Preface
If there is one subject that should be more attractive to the student and more inspiring to the citizen than another, it is that of social economics, because it deals directly and exclusively with the influences and conditions which control all human welfare. It is through a knowledge of the principles and laws of human economics that we are enabled to make nature contribute to man's comfort and luxury by substituting abundance for poverty, freedom for slavery, peace for war, intelligence and morality for ignorance and brutality ; in short, a civilization of democracy and culture for one of despotism and degradation. Whenever the science which should furnish the key to nature's bounties and the light to human progress becomes unattractive to the student and repulsive to the average citizen, we may be assured that there is something fundamentally amiss with the conception and treatment of the subject.
This is precisely the case with political economy to-day. Instead of being the beacon-light of industrial and social affairs, — the source to which all may turn for safe instruction and hopeful guidance, — it is the " dismal science " which students avoid, statesmen and capitalists disregard, citizens ignore, and laborers discredit. Why is a science so dreary and pessimistic, which by its very nature should be fascinating and hopeful ? The obvious answer is, that it fails to fulfill its function as a science of industrial welfare and social advancement. On nearly all fundamental questions affecting the production and distribution of wealth its doctrines are both uncertain and inconsistent. The popular
Vi PREFACE.
theory of wages has been exploded by experience, and the current doctrines of value, interest, and profit have for generations been subjects of perplexing controversy between experts and sources of utter bewilderment to students.
This is mainly due to the fact that the accepted theories belong to the hand-labor conditions of the seventeenth and eighteenth centuries, which have very little relation to the factory conditions of the nineteenth century. Nor should this be a matter of surprise, since it is entirely consistent with the law of industrial evolution. In its development society has assumed several distinct and essentially different industrial phases, which have each changed the economic structure of society, shifting the centre of industrial movement and the point of view of economic study.
Under feudalism, for instance, the land-owning class was the centre of all social and industrial movement. Economic policy therefore was considered from the standpoint of a land-owning class.
With the development of manufacture and trade however, came a radical change in economic relations. Serfs became wage receivers, and the cultivation of the land passed to tenant farmers, which change transferred the distribution of wealth from the domain of authority, to that of economic law. By this transition the social basis of industrial prosperity was broadened, and the centre of economic movement was shifted from the industries required to supply the needs of a small land-owning class to those required to supply the demands of a relatively large commercial class, whose interests were more varied and extensive. In proportion as new conditions developed, the narrow paternal policy which was adapted to the old regime became inimical to the welfare of the community, and a reconstruction of economic doctrine from a new point of view became necessary. The efforts of two centuries to supply this need culminated in the " Wealth of Nations," which really marks the advent of middle-class political economy, whose influence has practically moulded the economic thought of the present century.
PREFACE. Vll
For the same reason that under feudalism every thing was viewed from the standpoint of the land-owner, every thing was now considered from the standpoint of the manufacturer and merchant, whose income was derived from trade.
How to promote sales became the fundamental idea of what has been well named the " Commodities School " of political economy. To sell extensively necessitated producing cheaply. And since wages formed the greater part of the cost of production, it appeared from the " commodities " point of view to be as necessary to obtain cheap labor as cheap raw material, and for the same reason. Consequently it became a cardinal doctrine of the ' ; Commodities School " that large profits depend upon low wages. " It has been my endeavor to show throughout this work," says Ricardo, " that the ratio of profits can never be increased but by a fall in wages." In the days of hand labor and small factories, when the consumption of the upper and middle classes furnished a sufficient market for products, this cheap-labor policy was successful in giving profits.
But this very success led to the development of large factories, which were destined again to revolutionize the economic structure of society. For since these large enterprises required a more extensive market for their success than any possible increase in the consumption of wealth by the upper and middle classes could furnish, the habitual demands of the masses for the first time necessarily became the foundation of industrial prosperity. Therefore it is in the needs of the masses that the economics of the future must be studied and statesmanship determined.
To such a change of industrial relations Adam Smith and his followers were altogether oblivious ; their conception of industrial evolution was too limited to enable them to anticipate it, and their purely " commodities " point of view prevented them from observing it. They saw the importance of the factory as a means of making wealth cheap, but they did not see the economic importance of making man dear. Having failed to recognize the laborer as the great factor in
Vlii PREFACE.
a market whose consuming power must be increased, they continued to treat him only as a productive force in the factory, whose cost should be reduced, on the theory as Mill puts it, that " profits depend upon wages, rising as wages fall and falling as wages rise."
