24. THE RELATION OF LABOR TO VALUE…

24. THE RELATION OF LABOR TO VALUE

§ I. RELATION OF RENT TO WAGES

[Sidenote: Concrete conditions of industry must be studied with wages]

1. The law of wages must be considered in connection with other far-reaching influences. One may use the sentence, "the marginal productivity of labor determines wages," without having a true understanding of its meaning. Memorizing a definition is only the first step toward economic reasoning. Till that definition becomes a real thing in the student's thought it helps him but little. The law of wages is an abstract statement of the logical relation of wages to utility; it is not a concrete statement of the industrial conditions in which labor works, yet these are more nearly in the nature of true causes of value. The marginal utility is itself determined by forces and conditions outside of labor that are constantly changing. The more thorough is the student's knowledge of the actual conditions of industry, the more correctly he can apprehend the relations of wages to other incomes, and the more wisely he will apply the abstract law to practical life.

[Sidenote: Productivity of labor and diminishing returns of natural agents]

2. The marginal productivity of labor is affected by the relative abundance and efficiency of natural resources. If land suddenly becomes more abundant through the opening up of new continents, the lower grades of agents are sooner or later abandoned. Labor having more of a choice as to the place where it is to be used, spreads itself over the better grades and takes on a greater marginal productivity. The marginal unit of labor working on better soil than before produces more, and wages expressed in produce are higher. Ground rent, on the other hand, is less under these conditions. If, however, the land is fixed in area, and population increases, no other change taking place, the principle of diminishing returns applies. The marginal laborers (the last arrivals or the growing generation) being compelled to work with less efficient resources on a poorer quality of land, produce less than was the rule before, and a smaller product therefore is attributed to all the laborers of that grade. They get lower wages and more goes as rent to the owners of the land. By shifting of occupations this reduction may be somewhat moderated and equalized among the workers in other industries. In both these cases, wages vary more than does the physical amount of the total product. In the first case, wages are a larger proportion of a larger product; in the second case, the product is larger (there being more laborers) but wages are a smaller proportion of it.

[Sidenote: The iron law of wages]

3. The unwarranted assumption that a disproportionate increase in population is sure to occur, gave rise to the subsistence theory, or iron law of wages. This assumption is now seen not to correspond with what is occurring in the civilized world. A hundred years ago, however, when the poorer classes of Europe appeared to be increasing with little restraint, it was not strange that thinkers should look upon this increase as inevitable. According to the subsistence theory, the question of population was simply a question of food; it was believed that men surely would multiply up to the point where they could not further increase their numbers, and starvation wages would be the rule. It was this way of looking at things that gave to political economy the name of the dismal science. When population is limited in large measure by volitional means instead of by war, starvation, and other material means, the problem changes and the error in such a theory of wages becomes clear.

[Sidenote: The standard of living, and wages]

The "standard of living" theory of wages is a refined form of the subsistence theory. This theory is that wages must rise to meet the cost of any standard that the laborers may set, and below which they will refuse to multiply. This is probably a fragmentary truth, but is quite inadequate as a theory. A high standard of living and all the social institutions and customs that aid in keeping the population from too rapid increase, are factors in determining ultimately the marginal productivity of labor and, hence, the height of wages. If these restraining influences suddenly were withdrawn, a reduction of wages would follow slowly because of the diminishing returns of material agents. But the standard of living is merely a partial and negative factor. No limitation of the number of workers can raise wages above their productive contribution and, in the present state of industry, a considerable falling off in population might be expected to result in a loss of enterprise, of coöperation, and of capital. The positive factor in wages is productivity.

[Sidenote: If labor increases faster than wealth, wages fall]

4. An increase of population more rapid than that of the artificial industrial agents would reduce marginal productivity. Labor makes use of many kinds of agents besides the so-called natural resources. If population is stationary while tools are allowed to wear out or if an increasing population, while opening up a proportionate supply of land for food, fails to accumulate a proportionate stock of other tools, the marginal productivity of labor must diminish. Labor would be more imperfectly equipped with spades, hoes, wagons, horses, cattle, machinery. These artificial agents help in getting not only manufactured products, but food products. The equipment of labor must keep pace with the number of workers or they will be forced to the lower, or less effective, uses in the tools. On the other hand, the growth of science and invention, and the growth of wealth faster than the population, equipping labor as it does with more efficient implements, cause the marginal productivity of labor to rise, and hence also the wages.

[Sidenote: The wage-fund theory explained]

5. The "wage-fund theory" was an imperfect perception of this truth that wages are influenced by the efficiency of the industrial equipment. As the subsistence theory took a partial view, looking at agricultural land alone as the determinant of wages, so the wage-fund theory looked alone at a portion of the capital in the hands of employers which was the fund from which wages were paid. The large part played in discussion by this doctrine and the strong hold it had on thought is somewhat puzzling now; for if one begins to doubt its entire truth it is difficult to be quite just to its merits or to state it in a form that is plausible. The theory was that wages depended on the amount of capital that, in some way not clearly seen, was set apart by employers for the payment of wages. The capital making up the fund out of which wages were supposed to be paid, was only a very small part of all capital, even in the narrow sense in which that term was then used. It was assumed that this wage fund, once set aside, was necessarily paid out to laborers, wages being therefore determined by simple division: laborers were the divisor, the wage fund the dividend, and the average wage the result. When the theory is thus baldly expressed, it appears to begin and end on the surface of the facts; and the wage fund appears to be rather the arithmetic sum of variously determined payments than, in any sense, the cause of wages.

[Sidenote: The wage-fund theory a partial truth]

The abler wage-fund theorists did not fail at times to see, though too dimly, as the determining causes behind the employers' action, certain other things, such as the material facilities, the desires of consumers, the capabilities of the workers, and the resulting value of the labor. The element of truth which still should be recognized in this theory is that the relation of labor to its equipment influences its efficiency, and determines the part of the product to be set aside for wages. In that sense, wages are related to the abstinence of capitalists and to the supply of "capital," but capital understood not as a special fund of the employers, but, in a broader sense, as labor's entire environment of indirect agents.

§ II. RELATION OF TIME-VALUE TO WAGES

[Sidenote: Labor may be near or far, in time, from gratifications]

1. The services of labor, whether for one's self or others, have a more or less immediate relation in time to the gratifying of wants. While all human efforts to which the term services is applied have a relation to wants, there is much diversity in their nearness to the gratification for which they are destined. The process may be technically roundabout, to use the language of recent economists. One may break a stick from a tree, pick up a stone and drill a hole in it, catch an animal, cut thongs, tie the handle to the stone, and use it as a weapon to kill other animals for food, the first step being taken with the last object in view. But a still more essential relation we have seen to be the relation in time. Some things, some goods, are used at once, some after a long interval; some are durable, others perishable. Labor produces a song or a glass of lemonade to be consumed on the instant; it is employed on bridges, monuments, railroads, or interoceanic canals lasting for centuries. In all these cases the general object sought is the same though very different intervals of time must elapse before the gratification matures.

[Sidenote: All future products of labor are discounted to their present value]

2. As different periods of time must elapse before services are enjoyed, the expected value of all products but those immediately available is discounted in advance. The services that afford gratification immediately, and those that afford gratification at a later time, are judged and compared at one and the same moment. All economic life centers in the present. This difference in the time of services surely cannot be ignored. If Robinson Crusoe, at work on his island with his limited supply of energy, continues to provide for next year's enjoyment, neglecting the present, present goods become scarce and their utility rises as compared with the future goods the same labor secures. To escape inconvenience, and in the extremest case to escape starvation, Crusoe would be compelled to restore the equilibrium between the wants of the two periods by shifting his labor back to the present. So in each little economic group and in our complex society there is constant rivalry of present and future wants, competing for the limited present supply of labor. The present says, "Give me your labor and I will give you the fullest enjoyment." The future says, "I will give you a greater gratification, but you must wait for it." A given labor force thus making possible a wide range of choice among present and future services, labor is distributed according to the prevailing rate of time-value, which, as we have seen, is approximately expressed by the rate of interest. If the rate of interest is high, it means that the present is urgent and will not easily yield to the future. If the rate is low, it implies that the present is comparatively well provided for, and that future wants are given more consideration.

[Sidenote: The employer adjusts his labor force to the interest rate]

3. The employer in hiring labor and producing goods takes account of these time differences. In the preceding paragraph has been noted the influence of time differences in the simplest problem of economic wages. Interest is likewise taken account of in the bargains between workman and employer, by which contract wages are fixed. The employer of labor works subject to a prevailing rate of interest. If he ignores it he must lose. He should direct a given amount of labor to products that mature next year only when their expected selling price is greater than that of products that can be marketed this year. This difference due to time can no more be ignored than can any other difference in the cost of products. If the employer keeps the future goods to sell later, they will normally increase in value as they approach maturity; if he markets the goods at once, he normally must pass on to the purchaser the benefit of the discount he has made on their future value. That is to say, it is not the employer of labor, the purchaser of labor as such, who gains by discounting the future value of labor; it is the investor of capital (whether employer or later purchaser) who secures the rent as it matures.

[Sidenote: The discount of the future value of services is inevitable]

4. Hence all wages paid for help on products that are remote are based on the present worth, or discounted value, of the future gratification to which the labor contributes. The idea is held in one form or another by all radical socialistic writers, that the laborer does not get the full value of his products. In the sense that is here discussed, he does not. He does not get what the product will sell for in the future. He gets the probable future value at its present worth, discounted at the prevailing rate. That part of the employer's gains corresponding to this discount on labor is economic time-value.

Nor is this discount of future services dependent on a political system or on private property or on the wage system, as some have assumed. It is a universal truth. It is in the nature of wants that present and future should differ. A communistic or socialistic state would have to take account of this difference, else the whole social economy would be irrational and there would be no principle by which to apportion in time the productive forces of the community. Contracts to pay interest and contracts to pay wages might be forbidden and made criminal by formal law, but time-value would persist.

