understanding of the causes of this unrest necessitates a review of the war in the particular phases which have a bearing on the present industrial problem.

Looking back to 1914, we find Germany a highly efficient empire, ruled by a small autocratic minority, who, by efficient and progressive direction, had united a group of small states into a nation and made this nation very powerful. It reached a stage where it could produce much more than it could consume and had to depend very largely upon the outside markets to sustain its rapidly growing population. It found other nations in political control of these markets. The German nation had come to believe, on account of its rapid rise, productivity and power, that its "Kultur" was superior to any other upon earth, and that as a missionary it should give its benefits to constantly increasing areas whether the inhabitants desired it or not. The result was that after many years of preparation for world control, feeling itself capable of carrying its government by force of arms to other countries, it seized the first convenient opportunity and threw down the gage of battle. It engaged its immediate neighbors in a struggle of life or death.

The initial advantage gained by Germany, owing to its state of preparation, followed by its barbarous methods of warfare and arrogant assertion of its desires and intentions, first shocked and then aroused the leading self-governing nations of the earth to the danger threatening their own free institutions and future safety. The whole conflict took the form of a world-wide contest to see whether government should be by self-determination, peoples having a voice in their forms of government, or whether a small autocratic minority should establish itself in the control of nations on the principle of " Might makes Right."

Russia, one of the leading nations against Germany at the beginning of the war, revolted from the Government of the Czar and established a republic. Soon afterwards, the first Russian Republic was overthrown by a second revolt and a Socialist Republic started. This was unable to maintain itself, and a third revolt took place, throwing the Russian Government into the hands of the proletariat. Conditions of civil war and anarchy became prevalent, and the new Government withdrew from the alliance of democracies, leaving that alliance facing both ways, fighting Autocracy on one hand and Anarchy on the other.

The first issue, that of fighting autocracy, was settled in November, 1918, by the triumph of democracy. The second issue, that of fighting anarchy, has not yet been settled, it being the avowed intention of the present Government of Russia to sow the seeds of discontent and civil war throughout the civilized world.

The Russian Bolshevik declares his revolt to be not against political hereditary autocracy, but against capitalism. He calls upon the peoples of the world to arise and overthrow it. His remedy is the destruction of all capital, and he proceeds to build up an autocracy based on ignorance of the most cruel kind, setting back the clock by centuries and bringing about idleness and starvation. And the fact remains that he has succeeded, up to the present at least, in putting his ideas into absolute effect over a hundred million people of the white race. A state of peace cannot come on earth as long as this challenge remains unanswered.

Bolshevism is an industrial disease, and a very contagious one wherever it finds lack of confidence in the management of industry, or a feeling of injustice amongst working-men with their present conditions. The problem which we must solve is to find a remedy for stopping the spread of Bolshevism. The first step toward this solution is a careful study and examination of the industrial situation, ferreting out any injustice which may be present, and establishing a feeling of confidence between the working-man and the management of industry.

The relations between a political government and the people living under that government are very similar to the relations between the management of an industry and the people working in that industry. In other words, management and government are synonymous terms, one being usually applied to the political and the other to the industrial world. Since this war has been fought to establish certain principles of political government, therefore, it is only natural that working-men should see whether or not management, as it now exists, measures up to those principles, and if it does not, they are certainly entitled to know the reason why.

The principles of government which we fought successfully to establish are what we believe to be American ideals of government. Let us see what these are, and the historical development which caused them to be what they are- Back in the early part of the seventeenth century a small group of Pilgrims braved the dangers of the winter ocean, the dangers of an unknown land across the sea, to leave their homes and establish a new form of government where they would have more freedom and more voice in their affairs than they had at home. Others followed them and these groups formed colonies along the Atlantic seaboard. For a century and a half they lived as colonies under the mother country with comparative freedom. In the latter part of the eighteenth century, England tried to tax them without representation and these colonies then declared themselves independent and avowed their intention of governing themselves as an independent nation. They adopted a new type of government, where representatives, who formed the governing bodies, were directly chosen by the people.