Thus through an effort to apply erroneous ante-factory theories to factory conditions political economy has for three quarters of a century been made a gospel of cheap labor and an enemy of social advance.
The growing incompetency of political economy to deal with modern conditions has begun to be recognized by inductive economists, and during the last twenty years an increasing departure from economic orthodoxy has been manifest among the younger economists of Europe and this country, which is now developing to the proportions of a new school.
In breaking from the hard and narrow lines established by the doctrines of early English economists, the " New School " has already rendered an important service to economic science, by making respectable the re-discussion of the fundamental principles governing industrial relations and political policy, in the light of modern knowledge.
Thus far, however, its work has been critical rather than constructive. It has contributed far more to break up the old than to establish a new body of economic doctrine. Although the English theory of wages has been repudiated and the doctrine of laissez /aire rejected by them, no approximately adequate explanation of wage phenomena has been furnished, nor any affirmative principle of public policy suggested.
In the following pages I have endeavored to discuss the principles of social economics from the nineteenth century point of view. If the facts of modern experience are to be the court of final appeal, the great fundamental fact to be recognized in our society is the democratic basis of industry .
The factory system has made the use of natural forces (steam, electricity, etc.) necessary to successful industrial en-
PREFACE. IX
terprise. Nature is intensely democratic. She will only work cheaply when she is serving a large number. Kings and aristocracies may command the unpaid service of slaves, but natural forces will work efficiently only for the million. Millionaires could not travel by steam or communicate by electricity if millions of workmen did not use the same methods. In short, the success of all machine-using industries now primarily depends on the extent to which their products are consumed by the masses. Therefore the prosperity of the community in general and capitalists in particular depends upon increasing the wants and elevating the social life and character of the laboring classes. Considered from this standpoint, the whole subject of economics assumes a new and altogether more rational and humane aspect. It ceases to be a mere " science of wealth," subordinating producers to the product, and becomes a science of human welfare, making the social life of the producers the end to which the creation of commodities is the great means. In other words, it is transformed from a dismal science of pessimism and despair, which complacently sees the masses crowded to the verge of starvation, into a science of optimism and hope, which bears a message of prosperity and progress to the whole of humanity.
Besides giving economic science a humane, hopeful aspect hitherto conspicuously wanting, this change in the point of view makes it integral, harmonious, and intelligible. Much that has been involved in confusion becomes simple and clear; much that has been mistakenly regarded as unjust and oppressive enough to warrant revolution, becomes obviously beneficent and progressive ; and much that has been dolefully taught as axiomatic truth is seen to be manifest error.
Moreover, when we change our point of view from commodities to men, and make the laborer the initial point of observation, the questions of production and distribution become susceptible of discussion in terms intelligible to ordinary minds. We then find value or price assuming a human basis, and commodities are seen to be dear or cheap not as
X PREFACE.
they will exchange for more or less gold, but as they will exchange for more or less of labor, as economic equivalents- With this idea of value the theory of supply and demand of which Malthusianism and the wage-fund fallacy are a natural outcome, is incompatible. The ratio in which a given quantity of cloth or shoes is the economic equivalent of a day's labor can no more be determined by the mere fact of the quantity of cloth or the number of laborers, than can the moral quality of a robbery by the number of thieves. The only basis upon which two things can be economic equivalents of each other is the substantial equality of their cost of production. Upon no other principle can exchanges be economic, equitable, and mutually advantageous.
The principle of cost, governed as it is by the cost of the dearest portion of the economic supply of any commodity, furnishes a keystone to the arch of economic science. It supplies the basis for a consistent body of economic doctrine capable of explaining the phenomena of wages, rent, interest, and profit upon one general principle of universal application — namely, the law of economic price and its corollary, the law of economic surplus. Instead of a system of " commodity " economics which justifies human degradation as a means of cheapening wealth, we have a system of social economics, which shows that the most effective means of promoting the industrial welfare of society on a strictly equitable basis, must be sought in influences which develop the wants, and elevate the social life and character of the masses. Here then we have a sound, economic, and broad social basis for intelligent, humane, and progressive statesmanship, which shall promote individuality without incurring the follies of laissez /aire, and utilize the educational and protective functions of the state without incurring the dangers of paternalism.