[Sidenote: Relations of wages, rent, and time-value]

5. Wages and rent are coördinate species of the value problem; time-value is a different kind of problem, bearing to both the other problems a similar relation. A close examination of the problems of rent and wages serves to bring out the close parallelism of these two forms of income as here defined. Rent is the value of the usufruct of wealth, wages are the value of the usufruct of labor. The bearer of the use in one case is material goods, in the other is human agents. Different in the source of use, they are in large measure alike in the form of contract, or nature of the calculation. Together rent and wages comprise the value of all currently arising uses; they are the two coördinate species of the genus "value of uses." The two groups of uses are closely interrelated in practice, each acting and reacting on the value of the other.

Time-value is a different genus of the value problem. Having to do with time differences, it must be found in connection with every use that is not immediate, whatever be the bearer of that use. Its application to rent is more frequent and obvious, as only the uses of material agents are capitalized, that is, sold in perpetuity. Moreover any service of labor that is not at once consumed is fixed in material form and appears thenceforward as wealth whose uses are yielded as rent or as consumption goods.

§ III. THE RELATION OF LABOR TO VALUE

[Sidenote: Several conditions of value]

1. Labor is a cause, but only one of the causes of value. A cause is some one condition which is seen to be necessary to the existence of a thing, and usually that condition which brings the thing about, other things being assumed. In what sense ought a cause of value be spoken of? In one sense it is in the minds of men--it is their wants; again, looked at objectively it is in the nature of the good--it is the quality that fits it to gratify the want. But if both these causes are operative, and labor is applied to fit goods better to gratify wants, labor appears as the cause of value. Personal causes are so much more evident, an explanation through personal causation is so much more satisfying in the earlier stages of scientific inquiry, that labor long continued to be looked upon as the one source of value. This erroneous view has never quite ceased to influence economic thought, and a great deal of effort has been directed to formulating theories of value based upon it. The cruder form of the error has now almost disappeared, but in various little recognized ways it still persists.

[Sidenote: Two phases of economic production]

2. Economic production is the origin, or genesis, of value finding its source either in objective things or in services. The writers of fifty years ago defined economic production as the application of labor to the creation of wealth. But as there are two factors in production, man and material things, so there are two productive sources of value. In some cases the origin of value is attributable to man's action; in other cases scarce uses arise in objective things without man's action. Broad as is this definition of production, it does not include the enjoyment of free goods, as in the case of the care-free darky basking in the sun. Anything that, causing a feeling of greater importance to attach to a thing, changes it from a free good to a scarce good or makes it more scarce, is a cause of its value. A large rainfall causing a greater crop of grain may be thought of as producing utility. The regular surplus of value attributable to the waterfall or to the railroad, is the product of the material services of wealth. Production through human action is the more obvious and is the more usually thought of; the part of material agents must be recognized if the fallacies of the labor theory of value are to be avoided.

[Sidenote: Labor applied to creating utility]

3. Human activity is directed to shaping and arranging things so as to increase their want-gratifying power. Human and non-human agents are combined in different proportions in various products. In one thing more land and machinery are used, in another more labor is used. But either of these two great classes of agents may touch the vanishing point in the production of value. While it is true that man's part is the most striking aspect of production, yet there may be value without labor. The study of rent puts this abstractly, but in a clear light. In actual life, however, a part of the value is usually attributable to rent, a part to labor.

[Sidenote: Value of labor derived from its products]

But in what sense is even this part attributable? Not in the sense that the labor is the original source of value which imparts that value to its products. The usufruct of wealth is the basis of rent; the need to pay rent is not the cause of value in the product. Likewise, product is the basis of wages, labor is not the origin of value. Labor, like the forces and qualities of wealth, is the cause of technical changes. These changes, if favorable, cause the goods to take on a higher value which is reflected back to the labor. The labor itself has not a predetermined, ascertainable value, but only a resultant, derived value. An exception to this statement appears on a superficial view of the value of labor hired under the wage contract to make a particular product. The labor having a market value because of a large number of well-known alternate uses, can be diverted to a particular use only on condition of a definite payment. Labor here, as viewed by the employer, appears to have an original value; products, a derived value. But in the logical view, labor is seen to impart technical qualities to the goods; in turn, the goods to impart value to the labor. Man hunts throughout industry for those things to which his labor can be applied usefully. He foresees in them the changes that will increase the value. It is only as he has judged rightly that the value taken on by the things is reflected back to the labor attributed to it.

[Sidenote: No unit of labor to serve as a standard of value]

4. Labor being of many qualities and receiving many rates of pay, there is no unit of labor that can be used as a measure of value. The idea of finding in a "unit of labor" an objective standard of value to which the value of all other things could be reduced has been a very attractive one. This fallacious hope animates every one beginning to think of the value problem. The thought was so plausibly formulated by Ricardo that it continued for a long time to be the generally accepted doctrine of value. Although most writers reject the formal statement of the labor theory of value, use is frequently made, even now, of the phrase "unit of labor," suggesting the thought that labor is the standard by which the value of all goods may be measured. This unit of labor of the text-books may be seen to be either labor arbitrarily assumed to be of uniform quality and quantity, as a day of unskilled labor (in that form quite incomparable as to amount with other qualities), or a given amount of money invested in labor of different grades at its market value. It is only by expressing labor in terms of its value that the various grades of skilled and unskilled labor can be reduced to a homogeneous unit, which is but a unit of money wages. This should not deceive us into the belief that in any peculiar sense labor can be used as a unit of value. It is equally valid and convenient to speak of units of machinery and of units of land. In terms of capital a factory site can be expressed as a multiple of a potato patch not less perfectly than can a sculptor's labor as a multiple of a ditch-digger's.

[Sidenote: Scarcity and utility of labor]

Scarcity of things desired is the one objective condition of value. The things that labor can produce and the labor to produce them being scarce, labor takes on a value. All things at last become comparable in terms of psychic income in each individual's judgment, but as yet neither in this comparison nor in the market values that are fixed in exchange, has any absolute standard been found by which the utility of all goods or the welfare of all men can be measured.

25. THE WAGE SYSTEM AND ITS RESULTS

§ I. SYSTEMS OF LABOR

[Sidenote: The wage system defined]

[Sidenote: Never the exclusive form of organization]

1. The wage system is the organization of industry wherein some men, owning and directing capital, buy at their competitive value the services of men without capital. The wage system is a method of organization never found completely realized. A community made up entirely of independent small farmers, living each on his little patch of ground, does not have any essential feature of the wage system. So long as they continue to be independent small farmers, owners of small capital, self-employing workers, the wage system does not exist in complete form. Some men with capital in every community are working for wages, while others, as independent producers, are their own employers. Society is not sharply divided into two classes, one controlling all the working capital, the other quite without resources. The wage system may be spoken of as prevailing to-day not as the exclusive, but as the typical, or dominant, form, while side by side or along with it is found independent production. It is clear that the wages here spoken of are contract wages. The wage system implies a money contract between employer and employed. The relation or bond between them is that of a wage payment.

The wage system cannot be judged properly apart from questions to be later considered, such as private property and the enterpriser's part in industry; but some consideration of the subject properly belongs here. The wage system has become of recent years in America the dominant form of industry. The theory of wages is applied most frequently in the discussion of contract wages, and there are certain practical relations between the results of the wage system and the theory of wages.

[Sidenote: Workers subordinate in early societies]

2. The wage system, historically considered, is seen not to have displaced a system of independent labor. This question should be viewed in historical perspective. As far back as history can be traced, the masses of workers have been subordinate. Civilization began with direction, with obedience to superiors on the part of the mass of men. Within the family, in the rudest tribes, the women and children were subject to the will of the stronger, the head of the family. Among the Aryan races the family system was widened, and the patriarch of the tribe secured personal obedience and economic service from all members of the community. Chattel slavery, the typical form of industrial organization in early tropical civilization, seems to have been one of the necessary steps to progress from rude conditions; students to-day incline to view it as an essential stage in the history of the race. But as conditions changed with industrial development, chattel slavery became a hindrance to progress, a disadvantage to higher industry.

[Sidenote: Place of the workers in the Middle Ages]

3. Serfdom for rural labor and many limitations on the workman's freedom in the towns, were the prevailing conditions in medieval Europe. Serfdom was both a political and an economic relation. The serf was bound to the soil; the lord could command and control him; but the serf's obligations were pretty well defined. He had to give services, but in return for them he got something definite in the form of protection and the use of land. Between the lord and the serf continued a lifelong contract, which passed by inheritance from father to son, in the case both of the master and of the serf. In the towns conditions were better for the skilled workmen, but many things bore heavily on the mass of the workers shut out from special privileges. There were strict rules of apprenticeship; gild regulations forbidding the free choice of a trade or a residence; laws against immigration; settlement laws making it impossible for poor men to remove from one place to another; arbitrary regulation of wages, either by the gilds in the towns or by national councils and parliaments, forbidding the workmen to take the competitive wages that economic conditions forced the employers to pay; combination laws forbidding laborers to combine in their own interest. It is not an attractive picture, but, as far as is possible in a few words, it is a truthful picture of the conditions that existed before the coming of the modern system.

[Sidenote: The wage system not the main cause of present evils]

4. Many continuing limitations on the freedom of the worker are not the results of the wage system or a part of it, but are opposed to its complete workings. The worker's ignorance is a limitation, preventing the choice of an occupation for which he might naturally be fitted. Neglect of children by parents is a limitation, preventing industrial training and the development of qualities that would make it possible for the child to excel. The faults of human nature cannot be attributed to any "system"; and if they are remediable, it is by education and better social opportunity. Trade unions often forbid boys to become apprentices, and forbid the choice of a trade except under conditions so exacting that to many they are impossible. Such limitations are made by the privileged few in their own interest, but they are annoying and opposed to the interests of the many. The typical wage system would be one in which all such hindrances were lacking, in which there were no social or political limitations on free competition except such as would help in educating and training the worker. The wage system should be judged by what it is, not by things directly opposed to its spirit.