Failure of this form of government was freely predicted everywhere. For it was felt that only the few were capable of governing and that the majority could not be trusted with this function.

The newly organized government, however, under the constitution then enacted, has existed substantially without change from that day to the present time. It has been the model from which all republican governments have been patterned, and the principles underlying this form of government have just won a glorious victory, establishing those principles as the foundation for the governments of the world for the future.

Yet the republican form of government has not been a panacea or "cure-all." It has not always met with success in other places. Successful government by the majority depends upon the character of its citizenship and the ability of the majority wisely to select representatives to govern them. It requires a community of interest amongst the people, and the absence of sharply drawn class distinctions. Wherever the character of citizenship is low, or lacks intelligence, democracy has not been an entire success, and a form of government more or less autocratic has been necessary to maintain order and promote prosperity. The success of democracy, therefore, requires the fostering of education for the greatest number possible, in order that the government may be of the greatest good.

The citizenship of our own country has been such that under a republican form of government by the majority, we have grown to be the most influential power in the world, and stand as proof that what the world said could not be done, has been and is being done.

Let us contrast for a moment the development of the German Government during the past fifty years with that of our own. Prior to 1850, Germany was composed of several small states and frequently they had differences of opinion and wars with one another, each state so small that it frequently became prey to other nations. Lack of unity and common interests very seriously affected their peace and prosperity. But, face to face with a common danger, they united, and in 1870 succeeded in overwhelming the French Empire under Napoleon III so decisively that they became a world power of the first rank. They were welded together in a strong autocratic government in the hands of a few very efficient men, who, with a keen realization of the nation's needs, were able, with the almost absolute power given them, quickly and quietly to do those things which were necessary to enhance the material prosperity and power of the German nation.

There is no question of the maximum efficiency of autocratic government when administered wisely and justly, and Germany's prosperity so increased by leaps and bounds that the whole nation stood behind the autocratic forms which had produced such results. The same thing happened, however, as always happens under such a form of government. First came peace, then prosperity, then efficiency, then self-satisfaction, ambition, and greed. Reaching this last stage, the World War was the inevitable result, teaching mankind that no matter how efficient autocracy may be, the only safe form of government to rely upon in the future is government by the majority, working to the end of making the majority as efficient as possible. To prove that results have been the same in the past where autocracy ruled, we have but to go back in history to the Roman Empire, to the French under Louis XIV, and under Napoleon, and to every other large nation in the past which has followed in the same footsteps. In all such cases the ruling party has seen the "handwriting on the wall " too late to let go gradually, a revolution results and destroys in a large measure the efficiency and prosperity previously built up.

Chapter II The Labor-capital Opposition — Genesis And Growth

THERE is such a similarity between the evolution of political government and industrial management that it is instructive to go back to the origin of industry, tracing its development to the present stage.

First, man existed on the bounty of nature, hunting and fishing, and by his labor alone acquired those things which were necessary to sustain life. With this method of living, each man required large areas of land to support him, and the world could, therefore, support a very small population. Man soon found, however, that he could cultivate the ground, produce food, and that he could raise animals also, instead of depending only on what nature produced unassisted. This enabled a much larger population to exist on the same area of land. It was next found that productive capacity would be further increased by subdivision of labor, some men doing one thing and some another, and exchanging the products of their labor. As soon as the condition developed whereby a man was able to produce more than he was himself able to consume, he had the choice of ceasing to work as soon as his wants were supplied, or continuing to work and saving a portion of the product of his labor. The hunter saved some of the animals, fish, and fruit which he secured in the summer, dried and put them away for the winter. When he started to cultivate the ground, he saved and stored away the surplus to tide him over until the next harvest. After he gathered the harvest, he industriously devoted his spare time to making tools with which he could produce crops in larger quantities with less labor.