New York City, January, 1891.
Chapter I. Social Progress
The law of progress the key to history ....
The nature of progress .......
Progress defined and phenomena classified
Its tendency shown by the primitive condition of man
By the development of the family as a social unit .
By the rise of the feudal system .....
By the growth of free towns and individual rights
By the development of the middle class and the factory system Industrial progress different from social and political The source of individual freedom .....
Socializing effect of the wages system ....
Economic interdependence and social individuality a criterion of civilization, 14
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3 4 5 6
7 8
9 10 11 12
Chapter II. The Law Of Social Progress
The elements in social progress 15
Natural order of social progress ........ 16
Industrial progress the basis of all progress . . . . . .17
The intellect the servant of human wants ...... 19
Relation of egoism to altruism ........ 20
Law of social progress summarized ........ 21
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CONTENTS.
Chapter III. The Cause Of Social Progress
Human wants the cause of social evolution Effectual and non-effectual desires .
The social source of equity ....
Intelligence, justice, and virtue have same origin As human wants increase civilization advances
PAGE 22
25 26
Chapter IV. Verification Of The Law Of Social Progress
Progress accompanies large consumption of wealth by the masses Small consumption in Oriental countries .
Under ancient Greece and Rome, few rich, many poor Slavery preponderates ......
Why ancient philosophy long remained without effect Arrested progress cause of Rome's fall
27 28 29 30 31 32
Chapter V
THE RISE AND SOCIAL POWER OF FREE CITIES AS VERIFYING THE LAW OF SOCIAL PROGRESS.
Barbarism supplanted by feudalism . . 33
Concentration of the serfs in the towns 34
The burgesses secure control of the towns by paying rent . . . 35
Insurrection of the towns ......... 36
Transformation of towns into free cities ....... 37
The cities were the homes of freedom 38
Chapter VI. The Fall Of The Free Cities And Its Effect Upon Social Progress
Progress arrested by their fall . . . . . . .... 39
Spain distracted by religious wars . . . . . . . . 40
Premature development in Italy ........ 41
German freedom destroyed by imperial alliance 42
French cities overcome by the barons . . . . . .43
In England the cities not suppressed ....... 44
Charters rendered inviolable ......... 45
Labor rents superseded by wages ........ 46
Feudalism abolished by expansion of freedom in the towns ... 47 Increased wealth of the middle class . . . . . . .48
CONTENTS.
XIV
Chapter VII
THE LAW OF SOCIAL PROGRESS AS VERIFIED IN THE PROGRESS OF t OLITICAI AND RELIGIOUS FREEDOM.
Political power of English Commons .....
Religious and political liberty follow material development Wicliff's Bible succeeds ; Hussite War a failure Character of the Jacquerie and the Peasant War Social character of the Reformation .....
Protestantism due to the social power of middle class Condition of the masses from the fifteenth to the eighteenth century The factory system. Industrial legislation .... Right to vote extended to the laboring classes .... Superior industrial conditions of America ....
Difference between French and American Revolutions Industrial prosperity cause of our free institutions .
59 60
Chapter I. Wealth And The Law Of Its Proe
Mill's conflicting definitions of wealth
Walker's definition .
Perry substitutes the word property
Essential characteristics of wealth
Wealth defined
Various views of production
Theory of non-productive labor
All useful labor productive
Differentiation of productive effort
Gratified desires complete the cycle of effort
Land, labor, and natural forces the necessary factors in production
Land passive, man and nature active
Nature and character of capital ....
Economic use of the term capital ....
Use of capital determined by increasing returns
Mistaken praise of parsimony .....
Capital the effect not the cause of industrial prosperity
Capital arises from the hope of gain
No use for capital in barbarism ....
Social consumption the cause of economic production
*3
65 66
67 68 69 70
72 72 73 74 75 76 77 78
XIV CONTENTS.