§ II. THE WAGE SYSTEM AS IT IS

[Sidenote: Merits and faults of the definite wage payment]

1. Under the wage contract the worker gets in a definite sum at once the market value of his services. Under the wage contract the employer takes the risk as to the future selling price of the product. That he is the one best prepared to assume the risk will be made clearer in the discussion of the employer's function. Wage payment, therefore, is a form of insurance to the workingman; he gets something definite instead of taking chances he is ill prepared to take. Wage payment is a form of credit to the laborer whose labor has not yet produced the distant gratification. The employer advances to the workman the value of the future gratification, discounting it at the prevailing rate of interest. The darker side of the wage bargain is that the "cash nexus," as Carlyle expressed it, is too often the only bond between the parties. When the wages are paid, the employer considers his obligations discharged. There is a lack of fellowship and sympathy in it all. Work should be a bond of communion between men, but as it is, the laborers in some great factories and their employers live in entirely different worlds. The great inequality of their condition makes mutual understanding difficult. They are master and man, "boss" and hireling, not co-workers, each with a worthy part in the noble tasks of industry.

[Sidenote: Strength and weakness of the worker in competition]

2. The wage-earner gets the competitive value of his services, securing in most cases much more than a bare subsistence. At the present time competition is in a large measure active among employed as well as among employers. A believer in the subsistence theory of wages must, under these conditions, expect wages to fall to the starvation level. But according to the law of wages here presented, it is to be expected that wages can and will remain indefinitely above that level, falling or rising as conditions change. The increase in material wealth of itself tends to increase the wages of the workman. The laborer, though without resources and even though not contributing to the increase of capital by saving, thus shares in the benefit of increasing capital. It is true that under some conditions the workman is at a disadvantage in making the wage contract; labor must be applied from day to day or it is lost, and the laborer must work to live. While this does not determine the rate of wages in the long run in any occupation nor to any great extent except among the lowest grades of labor, it does give an advantage for the moment to the employer, and enables him to exercise at times a harsh power over the workmen in his immediate neighborhood. A single workman is thus very often at a disadvantage, but it must not be overlooked that in a large degree the competition for good workmen is effective between employers in different trades and in distant localities.

[Sidenote: Wages as affecting the ambition of the worker]

3. Increase of efficiency due to the sacrifice of parents or to personal exertion, goes to the individual worker. The most essential practical feature in any industrial system is the appeal to the ambition of each man. This appeal is made where a premium is placed on increasing efficiency, by insuring to it a higher return. This result is possible and in large measure is attained under the wage system. Little less important is the appeal to family affection to make possible by its sacrifices each worker's best preparation.

An offsetting disadvantage appears in the loss to the laborer in the decline of his powers. As he gains in wages if he increases in efficiency, so he loses if his strength fails from accident or in the course of years. This loss falls upon him, not, as is sometimes said to have been the case under serfdom or slavery, upon his owner (as if that secured to the slave immunity from suffering). It is true that in general under the wage system the worker has no guarantee against loss of work or, what is equally important, against sudden changes in industry. He may be, and often is, a victim of invention and of changes in machinery or industrial processes, by which the masses of men are the gainers.

[Sidenote: Large liberty of the wage-worker]

4. Liberty of the worker in his choice of work and outside of working hours makes for happiness, character, and progress. Opinion is almost a unit as to the truth of this statement. The present wage system is the freest condition for the mass of men that ever has existed. Their religious, political, and personal convictions, are for the most part inviolate. There is a true but much misused maxim that liberty has its dangers. Freedom means freedom to make mistakes. Intelligence and strong industrial virtues are required to exercise properly a freedom newly acquired. Thus it is the lowest class of labor that reaps the smallest advantage from free conditions, and that suffers most from their misuse.

[Sidenote: Limits to the worker's liberty]

The main evil in the wage system is certainly not that the liberty of the worker is too great, but that it is too small. The sale of labor involves the obeying of orders during certain hours specified in the contract. Here again the evil is greatest in the lowest grades of work, while the great majority of wage-earners are left a large measure of choice in the time and manner of their work. Where labor is severe and without joy to the worker, it appears to be little better than a form of slavery. Contrast the condition of the section hand, cursed and beaten by a brutal foreman, with that of the wage-earner in the locomotive-cab, self-respecting, self-directing, and trusted with the safety of property and lives. The wage system is manifold, it is adaptable. If it holds a portion of the laborers with a harsh hand, it gives to all a wide measure of opportunity, and to most a great degree of independence in their lives. A hasty resort to indiscriminating analogy, as in calling wage-work "slavery," does not further truth or social justice.

§ III. PROGRESS OF THE MASSES UNDER THE WAGE SYSTEM

[Sidenote: The rise of money wages]

1. The nineteenth century was a period of great progress for the masses in America, England, and throughout Europe. There are differences of opinion as to the extent of this progress, the way in which it is to be measured, and the degree to which it is an occasion for congratulation. There is no longer any dispute as to the actual fact that it has taken place. Many lines of evidence converge to confirm this one conclusion. The average money wages in the United States may be represented in 1840 by 87.7, in 1860 by 100, and in 1891 by 161.2. This was the high mark for a time and a decline followed. Again wages rose from 1897 on, and in 1899 had reached 163.2. They have continued to rise since and in 1903 attained the highest point in the history of our country and therefore in the history of the world. Another temporary decline undoubtedly will occur when industrial conditions become less prosperous.

[Sidenote: Changes in real wages]

Real wages, also, the power to purchase goods with labor, are greater than ever before so far as this can be measured in the price of leading commodities. The offsetting loss of the free health-giving pleasures of country life cannot easily be expressed. In England likewise the rise in money wages has been great. In 1860 it is represented by 100, in 1870 by 113, in 1880 by 125, in 1891 by 140, in the intervals some decline occurring. For a century in all civilized lands wages have moved in an ever-rising series of waves. The purchasing power of wages in England increased ninety per cent, in the thirty years between 1860 and 1891. Throughout Europe the same general change is seen, going always hand in hand with new industrial methods and the displacing of the old agricultural system by the wage system. As the hours of labor have at the same time been shortened, the workers have gained doubly.

[Sidenote: Need of a broad explanation of rising wages]

2. This progress is mainly due to the opening up of rich natural resources and to the development of industrial processes. Recognized in some measure by every one, this progress is attributed by different observers to different causes: in America, by many to the protective tariff; in England, by many to the freer trade introduced about 1840; throughout the continent of Europe, to the spread of constitutional government and free institutions; by trade-unions everywhere, to the organization of labor. There is, doubtless, under certain conditions, some portion of truth in each of these claims. But, either separately or altogether, they fall short of a broad, reasonable, and sufficient explanation. The two-fold proposition just presented, the justification for which has been given in preceding chapters, points to a general and adequate cause.

[Sidenote: The gloomy view as to the wage system was mistaken]

Seventy-five years ago it was thought that, with the increase of machinery, of factories, of the concentrated control of wealth, and especially with the wage system, there must go a steady depression in the welfare of the workingman. This idea was connected with the iron law of wages. It was believed by some that, whatever the causes of advancing social income might be, the wage system would rob the wage-earners of all share in progress. In view of the facts, if it cannot now be asserted positively that the wage system is the cause of all the gain, it can be asserted negatively that it is not inconsistent with great progress on the part of the laboring classes. It might be possible to go further and to maintain that the organization of industry, under the wage system and competitive conditions, by its encouragement of enterprise, energy, and economy, has been an indispensable condition in the industrial progress which has in turn made possible the rising wages of labor.

[Sidenote: More workers now in better-paid callings]

3. The increased proportion of workers in the higher occupations means a further rise in the average condition of the masses. A smaller proportion of workers is now engaged in the low-paid industries than fifty years ago, and a correspondingly larger proportion is in the better, or highly paid, industries. Decade by decade the proportion shifts toward the upper part of the scale. Both in America and in England (doubtless also in other countries) more men are now engaged in the higher professions and skilled occupations, a smaller proportion in the lower occupations. This would raise the average of wages even if the wages of particular occupations had not risen.

[Sidenote: The masses gain by general social advance]

4. The diffused advantages of progress mean relatively more to the masses than to the rich. In the olden days the poor man was bound to the spot where he lived, the rich man had his carriage; to-day poor and rich ride side by side in the trolley car. The introduction of these cheap methods of enjoyment means relatively more to the poor. Better medical care, better sanitation, more abundant food, clothing, comfort, free schools, and libraries have all a part in this movement. The enormous possibilities in these lines are just beginning to be realized. The achievements of the last twenty years read like a story from fairy-land. It tells the leveling up of the conditions enjoyed by the common man.

[Sidenote: Better social conditions must grow out of the wage system]

[Sidenote: Improvement in the wage system]

5. Any sound method of improving social conditions must grow out of experience, not break with it. Even if things were on the downward instead of the upward road there would be no excuse for wild speculation. The only rational way is to find what is good in what is, and build upon it. There can be no excuse for suggesting a method from imagination. Projects of social change must be tried by successful experiment, and gradually fitted to present needs. It is in this way that the higher forms of life have developed; it is in this way that social and political institutions have come into being. Things that work successfully first in a small way are worthy of trial on a larger scale. The wage system is a favorite object of attack for radical social reformers. It has many unlovely features and there are many individual cases of hardship. It may well be asked, What method shall be pursued to reform it? Its retention, however, is not inconsistent with very great changes in the present political and economic arrangements. The impersonal economic forces are working for improvement; but further, there is a growth of sentiment, an increase in sympathy, a feeling among men that the "cash nexus" is not the only bond that should unite different classes, and this sympathy is becoming an economic force, softening and improving many of the most unlovely features of the modern wage system.