This gave rise to Capital which is always the result of and has its origin in the savings of labor. Some men did not save, but ceased to work beyond the point of barely taking care of their necessities. Others continued to work both for their physical and material benefit, and out of their savings created things necessary for sustenance, and tools and machinery with which to increase their productive capacity. These savings became what we now know as "capital/ 5 The use of this capital by labor resulted constantly in increased production at less expenditure of labor. The savings of this combined effort were again applied still further to increase production, enabling the earth's surface to support a constantly increasing population, until now it is so densely populated that destruction of capital would result in world-wide starvation. Therefore, in industry to-day it is absolutely essential that capital and labor go hand in hand to produce the best results, in which they have a common interest.

In the old days when tribes existed on the bounty of nature, as the population increased it was found necessary for one tribe to fight another to kill off the population in order that there might be enough food for the remainder. It was popularly considered that wars were an economic good, as otherwise the standard of living and subsistence would go down constantly as the population increased. The introduction of capital has destroyed this theory, and we now know that it is the use of capital, combined with labor, that is the key to the solution of an increase both in the population and in the higher standards of living.

Capital, be it reiterated, is nothing but the savings of labor, and its logical function is to be put at the disposal of mankind to be combined with labor to make that labor more productive. In other words, capital should be put at the disposal of those who labor, for the benefit of the community, and the owners of that capital should be entitled to a fair reward for its use. It is evident that this is something entirely different from the view that humanity should loan its labor to the man who owns capital for the benefit of capital, and it is the difference between these two ideas that is to a large extent at the bottom of the industrial unrest of to-day.

To return to the progress of industry: As we pass from the agricultural stage to the manufacturing stage, it becomes advisable to divide laborers into groups, part to do the farming, part to manufacture the tools and machines necessary to increase production, and part for special services, such as doctors, ministers, lawyers, etc., render. This started the so-called "crafts 55 where different groups of men specialized in their particular craft or trade, and by study and practice became very efficient in these lines, making the tools necessary and exchanging these tools for the products of the labor of others. These men combined their own capital with their own labor and disposed of the product to the best advantage to themselves.

In this evolution some men saved a great deal more than others. Tools became more highly specialized and more costly in time and labor, and only those who had saved considerable were able to own these tools. The men who had these tools were able to produce cheaper than those who had not, which caused the latter to find their business unprofitable, as they could not get sufficient returns in competition to give them an adequate return for their labor. These men in the meantime, however, had become so skilled in their crafts that they could combine their labor with the capital of others and still make more than they could by engaging in some other occupation which did not require capital.

From this grew the wage system whereby a man sold his labor for a fixed amount as being the most convenient and easy way of getting his share of the combined effort. The lack of control of capital on his part placed him at a disadvantage, and in order to protect himself and get a fair share of the product of his labor, he combined with others in a similar position, and this has resulted in the formation of trade unions for the mutual benefit of those who work for wages. The result of this was that he built up a community of interest with others of his class, and by force of numbers was able to get better wages and better working conditions than would otherwise have been the case. A natural reaction was the creation of a community of interest among owners of capital, and they in turn joined to protect their capital or savings, to see that it also had a fair return from the combined efforts of capital and labor. This resulted in the opposition of the two classes, Labor and Capital, each more or less sharply defined, each dependent upon the other, and each trying to see that it got its fair share of the results of the combined effort. For several centuries past the proportion of wage-earners who combine their labor with other people's capital, has been constantly increasing over the people who combine both capital and labor in their own supervision, such as the farmers, professional men, and others, until at the present time an extremely large proportion of laborers are wage-earners with little if any capital at their own command.