PAGK
Characteristic simplicity of physical wants 82
Complexity of social wants ......... 83
Nature responds liberally only to large demand 84
New wants make large markets . . . . . . . .85
High wages lead to low prices ........ 86
Two kinds of discoveries under ancient and modern civilizations . . 87
Why ancient civilizations were not self-sustaining 88
Resume of laws of production 89
Chapter II. Economic Value
Adam Smith's definition confusing 90
Relation of value and utility . . . 91
Definition of value ........... 92
Price and value identical ........ 93, 94
Value a relation between man and things ...... 95
Mistaken point of view .......... 96
Error of Mill and Cairnes ......... 97
Value is not the exchange ratio of things to things, but of things to man . 98
Effect of the new point of view 99
Chapter III. Demand And Supply Not The Law Of Economic Prices
Economic price not governed by demand and supply .... 100
Gregory King's law IOI
It applies to agricultural products . . . . . . . 102
Not to manufactured products 103, 104
The theory does not fit the facts 105
Wages do not obey the law of supply and demand ..... 106.
Economic price the exchange of equivalents ...... 167
Cost the basis of economic equivalence ....... 107
Testimony of McCulloch 10S
Cairnes' error regarding supply and demand ...... 109
Commodities do not create demand . . , . . . . .110
Demand the cause of supply .ill
Origin of price 112
Initial point of supply 113
Price phenomena originate in man . . . . . . . . . 114
Chapter IV. The Law Of Economic Prices
Exchange ratio of wealth and service . . . . . . .115
Meaning of economic law . . , . . . . . .116
CONTENTS.
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PAGE
Laissez faire not scientific . . . . . . . . .117
Economic law defined . ..... . . . . . .118
Maximum and minimum price, how determined . . . . .120
Cost the point of economic equilibrium . . . . . . .121
All the factors in production must receive the equivalent of what they contribute . . . . . . . . . . .122
The possibility of an economic surplus . . . . . . .123
Equity of economic law .......... 124
How cost of production affects price . . . . . . .125
Origin of economic profits . . .126
Their equitable basis . . . . . . . . . .127
Primary law of price 128
Character of price variations . . . . . . . . .129
Prices in the same market tend to uniformity . . . . . .130
Statement of law of prices . . . . . . . . .131
Verification of the law of prices ........ 132
Agricultural prices . . . . . . . . . . .133
Relation of quantity to price . . . . . . . . .134
All prices regulated by cost of dearest portion . * . . , . . 135
Quality of labor determines its cost .136
Variation in wages ........... 137
Chapter V. The Law Of The Cost Of Production
Popular errors regarding cost of production Simple phenomena misleading .
Ricardo's illustration Cost and quantity ....
Brassey's experience in several countries High wages make cheap wealth Important relation of wages to machinery Use of capital, how determined Nature and function of capital Importance of large market Wages measure the laborer's consumption The true law of prices ....
139 140 141 142
143 144 145 146
147 148 149
Chapter VI. Money And Its Economic Function
Walker's definition of money ......... 150
Money and wealth not identical . . . . . , . .151
Money an evidence of credit . . . . . . . . .152
Definition of money . . . . . . . . -153
XVI CONTENTS.
PAGE
Function of money , . . 1 54
Evils of fluctuations in the value of money 155
Of what should money be made ? . . . . . . . .156
Essential attributes of money . . . . . . . . .157
It must have maximum value in minimum form . . . . .158
Claims of a tabular standard . . . . . , . .159
Its difficulties ........... 160
Need of a scientific price-level ........ 161
Depreciation of money . 162
Inadequacy of metallic money ........ 163
Basis of a paper currency . . . . ... . . r64
Necessity of gold and silver . . . . . . . . .165
Because universally acceptable . . 166
Proportion between property and credit money ..... 167
Herbert Spencer's view . . . . . . . . . .168
Essentials of a sound monetary system ....... 169
How to regulate the quantity . . . . . . . . .170
Advantages of private enterprise ........ 171
Money should be- taken out of* politics 172
chapter 1. THE DISTRIBUTION OF WEALTH
Distribution inseparable from production . . . . . .175
It is an economic transfer. Difference between consumption and productive use ........... 176
Function of productive wealth . . . . . . . .177
Order of economic distribution . . . . . . . .178
Walker's inconsistency . . . . . . . . . .179
Walker's doctrine of " residual claimant " fallacious . . . 180,181
Historic order of distribution ......... 182
Economic order — wages, rent, interest, profit ....... 183
Chapter II. Some Recent Theories Of Wages Considered
Wood's theory of wages . . . . . . . . . .184
Doctrine of final utility .......... 185
Mistaken application of ......... 186
Wages not uniform in all industries ....... 187
CONTENTS.