26. MACHINERY AND LABOR

§ I. EXTENT OF THE USE OF MACHINERY

[Sidenote: Tools, machines, and power]

1. A machine is a mechanical device by which power is applied in an automatically repeated manner, to change the place or form of things. It is not easy, perhaps not important, to distinguish the machine from the tool in every case. Tools are portions of matter, such as bone, wood, iron, which man guides and directs in applying his energy to things. A machine may be used by the foot, but the hand is the great tool-using member. In many cases there is a clearly marked distinction between tool and machine. A simple, single piece that can be taken into the hand, as a spade, a hammer, a knife, is a tool; a combination of wheels, levers, pulleys, etc., is a machine. The simplest machine is but a slight adaptation of the tool, by which power may be applied in an automatically repeated manner. The drag develops into the cart, a simple machine. The spinning-stick, a tool used in ancient times, developed into the Saxon spinning-wheel of the sixteenth century, the form used when America was colonized. The use of power derived from nature, as that of wind and water and steam, while not the essential mark of machines, is the most characteristic feature of their modern development. Hand-machines, such as the hand-press and the type-writer, have had important industrial results, but it is the use of power leading to the concentration of industry and the ownership of machinery by the employers that has the greatest significance in the modern economic problem.

[Sidenote: Machinery brought in an industrial revolution]

2. Machinery of many sorts has long been used, but the "age of machinery" begins with the eighteenth century. Inventions, new machines, and new processes, though not frequent, were not unknown in the Middle Ages; but no one class of machines took possession of a whole field of industry and gave rise to a great economic problem by the displacing of labor. The great industrial changes in the Middle Ages generally grew out of political changes, or of changes of routes of trade whereby large industries were disturbed, or of changes in the use of land through new methods and the bringing into use of land in other places. The industrial changes in England at the end of the eighteenth century on the contrary were due mainly to great mechanical inventions. The development of the textile machines for cotton and wool spinning and weaving mark the beginning of the movement. Here for the first time were inventions in such numbers, of such a nature, and under such conditions, that they were rapidly and widely applied, affecting the lives of a great number of workers. The steam-engine at the same time opened up the long line of mechanical inventions by which wood and iron are shaped and wrought, and the iron industry underwent notable developments. Since that time, have taken place in all Western countries that rapid expansion in the use of machines and those notable changes in industrial organization which distinguish our era from all others.

[Sidenote: Increased use of power]

3. Machinery is applicable in very different degrees to the different processes and industries. Machinery can save much labor in some directions, little or none in others. It is especially adapted to the application of power. In the United States, in 1870, in manufactures alone, two and one third million horse-power were used; in 1900, eleven and one third million, the increase being five-fold. It is said that in the world, in 1870, three and one half million horse-power was furnished by stationary engines, ten millions by locomotives. Probably to-day the total is four-fold as great.

[Sidenote: Machines can best be used in manufactures]

Machinery is applicable with especial advantage to industries that change the form of materials easily transported and widely used. There must be a large output to justify the use of machinery. In 1840 a man's work in spinning cotton was three hundred and twenty times as effective as in 1769, in 1855 it was seven hundred times; and though the rate of improvement is diminishing, to-day the productivity of such labor is still greater. Similar examples are found in the manufacture of shoes, and in all varieties of wood- and iron-work. Machinery is most applicable where there is a compact plant; not so easily where the power has to be distributed over a wide area, unless a special track can be provided.

[Sidenote: Not to so great an extent in agriculture]

Machinery, therefore, has affected manufactures much more immediately and greatly than it has agriculture. It has not as yet, for example, been found practicable to apply steam to ploughing to any great extent. As the profitable use of most farm machinery requires a level surface and a large area given to a single crop, it cannot be used as well east of the Alleghany Mountains as in the Mississippi Valley, and it is still uneconomical in large portions of the civilized world. Despite this difficulty the methods of the farmer of to-day contrast strongly with those of one hundred or fifty years ago. Planters and seeders, reapers, harvesters, corn-shellers, hay-loaders, automatic unloading-forks, elevators, water-power-, steam-, and gasoline-engines allow great economies. The labor needed to produce food for one hundred people is a fraction of what it was one hundred years ago. In many other industries machines are usable only in a slight measure, indirectly, or not at all. They are of the least assistance in the personal services, and in the work of the thinker, the teacher, the speaker, and the artist.

§ II. EFFECT OF MACHINERY ON THE WELFARE AND WAGES OF THE MASSES

[Sidenote: Evil of sudden introduction of machinery]

1. The immediate effect of improved machinery, if suddenly introduced, is almost always to throw some men out of employment. Any sudden change in industry injures men who have become adapted to the work that is affected. A well-mastered trade, a wage-earning though intangible possession, may be made suddenly valueless. Men cannot quickly change their methods of working or their place of work. This is as true of change brought about by new trade routes or by scientific discoveries (where machinery does not enter in) as in the case of labor-saving machines. If machines displace labor rapidly, men who cannot adjust themselves to the new conditions suffer, and there are always some who cannot adjust themselves, always some who suffer. It is rarely possible for a man past middle life to shift over into a new trade where his efficiency will be as great and his pay as high as in the old. New methods of puddling iron sent many old men into the poorhouses of Pennsylvania only a few years ago. Even where the total employment increases, the individual sometimes suffers. The increased demand resulting from the cheapening of a product may call for more workers than were employed before the new machinery came in, and yet some of the former workmen may be thrown out of employment. The introduction of the linotype is said to have displaced a large number of hand type-setters, but to have increased greatly the amount of printing. As the machines are expensive and cannot be worked properly by men not highly expert, men past thirty-five years of age have not been allowed to learn their use.

[Sidenote: Loss falls on the less efficient workers]

The least efficient men in any trade always suffer most. The change crushes hardest the man at the margin of employment. The more skilled workman can hasten his pace and still earn a living wage in competition with a machine, while the less skilled can but drop out entirely, innocent victims of an economic change, sacrifices to the cause of industrial progress. Happily such pathetic incidents are relatively not numerous. Most machinery is introduced in commercial centers, and gradually spreads to other factories in such a way that most men can adapt themselves to the change. The effect of machinery must not be judged by the extreme cases. It was found that there were more hand-looms in use in England in 1850 than fifty years before, though in the meantime power-looms had displaced the hand-looms in all the great factories.

[Sidenote: Error of the "lump of labor" notion]

2. After time for adjustment, the total sum of employment is as great as before, but the labor is differently distributed. The "lump of labor" idea, as it is called, is widely held, especially among workingmen. The notion is that there is exactly so much labor predetermined to be done; therefore, if machines are introduced, there is that much less for men to do. The logical conclusion easily drawn is that every machine reduces wages. Few, however, would go on to the further conclusion that in the aggregate the existing machinery, like an enormous vampire, is sucking the life-blood of the working-people,--though traces of such a notion frequently appear.

[Sidenote: Effect of machinery varies in different industries]

If extreme examples are taken, it may be made to appear either that an increase or that a decrease of employment results from machinery. Industries grade off from those that are capable of developing a greater and greater demand, to those at the other extreme that are capable of a very slight increase, as a result of a lowering of the price. There seems to be practically no limit to the consumption of textiles, provided their price falls; the demand for dress alone is indefinitely expansible. Queen Elizabeth, who had a different dress for every day in the year, has many potential imitators. There is a constant increase relatively, as well as absolutely, in the number employed in transportation, as each census shows; there are more railroad men relatively than there were stage-drivers and teamsters before the day of railroads. The number of people now engaged in printing books and papers is larger by far than in the days when all the books of the world were written by the old monks in their cloisters. The proportion of workers in agriculture, on the other hand, is less than it formerly was. In part this is a change in appearance only, for the farmer once made a large part of his tools which are now made by workers employed in manufactures, yet who in a very real way are aiding in agriculture. In part the change is, however, the effect of the use of machinery and other improvements in agricultural processes. The amount of raw-food products required for each hundred persons is quite inelastic. As it becomes possible to expend more for food, the change is made in quality, variety, flavor, rather than in quantity. The greater part of the saving in the cost of food is, however, expended in other products, and the labor saved in agriculture finds employment in supplying these rising wants. In other cases also, new industries are made possible as machines liberate energy from the production of the more necessary goods. At each census it is necessary to change the schedule of occupations, because men have adopted callings unknown before.

[Sidenote: Abnormal effect of the new machinery in England]

3. In some cases the introduction of new machines injures particular workmen. The only reason for the use of machinery is to improve the quality or to lower the price of products. If the workers can do nothing but blindly pursue the same tasks, it is to be expected that the wages of hand-labor will fall in a particular trade into which machinery is suddenly introduced. When, as sometimes happens, employers introduce machines for the immediate purpose of breaking a strike, the workmen are convinced that machinery is the enemy of labor.

Because the extensive introduction of machinery in England was at first accompanied by the unhappy result of a lengthening of the hours of labor in factories, this result was deemed to be necessary in all other cases. It was in fact quite abnormal, and has not been seen elsewhere. The owners of factories wished to keep their machines employed as many hours as possible; the laboring classes of England, being at the same time demoralized and depressed by industrial and social influences that had no logical connection with machinery, had no power to resist this movement. In all other countries of Europe and in America, where the introduction of machinery has been more gradual and normal, it has been followed immediately by a shortening of working hours, as eventually it was in England also.

[Sidenote: Higher wages logically result from the use of machinery]

4. Indeed, the economic effect of improved appliances is logically and inevitably to raise wages. It has been shown above, in the discussion of wages, that if the efficiency of machines increases faster than does the number of workers who use them, the marginal application of labor stops at the higher uses or services of agents and is not forced to the lower. The more perfect the economic environment, the higher the incomes even of those who own no part of the machinery. A part of this benefit may appear in the form of higher money wages received, a part in the form of the lower price of things bought. Real wages are the essential thing, and as a consumer the laborer shares with every other member of society in the benefits of improved machinery. The benefits resulting from greater abundance are diffused, and as goods are brought from the high, or scarcity, end of the scale of value down toward the level of free goods, everybody gains by the abundance and cheapness.

[Sidenote: Some grades gain more than others]

The general, or average, gain is not to be judged by comparing the conditions of the lowest grade of society with those of fifty years ago, for while that grade may have been bettered only a little, it has been possible for large numbers to rise to higher grades because of the use of machinery. The physical tasks are to-day much lighter than ever before, and a larger proportion of society is engaged in industries that require skill and thought rather than physical labor. That portion of the work is being more and more shifted upon machines. It is important, though, to distinguish between classes of workers in judging of the benefits and evils of machines. A machine is "an iron man," it has been said, and comes into competition with other men to lower their wages by outworking and underbidding them. But this iron man can do only automatic tasks; it is not capable of exercising judgment. Every intelligent laborer who can adjust, adapt, fit himself for more intelligent action will rise above the machine and profit by its presence. But the crude physical labor which can compete only on the plane of automatic machines, must find its field of employment more and more hedged in. If the wages of unskilled labor are not depressed, it is because of the enterprise of others who rise to more skilled employments and thus reduce the competitors of the lowest rank.