In the beginning the division of the product of industry between those who furnished the capital and those who furnished the labor was relatively a simple matter, as the groups working together were very small. The men who furnished the capital were working with the others, and understood the wants and needs of labor, and were in a position to measure accurately the service rendered by those who furnished the labor. But in order to increase production and lower costs, labor became further and further subdivided and industries changed from small units to very large units, concentrated in centers of population and in convenient locations with reference to power, the gathering of raw materials, and distribution of finished product. Industries of this nature so much better served the community that others were soon at a disadvantage and went out of business.

The efficiency of this so-called "mass production" or "big business" organization of industry produced so much greater results that those whose capital was invested in this form of organization received very large returns, and the owners of this capital, having much more than sufficient to support themselves, either for the present or future, found that work of any nature for them became unnecessary and many of them simply continued to loan their capital and live upon the returns from this; that is, instead of running the business themselves, they hired other men to manage the business for them.

These men were hired to, perform labor which had formerly been done by the capitalist, this being to look after and increase the share which capital should have in the reward. In other words, they were laborers hired to manage other laborers, but not with the same community of interest with the other laborers, and their reward was to be measured by the amount that they could increase the capital which they were hired to manage. In consequence, lack of interest in the collective result of the industry outside of the wage received (which seemed to bear no particular relation to the success of the industry as a whole) soon seized upon the rank and file of industrial employees. No longer having any acquaintance with the men who labored in industry soon caused a lack of interest on the part of those who supplied the capital. The employees, feeling their wage reasonably assured, started to spend all of their wages for current needs and did not save for the future.

Such has been the genesis and development of the labor-capital opposition. The result of this evolution has been to create a class of capitalists who do not work, and a class of laboring men who do not save and who have no capital. It must be perfectly evident to any one that there can be no community of interest whatsoever between these two classes, and the division of a population into two classes of this nature results in endless friction and continual collective bargaining, neither side being satisfied with the ever- varying results.

Thence follow strikes, lockouts, and loss of product, as the capitalist who does not work always desires to have as much reward as the capitalist who does work, and the laboring-man who saves nothing always desires to live as well and be as well taken care of in the future as the man who saves a part of the results of his labor for a rainy day. Neither of these desires is right, and both aim at special privileges which can only be granted by injustice to others. As there never can be any common ground between the capitalist who does not work and the laborer who does not save, the power of either one of these groups to obtain for itself special privileges, to which it has no right, should be curbed.

SO THE INDUSTRIAL REPUBLIC

The tendency of combinations of capital and combinations of labor to build up large, powerful bodies, each one for its own interest, is, therefore, undemocratic and un- American, and in the interests of all there should be substituted for this something which would increase the incentive for labor to save more, which in turn would cause it to produce more. We should also endeavor to see that the owner of capital who does not labor should be restricted in his ability to acquire more than the current market rate for the use of his capital, and remove from such capital any possibility of being used on the principle of "Might makes Right."

Increased production and the ability of the earth to support an increasing population depend entirely upon both labor and capital working together. Economically, therefore, they have a common interest, and they should be so organized that this common interest will be so apparent to both that they will work together in harmony.

Chapter III Present Status Of The Labor- Capital Opposition

EXAMINING the typical form of large industrial organizations of to-day, we find a very large plant investment, often running into many millions of dollars in value, for purposes of production and distribution. The capital which this represents has been furnished, often, by thousands of different people who have presumably placed their savings in this particular enterprise because they thought their savings would bring a higher return when invested here than elsewhere.

Such investors may be divided into three classes; first, those who have invested in the form of a straight loan to the business, taking a mortgage on the plant as security. The reward for the use of this capital is usually a small interest rate which is paid out of the profits of the business, and if there are no profits these investors have asked that the plant be sold and that they be paid out of the sale of the plant, which necessitates the discontinuance of the business. In this, capital takes very little risk. Such investors are usually known as "bondholders."

Second, there are those who lend their capital to the business, taking all of their return out of the profits of the business, and who insist that their claims have preference before lending their capital, and with this preference are satisfied to take a fixed return out of the profits, allowing those who do not have this preference to take the balance. These are known as "preferred stockholders."