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Laborers' welfare depends on absolute not relative income . . . 188 Capital sometimes yields no interest . . . . . . .189
Wages not determined by rate of interest ...... 190
Nor must they be confounded with profit ...... 191
Uniformity in wages and prices ; diversity in profits .... 192
Prof. Clark's theory of wages ......... 193
He, like Marx, confounds the last increment with the dearest . 194, 195 Price-fixing increment not the same in manufacture as in agriculture . 196
Confounding wages with rent ..... .... 197
Price and surplusage 198
Defects of Prof. Clark's theory summarized . . . . , .199
Chapter III. The Law Of Wages
Requisites of a sound theory
Definition of wages .
Real and nominal wages .
Wages the economic price of labor
Statement of law of wages
Wages determined by standard of living
Prices of labor and of products move differently
Dearest laborers fix price of labor
Poorest capitalists fix price of commodities
Relation between wages and savings-bank deposits
Difference in cost of living the source of savings
Agriculture unfavorable to savings .
Foreign laborers save more because they cost less
Very highest-paid laborers strike
Family income regulated by its cost
How the cost of living is determined
Remedy for low wages .....
. 200
. 201
. 202
. 203
. 204
. 205
. 206
. 207
. 208
209, 210
. 211
. 212
. 213
. 214
. 215
. 216
. 217
Chapter IV. Rent, Its Economic Law And Cause
The Ricardo- Walker definition of rent .218
Amended definition .......... 219
Economic production as applied to land ....... 220
The law of rent stated .......... 221
Rent governed by the law of surplusage ....... 222
Walker's explanation of rent ......... 223
Fertility not cause of rent ......... 224
Rent has a social origin . 225
Relation of rent to prices ......... 226
XVU1
CONTENTS.
FAGH
Economic basis of rent . . . . . . ... . . 227
Effect of population on prices . . . . . . . .228
Effect of improved methods ......... 229
Rent follows and leads the movement of wages ..... 230
Is rent a social tax ? . . . . . . . . . .231
Difference in the economic order of using land and machinery . . .232 Relation of rent to wages illustrated ....... 233
High wages cause of high rents . . . . . . . . 234
Effect of abolishing rent . . . . . . . . . .235
Rdsumd of the doctrine of rent . . . . . . . . 236
Chapter V. The Law Of Interest
Interest related to capital as rent is to land ...... 237
Walker's view considered ......... 238
Not consistent with facts 239
No-interest capital common ......... 240
Economic movement of capital ........ 241
Economic movement of interest ........ 242
Improved methods constantly push capital towards the no-interest point . 243
True law of interest . . . . . . . . . . 244
The law illustrated ........... 245
Surplus enlarged by increased production ...... 246
Entrepreneur's profit comes from surplus above rent and interest . . 247
The social character of interest . . . . . . . . 248
Chapter VI. The Law Of Profit
Orthodox errors the source of socialistic theories
Employers' view of profit and wages
Theories of Rodbertus and Marx
Statement of Marx's theory of surplus value
Misleading illustrations ....
Fallacy of his theory demonstrated .
Relation of labor to value
Distribution of cost-items does not alter value
Cause of Marx's error ....
His mistaken assumptions
Economic evolution of profit .
Equity of economic profit
Surplus does not prove exploitation .
Ratio of product to profit and wages
Illustrated by cotton industry .
249 250 251 252
253 254 255 256
CONTENTS.
XIX
Mr. Giffen's view of wages and product .
His error ......
Distribution of economic benefits Ratio of wages and profits to product Defective modes of calculation
They lead to false conclusions Omitted data vitiate conclusions Salaries and depreciation of capital overlooked Wages have increased relatively to net product Relative decrease of profits ......
Correct mode of ascertaining economic condition of laborer Incompleteness of obtainable data .....
Table showing ratio of wages to profits ....
Nature of industrial tendencies .....