[Sidenote: The growth of factories]

5. The early effects of the factory system on the health, intelligence, and morals of the workers often have been bad; but not necessarily the abiding effects. Some kinds of machines can be more profitably used when they are grouped in great factories, and, where this is common, it is spoken of as the factory system. In the ideal modern factory (realized in few cases) each smaller machine is a part of a larger organization of machinery, so perfect that the material goes in at one end of the building and out at the other without the loss of a single motion. Factories compel great numbers of laborers to live near each other and to work together. The sudden crowding together of people into new social relations is usually bad for morals. Men are moral under the eyes of their neighbors, acquaintances, and families; habits become adjusted to right standards, and the temptations in new conditions are always great. Until of late, engineering science has not been able to deal with the problems that arise where population is densely crowded, and the early factories with their surroundings were most unsanitary. Under the degrading conditions that resulted in some places, especially in England, the effect of machinery on the intelligence of the workers was bad. Whether this is its natural result is debatable, but the factory worker in general does not appear to be less intelligent than the agricultural worker. The alertness of the city dweller is due doubtless to social contact more than to the immediate work he does. This work may or may not be less thought-awakening than work with simple tools. There is a general improvement along all the lines of intelligence, morals, and health. The conditions in the cities as regards health and morals are approaching those of agricultural communities. While many factory districts are forlorn, there may be seen around many factories more happy conditions, better buildings, better sanitation, increased leisure for workers, workmen's clubs, educational agencies, and many other evidences of civic and social progress.

[Sidenote: Problems of large industry]

6. The great social consequences flowing from the concentration of industry and wealth are the most serious problems in the relation of machinery to labor. The ownership of tools was widely diffused in medieval times. It is not yet evident how many can own a share in great factories, but the control drifts into few hands. It is not yet clear what social effects great corporations will have on our democratic institutions. Many problems of large industry remain to be solved in the near future. The question in the old form, as to the effect of machinery on labor, is no longer open. It has been clearly answered by experience and explained by theory: the economic effect of machinery is to lift the productiveness and efficiency of the average man. The benefits are unequally distributed, but nearly all share in them to some degree. The question which the future will have to answer is, What will be the social and political effects of the great fortunes that have been made possible by the enormous development of machinery?

27. TRADE-UNIONS

§ I. THE OBJECTS OF TRADE-UNIONS

[Sidenote: Definition and purposes of trade-unions]

1. A trade-union is an association of wage-workers for purposes of mutual information, mutual help, and for the raising of wages. The term trade-union is used in a general sense both of combinations of workers in the same trade, and of men in different trades, though usually the latter are called labor-unions. The "Knights of Labor" is a good example of the labor-union, the "American Federation of Labor" of a combination of trade-unions. The Knights of Labor is composed of local branches to which workers of every class except lawyers and saloon-keepers are admitted. The Federation of Labor, however, is composed of chapters, or lodges, that are homogeneous, all the men of each lodge being in the same trade.

The definition given is broad enough to include the various degrees of help given and the various methods adopted by trade-unions to accomplish their objects. Trade-unions are mutual-benefit associations: insurance against accident, sickness, death, or lack of employment, forms an important part, and in some cases almost the whole of their work. All unions in a measure serve their members as employment bureaus, while in some unions this is a most important feature. Through trade-papers, correspondence, and personal meetings, information is exchanged regarding trade conditions, and great mutual service is thus rendered. But a great deal of the help given is in the more impersonal economic ways: help to get from the employers better wages, to secure shorter hours, to improve in various ways the conditions of employment.

[Sidenote: Lack of personal touch between employers and workmen]

2. The organization of workers has resulted from the separation of the economic and personal interests of employers and workmen. The control of industry has become more concentrated during the age of machinery, and this has reduced the feeling of economic unity among the different ranks of industry. There is now to the average workman no possibility of becoming a master, an employer. The largeness of industry forbids, moreover, the meeting and personal acquaintance of employer and workman which were before possible. Misunderstandings grow when men cannot talk over their differences. The social chasm has widened between the workmen and the responsible director of industry. As a result of these changes, the attitude of the employer very often has become that of the buyer of labor as a mere ware. He has with the mass of his employees no personal relations whatever. Under these conditions, when the employer feels the presence of competition, he is more likely to force the lowest wage that is possible. It is not unusual for the immediate direction of factories to be intrusted to paid managers, who are responsible to the stockholders and whose work is judged only by the dividends they succeed in earning. Many examples might be found where the managers or the resident owners have wished to pursue a more liberal policy than the absentee shareholders would permit.

[Sidenote: Lack of personal acquaintance among workers]

3. The need of organization of labor has grown with the growth of factories and with the loss of personal touch among the workers. This is another aspect of the point just mentioned. The smaller the number of employers, the easier is it by an understanding to suppress competition on their side. If there is only one factory of a kind in a town or city, the employer is able to drive a harder bargain with the worker. Especially in times of industrial depression is a change of employment difficult for the laborer; it involves much risk, and loss of time and money in moving. In the long run competition must be felt even in such cases. The unfair employer will find his workmen drifting away, his force reduced in number and quality, and his evil reputation going abroad among workmen. But there is a great deal of friction in this adjustment and the loss falls largely upon the workman. In a large industry, especially, the workers have no personal acquaintance with each other, nothing to give them a sense of unity and power. In the old-fashioned shop, with its close association and its interchange of views, could grow up a strong public opinion; but in the wilderness of a modern factory the worker may be unknown in name and character to the man who touches elbows with him. Moreover, in America differences in nationality and in speech among immigrant workers is often an effective factor in preventing the assertion of their interests. There is an analogy (though it is only an analogy) between these conditions and the political conditions that have led pure democracies to give way to representative governments. So long as a community is small and men know each other personally, there may be popular government, but when the number becomes larger the only way in which public opinion can be concentrated and made effective is by delegating the functions of government to representatives.

[Sidenote: Main objects of trade-unions to-day]

4. The main objects of labor-unions to-day are to improve conditions in their working places, to maintain or increase wages, and to shorten working hours. Better conditions of safety and sanitation in their work were not the first thought of the unions. The workers, as a result of habit and ignorance, were strangely unconcerned about this matter. Reforms in this direction at the outset had to come largely from sympathetic observers. But since better ideals have been developed, organized laborers strive to improve the sanitary, moral, and other conditions in the places of work. Their main object, however, was for a long time to raise wages, or to resist any decrease. Shorter hours have been a prime object of recent years, and almost coördinate with that of higher wages. The eight-hour movement has declined somewhat of late, but a few years ago it seemed possible that the eight-hour day would become the rule. This aim has never been lost sight of, however, and now and then another step is taken toward it. Labor leaders have repeatedly asserted in recent years, when the two demands have been made together, that shorter hours were more desirable than increased wages.

§ II. THE METHODS OF TRADE-UNIONS

[Sidenote: Organized labor seeks to prevent competition among workers]

1. The union's first aim is to get control of all the labor force in the market, and to minimize competition among workers. Every labor federation aims to extend its control to every branch of its trade. A sense of wrong is one of the strongest forces to bring the workers into the organization. The appeal to a common interest is effective in times of great grievance, as it was effective in the dangerous times of the American Revolution, though failing during the Confederation. The unwilling are first persuaded, then coerced by threats, by petty persecutions, by the most cruel of all peaceful weapons, social ostracism, and finally by personal violence. The "public opinion" and class feeling fostered among workers by their organization are analogous to the sense of patriotism and loyalty in the country at large, and at times displace it, as is seen in the opposition to the militia and to the maintenance of public order at times of strikes. The individual who declines to enter the union is denounced as a traitor and made to feel the scorn of his associates. When all these measures fail, pressure is brought to bear upon the employer to get him to force the unwilling workers into the union.

[Sidenote: The union seeks to secure the full competitive wage]

[Sidenote: And as much more as possible]

2. Its next aim is to use collective in the place of individual bargaining, to force as much as the competitive wage, and more if possible. The term collective bargaining has been much used to describe bargaining between a group of labor leaders, the delegated representatives of the workingmen, and a group of employers or directors. It is sometimes claimed that all the trade-union seeks is to put the workman on an equality with the employer in bargaining, enabling him to get all he would if competition were free on both sides. It is said that organized labor simply prevents the employer from following the maxim of Napoleon to "divide and conquer," from meeting his employees one by one and forcing his own terms upon them. But the most effective argument in organizing the trade-union is that it forces a higher wage, more than the market would warrant. It is sometimes assumed by labor leaders that competitive wages would be very low, almost starvation wages, and anything above that level is credited to the work of the union; while in other cases where the wages are already large, the purpose frankly avowed is to limit the labor supply in the particular trade and to force a monopoly wage by any means possible. One's opinion of trade-unions is likely to differ according as they work in one or the other of these ways. The impartial onlooker sympathizes with the efforts of the trade-unions in so far as they serve merely to put the workers on an equality with the employers in bargaining. The public wants to see "fair play," and up to a certain point the union is merely a device to get fair play. But if the union is a device to defeat competition, to force artificially high wages, it will be judged differently. The public readily sees that if the unions force more than a fair and open market affords, it is rarely at the expense of the employer; that in the long run it is at the expense of the purchasing public itself, including the unprivileged workmen shut out from the monopoly of labor.