Third, there are those who loan their capital to the business, agreeing to take as their share only what is left after the wages and all bills are paid, and the bondholders and preferred stockholders taken care of. These are usually known as "common stockholders/' and as they take the largest amount of risk, they usually are in control of the operation of the industry and are the most vitally interested in its success.

The men who supply the labor furnish their services at a fixed rate and receive their return either in the form of wages or salary. They are usually paid at so much per piece for the articles produced, or so much for the time which they work, which amount is also based upon the amount which they are expected to produce within a given time. Here we run across the mistaken idea that a man's time is worth so much money, regardless of what he produces. The inconjistency of such an argument is 3sily demonstrated in the fact that the industry can sell only the products of labor and not the time used in that production. Therefore, there is no sound economic reason for paying for time, and wages must be based entirely upon the amount produced. The fact that it is expressed in units of time is incidental and not fundamental. Time is for use : it is not for sale.

Now we envisage all who supply either capital or labor and witness them united and working together in production. The products are distributed and the reward comes in. If the industry is going to continue, a certain amount of the reward has to be used to replace the raw materials and equipment which were used in making the finished product, and the balance is either to be invested in an expansion of the business or divided as nearly as possible between the capital and labor used in production in direct proportion to the service rendered.

Theoretically there should be no sum expended for labor or for interest or dividends until the products of industry have been sold and money received in exchange. But this is obviously impossible in modern industry, since it is often months or years before some of the capital invested is sold as finished product, and often many months before the article in which labor is expended is sold or exchanged. Owing to the large number of men who have not saved sufficiently to exist in the meantime, an estimate has to be made in advance upon what the results of the business are going to be so that these may get an advance return. It is impossible to make the wage a full payment to labor and at the same time a fair payment, but as a matter of practice we have come to do this very thing by making the wage payment the full return for labor's share in industry.

What is the result? The laboring-man says either he can't or he won't take any financial risk on the successful and profitable operation of the industry, but he will take his wage as his full return for his share in the partnership. It follows that those who supply the common capital of the industry assume, either from choice or from necessity, all the risk, and will quite naturally claim everything produced in excess of the fixed obligation to labor in the form of wages, and the fixed returns to other capital which is safeguarded against real risk.

So long as labor takes this stand, the owners of common capital are entirely justified in their position, and the share which labor has received in the past, based upon its acceptance of the "wage in full/ 5 has been its fair reward. If labor were to take the same attitude in the future, those who supply common capital are entitled to continue to receive the same proportion of the reward of industry that they have received in the past, up to a certain point.

All know that capital has been so well rewarded in many instances by this arrangement that those who provide the common capital, realizing the power which this gives them, are often apt to say to labor that whether labor wishes to take a risk with them or not, they don't wish labor to have the opportunity of doing so. This attitude is entirely wrong. Labor may not have any capital to risk, but it is risking all it has to risk, that is, its labor, and its ability to get the best results from this labor is bound up to a large extent with the permanency and profitableness of the business. Labor may not risk a proportionately large amount based upon the productiveness of what it lends, but it does risk a very large amount in proportion to what it has to lend. It is, therefore, only a matter of mere justice that if labor has received the current wage and capital at the end has received the current rate of interest, any surplus beyond this must necessarily have been created by the combined use of capital and labor, and should be divided between the two in some proportion and not go entirely to capital alone.

With this incentive the increase in quantity and efficiency of production will provide means for capital to share a percentage of earnings with labor without net loss to itself.

From all sides to-day we hear the economic axiom that the only way to keep wages at their present high level, or increase them in the future, is to become more efficient, and by so doing to increase production.

When profit-sharing or jointstock ownership with labor becomes a more established custom, companies which do not offer such opportunities will not only find it difficult to obtain new men of the right type, but will not be able to retain those whom they now have. The advantage and good-will accrue to those who first adopt it.