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265 266 267 269
271 272 273 274
275 276 277 278 279
Chapter I. Laissez Faire As A Guiding Principle In Public Policy
Origin of laissez-faire doctrine . . . . . . . .283
Adam Smith and the French Physiocrats . . . . . . . 284
Negative character of laissez faire . . . . . . . .285
Its erroneous postulates ......... 286, 287
False views of competition .288
Misuse of the term natural law ........ 289
Natural and human selection ......... 290
Survival of the unfittest . . . . . , . . . .291
Government essential to society ........ 292
Character of economic competition ........ 293
The competing units must be approximately equal ..... 294
The necessity of opportunity .... .... 294
Chapter II. The State J Or, The Nature And Function Of Government
The state as distinguished from society .
No absolute rights in society .....
All government is representative .
The state is the authoritative expression of the aggregate , Relation of the state to the individual .
295 296 297 298 299
XX
CONTENTS.
Social-organism theory of Plato, Hobbes, Rodbertus, Marx, and Spencer . 300 Spencer's claim that society is an organism, stated .... 301, 302
His fundamental propositions considered ...... 303
Radical distinction between society and an individual organism . . 304 Society is not an organic entity . . . . . . . .305
Social evolution different from physical ........ 306
Mr. Spencer logically supports socialism ....... 307
Clark's attempt to apply this theory to economics ..... 308
His position analyzed .......... 309
The function of government . . . . . . . . .310
Importance of mutual dependence ........ 311
Controlling principle in statesmanship . 312
Individual action preferable to state action 313
Difficulty of determining their respective spheres .... 314, 315
Sphere of individual action .. . . . . . . .315
Sphere of state action . . . . . . . . . 316, 317
Difference between protection and paternalism 318
State functions essentially protective and educational .... 319
THE PRINCIPLE OF INTERNATIONAL TRADE.
Necessity of national development .
Society a means for individual advancement The nation .......
Socializing tendency of manufacturing industries
Importance of their development .
A large home market necessary Superiority of home over foreign market .
Foreign markets and home wages A nation is rich by what it uses, not by what it sells Test of economic cheapness ....
False assumption of free-traders Operation of free trade illustrated .
Uneconomic competition ....
Basis of economic competition Popular fallacies regarding the nature of a tariff The law of international competition Weakness of the infant-industry theory .
Civilization depends upon protecting the higher against the lower India, Ireland, and Russia ....
England, America, and Continental countries . Protection and home prices ....
Proper mode of testing a tariff Ultimate effect of a protective tariff on profits .
. 320
. 321
• 322
• 323
• 324
• 325 . 326
• 327
• 328 329, 330
• 331 332, 333
• 334
• 335
• 336
• 337
• 338
• 339
• 340
• 341
• 342
• 343
• 344
CONTENTS.
XXI
Effect of protecting the higher wage-level . .
Illustrated by cotton industry .....
Led to improved methods of production
Effect on the industrial development in America . Wages in non-protected industries . . .
Erroneous views regarding ......
Mr. Blaine's mistaken view ......
Has not outgrown the English theory of wages How protection affects wages ......
Wages can only be raised by social forces
How to examine wages phenomena ....
Industrial improvement affects all classes
Effect of protection upon other countries
How protection promotes the economic selection of industries
It leads to free trade .......
Its domestic application .......
PAGE
• 345
• 346
• 347
■ 348
• 349
• 350
• 353
■ 354
• 355
• 356 357, 358
CHAPTER IV. THE PRINCIPLES OF ECONOMIC TAXAT Basis of equitable taxation
It should come from surplus incomes .
The mobility of taxes ....
Their relation to wages
Hoav transferred from laborer to employer
How he pays them out of his surplus .
How his surplus is replenished from nature Taxation like wages a form of consumption Economic fmportance of taxation exaggerated Taxes enable government to exercise its functions How taxes shor'.d be levied, paid, and collected Evils of direct taxation ....
Property and incomes tax Advantages of indirect taxation Taxes should be levied upon real estate .
Equitable nature of a land tax Objections answered ....
No profits on taxes. Mill's error Taxation is public consumption of wealth Henry George's delusion ....
363 364 365 366
367 368
Chapter V. Business Depressions
How distinguished from famines .
Historical facts about depressions
383 384
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CONTENTS.
TAOE
Inadequate causes assigned ......... 385
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