[Sidenote: The issue of the closed shop vs. the open shop]

3. In order to accomplish their ends, the trade-unions seek to control their employers' business in various ways. They demand, first, that no non-union men shall be employed even at union wages; they demand that the employer shall help them to force his employees into the unions. In this very usual demand for the "closed shop" or "union shop" the public can see very little justice. On this point, nearly always, unions forfeit in a strike the sympathy of the public; yet the unions assert that it is almost absolutely necessary to gain this point in order to carry out their objects. If a union and a non-union man work side by side there are many ways in which the employer may make the union man suffer. If business slackens, it is likely to be the union man that is discharged; if any preference is given, it is to the non-union man. Certainly all will agree that if the unions are to get the strength to enforce all their demands it is essential that they make good this claim which leaves the employer almost helpless. Yet it certainly is not essential to the accomplishing of valuable services for the members of the union. The educational and mutual-benefit features are attained without this means; and much experience shows that, if their cause is strong, the organized men can carry with them a large proportion of the workers and the sympathy of the public in a contest for higher wages. It never has seemed to any considerable portion of the public any more desirable that organized labor through its officers should be able to dictate to employees, than that employers should crush the workmen. It is by just this assumption that union advocates beg the question of the "union shop."

[Sidenote: Other limitations put upon industry by unions]

Further, the unions direct and control the employment of labor, often limit the number of apprentices in a trade, and assume to determine who shall enjoy the privilege of learning it. They limit the output, fix the maximum amount, and forbid the use of labor-saving machinery. Whenever the unions are charged with these acts, labor leaders either deny the facts or avoid giving a direct answer, but there is no doubt that the charge is true in many ways and in many cases. The requirement that each special kind of work shall be controlled by a special trade, and disputes between rival trades, for which their jealousies are responsible, give rise to great annoyance, expense, and loss to employers and to the entire public.

[Sidenote: The strike and the boycott]

4. The strike is a threat and a mode of attack to enforce the demands of the union. To most newly organized laborers the union appeals mainly as an instrument for striking, for threatening the employer or for making him suffer. When a new union is formed, it is nearly always dedicated by a strike, which is the simultaneous stopping of work by a number of workers. A strike is intended to force the employer to grant the wages and conditions demanded. Its effectiveness lies in the injury which it occasions or threatens in the stopping of machinery, the ruin of material, the loss of custom, and the failure to complete contracts undertaken. Its success being dependent on the inability of the employer to fill the places of the strikers, their energies are bent on persuading or coercing other workers from taking employment. There are many ways of coercing workers without personal violence. Public opinion does much, and probably the severest of all coercive measures is the social ostracism of the worker. What may be called the endless-chain boycott is an excommunication, without measure or limit, of the non-union worker and of every one in any way befriending him or the employer. So far as in their power lies, the enraged strikers dissolve the very bonds of society, brother casts off brother, and mother disowns son. The unhappy conditions in the coal regions in 1902 rivaled the tragedies of civil war. A reasonable use of the boycott, refusal to maintain social relations with the person who offends one, is doubtless a part of personal liberty; but the boycott, as experience shows, has moral limits, and it should have strict legal limits. Its use beyond the moderate limit of the first degree of personal relations is antisocial to the degree of criminality, whether it be used as the weapon of organized workers or of organized wealth.

[Sidenote: Violence in strikes is mob law]

When peaceable means fail, often there is a recourse to violence both against the employer and his property and against the non-union men. The evils of violence in strikes often are tardily recognized by the public, whose sympathy up to a certain point is with the striker as "the under dog." It is slow to realize that strike violence is mob-law. Whenever men of one group assume the right to coerce forcibly and to wreak their hatred against one of their fellow-workers, it is a blow at political liberty. No free society can safely go the first step in permitting one group of men to usurp control over others in this way.

[Sidenote: Costliness of strikes]

5. The great losses caused by strikes are the penalty of an unsolved industrial problem. The losses to workers in wages, to employers and to investors in income and property, and to the public in interruption of business, aggregate an enormous sum. It is, however, impossible to estimate it at all exactly, as the losses are in many cases indirect and intangible. The strikers are concerned not with the balance of total losses and total gains to society as a whole, but with the net gain that in the long run accrues to them. It is true that there are indirect gains not easily calculable, as the advance of wages made to avoid a strike while the lesson of the consequences is still fresh. Opinion among workingmen is not a unit as to the value of strikes. A few years ago it seemed safe to say that strikes were declining as compared with the period of the early eighties. It is probably true, as is often said, that as laborers become educated they put less faith in strikes. The epidemic of labor troubles, marking the years from 1899 to 1903, gave no evidence of a decrease in the use of strikes, yet many of these were due to the recent organization in various trades. The coal strike of 1902, though doubtless due to real grievances, was opposed by the officers of the union, an unusually capable set of men, but the more violent and discordant elements overruled the more pacific counsels. The public is perhaps as favorable as it has ever been to the cause of labor, but it appears to have less patience with strikes than it had fifteen years ago, and strikes usually fail if not backed by public opinion. The public has not as yet thought out consistent conclusions on the question of the rights of the union. It is just now much impressed with the value of arbitration. As experience destroys the unsound sentiments, and divides the wise from the unwise measures, a peaceable solution of industrial differences must and will be found.

§ III. COMBINATION AND WAGES

[Sidenote: Wages are raised by a labor monopoly]

1. Wages in particular industries often are maintained above the competitive rate. The older economic writers were somewhat unsympathetic with trade-unions, and were even inclined to deny that organization could be helpful in any way in raising wages. This view, it must now be recognized, was mistaken, and overlooked the hindrances to competition and the effective economic forces that organization can bring into play. The sympathies of most men favor the wage-earner so strongly that they hesitate to express an opinion in any way unfavorable to his efforts to raise wages. But the view of the economic theorist as to the services of the union cannot be as roseate as is that of the union labor leader. The general proposition, however, is applicable, that wherever it is possible to limit supply, prices may be raised. If men fitted to do a certain work are not permitted to do it, labor in the special industry becomes more scarce and consequently more highly valued. This involves the result that some men are forced to remain where they get lower wages than they could earn if free to act. The temporary need of the employer may enable the union to force from him a division of his profits. If the trade-union watches its opportunity and takes occasion to strike when a failure to fill orders would cause him great loss, it may compel him to pay for a time more than the normal value of the labor. It may well be doubted whether such action on the part of labor is generous, fair, honest, or in the long run wise; but that it may be immediately effective cannot be denied. By the principle of complementary goods an essential kind of labor can be given an artificially high value, if its supply can be controlled. If only the labor that is ready and willing to come in to take the place of the strikers can for a time be kept out, wages may be fixed practically according to monopoly principles, later to be discussed in connection with capitalistic organization.

[Sidenote: Exaggerated claims made for trade-unions]

2. Trade-unions can, in various but limited ways, set in motion economic forces to increase the productiveness of labor. It is difficult to take a moderate view of trade-unions; it is easier to go to one extreme or the other. In a book by Trant, reprinted from the English edition and circulated by the American Federation of Labor as representing its theory and claims, all the advances in wages that have been made are said to be due to the trade-unions. This claim is believed by many besides the members of trade-unions. The thought is sometimes expressed even by social students that but for the trade-unions wages in America would be the same as in 1850. Many well-known facts should cause such an opinion to be accepted with hesitation, to say the least. Only about one tenth of the workers in England are unionists and of the twenty-two million workers in the United States, far less than ten per cent. are organized. Can it be maintained that one tenth of the labor supply fixes the value of all? In many lines where labor is not organized, as in teaching, clerical positions, professional and domestic service, wages have risen even more than in organized trade. The evidence advanced to support the extreme claim is that wages are higher in some organized trades than in other unorganized trades requiring the same grade of laborers. Trant says that "where there are no unions wages should be lower. This is exactly the case"; and he quotes: "Wherever we find union principles ignored, a low rate of wages prevails and the reverse where organization is perfect." But he later explains in part this difference: "The union men are the best workmen and often employers pay a man more than union wages. This is not surprising as no man can be a union carpenter unless he be in good health, have worked a certain number of years at his trade, be a good workman, of steady habits and good moral character."

[Sidenote: Certain unquestionable reasons why union wages should be higher]

If this be true, it is in accordance with strict competitive principles that, as the elite of the trade, they should get higher wages than those outside. Moreover the unions exist mainly in the more populated places where cost of living, wages, and all prices range higher than in the towns. A much higher standard of work prevails in the cities, both among union and non-union men, and the old men and the inefficient drift away to the smaller towns and the places where wages are lower. Many of the differences are explicable without taking any account of the union. So far as unions tend toward intelligence, education, sobriety, efficiency, fuller and fairer competition, they are economic factors in all branches of industry, and it cannot be doubted that they do work in some measure in all these ways. So far also as they strengthen the bargaining power of the laborers, or as they can enforce a monopoly of labor in a particular trade and locality, they can secure the full competitive or even a monopoly price.

[Sidenote: Labor organizations a minor factor in lifting the mass of the workers]

[Sidenote: The chief factors determining wages]

3. Wages viewed in general industry, and in the long run, are determined mainly by impersonal economic forces. That implies the converse, that they are not determined mainly by the trade-unions. This statement, in fact, is admitted in calmer moments by the extreme partisans of the unions. Even the book before quoted says somewhat vaguely that "it is an error to think that the trade-union seeks to determine the rate of wages. It cannot do that. It can do no more than affect them." Again it says: "Capital is increasing faster than population.... It seems therefore merely in obedience to natural laws that wages should rise." Men can easily see personal and immediate results. They cannot follow out the impersonal and ultimate workings of economic forces. The leaders make exaggerated claims; laborers believe them and pay their dues more readily; the public believes them and is the more inclined to pardon the excesses of so important an institution. That wages in a number of special trades are raised in a considerable degree cannot be questioned. The open or secret use of violence and other antisocial forces make much of this boasted service to some of the workers, an injury to others, and an occasion of reproach from the citizen who condemns the spirit of lawlessness thus encouraged. The chief factors tending to raise the general standard of wages are the productiveness of industry, peace, order, and security to wealth, honesty in man and master, in lawmaker and in judge, the efficiency and intelligence of the workers, and an earnest effort on their part to get the share that competition would accord them. Chiefly, though not exclusively, because of their bearing on this last factor, trade-unions have a useful, even though subordinate, part in the regulating of wages over the whole field of employment.

DIVISION B--ENTERPRISE AND PROFITS

28. PRODUCTION AND THE COMBINATION OF THE FACTORS

§ I. THE NATURE OF PRODUCTION

[Sidenote: Man's active intervention in production here to be studied]

1. The aim of industrial effort is the increase of the quantity and quality of scarce goods; this is economic production. The thought has become familiar to the student that the supply of economic resources of whatever sort is limited, while the wants are practically unlimited. A supply of consumption goods meets a perennial stream of wants, the result being that value is attributed to things. The aim of production is to add to scarce things, to make the supply of goods as large as possible. There is occasion here to recall the thought of the two aspects of production noticed in Chapter 24. Man's part in production is passive when goods come into existence without his effort. One can imagine the indolent savage of the tropics, lying under the banana-tree, letting the fruit drop into his mouth. One can conceive of a tribe living upon manna, where every day the people awoke to discover a certain amount of food provided to each person's hand. Though no effort could increase that amount, still, if the food differed in flavor and the better qualities were rare, value would come into existence and exchange would arise. Now there is something very analogous to that in daily experience. There are some goods which effort can do little to, increase. Usually, however, there is a possibility of change and adaptation to make them better suited to needs, and there is required the use of intelligence to choose among the goods and to employ them in the best way. Further, man can intervene and direct the course of industry; he does not merely gather what is provided. It is this active intervention and effort that is here to be considered.

[Sidenote: The four essential characteristics of value]

2. To have value, a thing must be of the right stuff, in the right form, at the right time, and at the right place to gratify wants. A distinction is sometimes made between elemental, form, time, and place value. It is a mistake to say that the value of anything is due to any one of these features, for to have value all must be united in a single thing. But the distinction is useful in emphasizing the missing characteristics, which if supplied, cause value to emerge. Ice may be considered to have form value when produced artificially by a machine, time value when stored from winter to summer, and place value when brought from the north to the south. But not less essential is the psychological condition of a hungry and thirsty population ready to consume the ice. Any act or agent is said to be productive which works in any one of these respects: puts things in better form, or in a more fitting place, or provides them at a more fitting time to serve human wants.

[Sidenote: Economic vs. technical changes in goods]

3. Economic production (in contrast with technical or merely formal production) is such a change in goods as is attended by an increase in value. It is often well to contrast form, appearance, imitation, with the thing itself, the reality. Men sometimes go through the forms of study when their eyes and thoughts are wandering; through the form of getting a college education when they are simply having a good time. Likewise in production there is the form and the reality. The young lady just out of boarding-school rarely produces a masterpiece with the tubes and brushes that Raphael might have used. The justification for amateur work is to be found in the doing and not in the market value of the result. Blue rosebuds, painted with loving if unskilled touch on red velvet slippers, may bloom into a romance and happiness; but to the economist this appears to be a consumption of good pigment for amusement, not a creation of value. The difference between the form and value of productive effort becomes, in the study of business organization, a most essential question. The significance of leadership and control of industry is found in this fact that economic goods may be united to produce results having either a less or a greater value than the materials that are used.

[Sidenote: Acquisition vs. social production]

4. Individual acquisition may be contrasted with social production in cases where the individual increases his wealth at the expense of others, without adding to value. Most economic efforts increase the income of the individual and the income of society at the same time. The fruits of the field and the uses of machines are net additions to current income; they are not merely subtracted from the income of one and added to that of another. The increase of products by labor may depress somewhat the exchange value of competing labor, but the general welfare is furthered by the greater abundance. With very slight qualification it is true that in these cases the good of each is the good of all. But in some forms of human effort, social and individual interests clash. When two men bet, one gains and the other loses. The gambler's gain is a loss not only directly to his beaten opponent but indirectly to society. Certain forms of speculation approach dangerously near to the appropriation of the goods of others, and others become outright stealing, or cheating so nearly like stealing that it would be treated as a crime if discovered. But many a man prowls along the border-line of crime all his life and succeeds in making large gains without falling into the clutches of the law. Cheating that can be detected, and outright stealing, are prohibited by the law not because the burglar is an idler; he loses sleep; he has his trials too. The pursuit of burglary requires courage, effort, and ingenuity, but society does not reward these as virtues nor recognize as production the transfer of wealth from the bank-vault to the pocket of the burglar. It is the aim of social institutions to harmonize individual and social interests in the pursuit of wealth, to force men into lines of action where individual acquisition adds to the sum of social utilities. But there are many marginal cases where human justice discriminates only in a bungling way, and many controverted questions arise at the meeting-point of ethics, economics, and law.

[Sidenote: Industries are socially more or less productive]

5. In this sense, productive industries may be distinguished from unproductive ones. The old distinction between productive and unproductive labor rested on the idea that production must be embodied in material and lasting form. We have rejected this for the thought that the tests of production are to be found in feeling, not in outward things. The distinction, therefore, between productive and unproductive labor must now be of a very different kind. Viewed from the social standpoint, the efforts of men may be seen to be directed along more or less productive lines. Enterprise and effort shade off from the more to the less productive, from the extreme where the value is a net addition to wealth, through other cases where one's gain is partly at the cost of others, to fraud and crime where there is merely a transfer of ownership.

§ II. COMBINATION OF THE FACTORS

[Sidenote: The factors of production defined]

1. The various parts, materials, and agents that unite to form products are called the factors of production. In a general sense every separate thing that enters into industry is a factor; as, in agriculture, for example, the seed, plows, fields, fences, barns, cattle, labor. But usually in economic discussion, these numerous factors are grouped in large classes. The main factors are two, variously named as man and nature, or labor and material agents, or humanity and wealth. Rejecting, as we have, the old view as to the nature of consumption goods and as to the nature and possibility of the distinction between "land" and artificial capital, we class under wealth all material economic agents whatsoever. The discussion of labor and wages has broadly laid down the principles that apply to the value of human effort, but the factor of directing energy presents in modern society so many important features that it calls for special and fuller consideration.

[Sidenote: Progressive stages of control over natural conditions]

2. The economic progress of society has been marked by decreasing dependence on the bounties and chances of nature and by increasing control of natural forces by man. Various stages of progress in human history have been recognized. First is the stage of appropriation--the stage of hunting, or of fishing, or of gathering fruits. Man in this stage is still an animal in his economic methods, not guiding and controlling nature, but merely gathering what nature chances to bring forth. The limitations to man's powers in this stage are marked. There is excess of supply and waste at one season, scarcity and great suffering at another. With such crude utilization of the bounties of nature, a vast area will support but a small population. When sheep and cattle have been domesticated, and where there is a large area for grazing, industry rises to the pastoral stage. While still dependent on nature's bounties for the feeding of his cattle, man is hourly intervening to increase, regulate, and improve the supply of food and materials. Famines are more rare, economic welfare is greater, a greater population is nourished on the same area. The agricultural stage begins whenever man plants seeds, trims, tends, and increases by his care the supply of vegetable food. This is a still greater intervention in the course of nature. Man anticipates the future, directs forces, and groups materials to his purpose of getting a regular food-supply. He is thus himself forced into settled life, begins hand-production, and makes the first steps in commerce. Then gradually comes the industrial stage, in which control over nature grows, supplies increase, machinery and motive forces are utilized, and humanity is in the full tide of industrial development. These are not sharply marked changes, but throughout all there is a growth of security, of certainty, and of productivity. With man's increasing power and foresight, chance is lessened, for directing energy takes its place.

[Sidenote: Increasing importance of skilled organization and direction]

[Sidenote: The source of American enterprise]

3. For a high efficiency of production, as a whole, conditions must favor the best organization and direction of industry. Industry is dependent primarily upon natural resources. Climate, rainfall, iron deposits, fuel, supply of wood or coal, predetermine in large measure the limits within, and the direction in which, the industry of any community can move. The progress of production depends also on an increasing efficiency of labor as embodied in individual men, and upon social and political conditions making possible an increase of capital. But--a condition as important as any of these--production is dependent also on a wise combination of the factors. Social, political, and economic conditions must be such as to call forth the factor of direction and control of industry, to make possible industrial progress. This is one of the greatest sources of America's superiority to-day. It has been strikingly said that it is now no longer "young America and old Europe," but "old America and young Europe." America is older in industrial experience; Europe, with undeveloped resources, awaits the touch of American methods and machinery. There are dynamic forces in American society not present in equal degree in any other. It is therefore not alone the great resources of coal and iron,--equal resources may be found in unexplored parts of the world,--it is the dynamic social forces, invention, enterprise, and organization, which have brought America to the forefront in industry. Her natural resources have thus yielded an incentive and a premium to enterprise as a sort of by-product. Absence of caste, political liberty, the democracy following the spread of the frontier, have not made it possible for every one to succeed, but they have made it possible, as nowhere else in the world, for real ability to scale the barriers of birth, poverty, and hardship. A conservative population never can equal a progressive population in industrial efficiency. It has been remarked that America has little to fear from Oriental competition so long as the avenues of education and enterprise are open to her young men, insuring her the highest capacity in the organization and direction of industry.

[Sidenote: Growing specialization of industry]

4. A high efficiency of industry is dependent on many social causes making possible a great specialization. It was said in another connection that division of labor is dependent upon the size of the market. With a large population massed at one spot, so that the demand for even the less important products is large, there may be a high specialization of industry. An increase of transportation, such as railways and telegraphs, is equivalent for many economic purposes to growth of population on one spot. In colonial days it took ten days to go from Boston to Philadelphia, and two weeks to go to Washington. San Francisco is now for many economic purposes but one fourth as far from Boston as Washington was at that time. California and the eastern states are distant only thirty minutes by telegraph and three days and a fraction by railroad, and are thus in many respects in the same market. The great development during the past century in the means of communication and of carriage has made possible, as never before, the massing of population to secure the advantages of division of labor in most lines, without meeting the hitherto insurmountable difficulty in the securing of food for such large numbers in a limited space. The population draws its food from the whole vast area; whereas it is massed at the points more favorable for other products and can make use of the most highly specialized machinery. These several conditions thus have favored the growth of large industry under a single control and direction, on a scale never before approached. These changes have brought in their train social problems connected with the concentration of economic power. It remains to be seen whether the unquestioned economies of this new organization can be retained and improved while it is divested of its evils.

[Sidenote: Growing importance of directive ability]

5. With the growing division of labor, grows the need of the highest ability for the directing of industry. Ability may be judged by various standards. From one point of view, the scientific mind, grouping facts in the cold light of reason to arrive at truth, is the highest type. But supreme, each in his own sphere, are also the artist expressing, through painting, poetry, dramatic action, and music, the subtleties and complexities of feeling, the moral philosopher, the prophet, the preacher, in the best sense of the term the teacher, all aiding to guide the spiritual forces of humanity along lines that make for social welfare. Not least is the business enterpriser, whose function is to direct the economic forces for production. It is vain to assign a mean place to the organizing intelligence and its social work. Its importance grows apace with the growing magnitude and complexity of industry. Misjudgment now will destroy more wealth, and wise judgment can produce larger results, than ever before. The captain of industry also may work as an artist or as a gambler; he may, by the methods he pursues, uplift the moral plane of his society or he may help to corrupt and degrade it. No citizen is in control of more potent influence for good or ill than the successful business organizer. On the attitude of society toward him, and on the standards to which he is held, depend in large measure the use that will be made of his exceptional powers.

29. BUSINESS ORGANIZATION AND THE ENTERPRISER'S FUNCTION

§ I. THE DIRECTION OF INDUSTRY

[Sidenote: Judgment and self-direction as elements in personal skill]

1. In the simplest kinds of individual production the value of the results depends largely on intelligent choice. Even for the solitary worker the choice of the right time to do work is most important. The first thing Robinson Crusoe did was to turn to the ship to save as much as possible of the cargo before it was dashed in pieces by the waves. If he had begun first to till the soil to provide a future supply of food it would have shown one kind of foresight, but it would have shown very poor judgment. Every moment of delay in recovering the cargo of the wrecked vessel cost him many useful materials. The humblest farmer has a great range of choice and a need of good judgment in fixing the time to sow, to reap, to do each simple task. There is the same need to-day for the small shopkeepers, for the blacksmiths, for the small producers of all kinds to make wise choice of time in the use of their own labor. There is also a wide range of choice in the distributing and combining of labor, agents, and materials. A limited supply of agents can be used to secure a variety of goods, more or less desirable. There are many chances for mistake, but in the long run it is judgment, not chance, that determines the success of one man as compared with another. There is a choice in ways and methods by which a thing can be done. There are many wrong ways, there is but one best way, at any stage of industrial progress. While most work is done in customary ways and little independent judgment is required, yet in every business from time to time new problems arise and call for an exercise of choice as to methods. Moral qualities are continually called for, such as control of impulse, and the giving up of the comfort of the moment. The wisdom of our fathers is embodied in a multitude of proverbs that suggest the wise course. Men must "make hay while the sun shines," not lie in the shade. But virtue fails less often from lack of knowledge than from lack of will. As men differ in judgment, character, and will-power, their products differ, even in the simplest circumstances. The ability to choose and to do wisely is an element in personal skill.

[Sidenote: Direction of a group of workers]

2. When men work in an associated group, the direction of effort becomes relatively more important. The first and simplest advantage of association is working in unison. Men unite their muscular efforts for a single task, and accomplish what is impossible to them working singly. But when many work in unison, the right selection of time and way is of greater importance; a mistake will waste more materials and agents. If association is to yield its advantages, there must be division of labor; hence harmony of effort, hence agreement or direction. While the gain of well-directed association is large, the waste of ill-directed effort is greater, when specialization has taken place, than with isolated workers. Most communal societies have failed because of the lack of a good head. The few exceptional successes have been due to the presence of a man of superior ability, such as George Rapp of the Harmonist Community, who, had he lived in this day, could have become easily the head of a great business corporation.

[Sidenote: Direction of interrelated groups]

3. Where various industrial groups are associated, direction becomes still more important. In the single group it is an internal harmony alone that is needed. The work of a dozen men must be so arranged that each is in his fitting place. But as this group comes into contact with others, the relationship becomes two-fold, and there must be both internal and external harmony. The more complex the economic organization of society, the more the chance of mistake and the more injurious are the mistakes to a wide range of interests. Large amounts of capital and labor can be rapidly lost through lack of wise direction of associated groups.

[Sidenote: Greatest need now of capable direction of industry]

4. The increased efficiency of industry has been accompanied by the specialization of control. The crude, early methods of enforcing harmony in industry were slavery and political subordination. Under division of labor, with free workmen, industry is ruled by impersonal economic forces that bring the less capable under the direction of the more capable. This work is rudely done, no doubt, but the penalties of bad direction of labor and capital are so great that blundering cannot be permitted. The man who shovels dirt must do it at the right time and place if, in this complex society, it counts for something and gives the effort value. If he cannot choose well for himself, he comes under direction. The average man cannot decide nearly as well here as he could on a desert island where and when to put in his spade. There it would be to raise food for the current year; here it may be to dig a canal or a tunnel whose uses will not become actual for many years. The more distant the end sought, the more difficult is the choice. To every worker, according to his personal skill, is left some degree of choice in the method of his work, but in a large part of industry the range of choice is very narrow. The man with the shovel and the man with the hoe come under direction.

§ II. QUALITIES OF A BUSINESS ORGANIZER

[Sidenote: Technical knowledge and skill]

1. The organizer and director of industry must first have technical knowledge of methods, processes, and materials. The qualities required in the direction of industry are implied in the foregoing section, but they may be more specifically enumerated. Knowledge of technical processes is relatively more important in the direction of industry in the earlier stage. In the single independent producer it is the quality most desirable. He must know the quality of the materials with which he works and the best modes of combining them. But, as industrial organization becomes more complex, only a broad knowledge and ability to judge of the results of different processes and to compare plans are necessary in the organizer. He can hire the technical knowledge of details required in the larger management of business. Draftsmen, engineers, pattern-makers, men with far more education and capacity in certain lines than the business manager, work under his direction.

[Sidenote: Judgment of men]

2. The organizer requires ability to judge men and tact in relations with them. In the small group, ability to get on well in personal contact with workmen is of great importance. Especially rare is the genial manner that wins the confidence and even the affection of the men. A sense of humor and the ability to turn a joke are said to have obviated many a strike and thus to have prevented losses both to the employer and to the men. In large affairs much of this managing tact can be hired in good foremen; but the organizer must still have a knowledge of men, ability to judge of human nature, to select his subordinates, and to animate them with his own purposes and plans. Mr. Carnegie has said that an appropriate epitaph for himself would be, "He was a man who knew how to surround himself with men abler than he was himself." That seems too modest; but in a sense it is not, because he claims for himself, and justly, the highest of all industrial qualities. A great administrator in political or industrial affairs can dispense with everything else rather than with this, the supreme quality of the great organizer.

[Sidenote: Foresight in commercial affairs]

3. The organizer must have unusual foresight and the ability to form a large commercial policy. This proposition is to be interpreted relatively to the task before the organizer, and to the size of the business. Modern industry anticipates demand far more than did primitive industry. Large amounts of materials and energy are embarked in directions from which they cannot be recalled. With the progress of electrical engineering it soon may become possible to recall at any moment a cargo embarked for a distant port. But no wireless telegraphy is able to recall the great masses of capital that are embarked on distant and definite journeys in modern business. The organizer anticipates future demand, and prepares for it. The process has been figuratively expressed somewhat as follows: the enterpriser throws into the crucible great quantities of material; they melt, and an industrial result is secured, but whether the deposit is greater in value than the material is a question that cannot be answered for years. The need of anticipating demand is greater to-day than ever before, and this requires large investments months and even years in advance. The losses are proportionally large if there is miscalculation of demand. A large commercial policy is one that takes into account the more distant factors, and anticipates the new conditions. The rare ability to do this is rightly called statemanship in economic affairs.

[Sidenote: Command of financial resources]

4. The organizer need not himself have great wealth, but he must have ability to command financial resources. Business to-day is done in many cases with borrowed capital. Even a subscription to stock is frequently as much in the nature of a loan, made in reliance on the reputation of the organizer, as an investment for profits. There are many temporary needs that require sudden loans. The confidence of investors, whether banks, trust companies, individual shareholders or investors in bonds, must be secured by the organizer. Good judgment of the money market often is as vital as judgment of the market for the particular product. In some of the largest corporate enterprises this quality becomes the most essential.

[Sidenote: Scarcity of great organizing ability]

[Sidenote: The industrial leaders]

5. Organizing ability of the highest order is rarely found. This is almost a superfluous statement after the foregoing. According to the theory of chances, such a combination and balancing of qualities is likely to occur in very few cases. Even where it exists, it may not be discovered or developed. The man may not find his opportunity, nor the task the man. There are many misfits in the world. On the occasion of the visit of Prince Henry of Prussia to America, in 1902, he was entertained at luncheon in New York with one hundred of the leaders in invention, finance, and industry, wherein have been the most characteristic achievements of America. In jocular reference to the French Academy, whose members are the forty most noted literary men of France, the newspapers called this the meeting of America's one hundred immortals. There were J. P. Morgan, the great financier; Vanderbilt, Hill, and Harriman, the railroad kings; Carnegie, the iron magnate; Irving Scott, "the man who built the Oregon"--nearly all the company deserving a place at the table mainly by reason of excellence as business organizers. Such a gathering has a dramatic interest as presenting the greatest leaders of industry, but about other tables might be gathered thousands of other less notable figures worthy to be accounted captains of industry in their several fields. One may well ask, How did they come into the important places they occupy?

§ III. THE SELECTION OF ABILITY

[Sidenote: Various roads to industrial leadership]

1. The men actually in control of industry have been selected in manifold ways. Skill develops a small industry into a large one. A small factory owner gradually adds machine to machine, building to building, till he finds himself at the head of a great industry. Or an employee develops ability and becomes an employer. Who does not know of some one who, as a small boy, went into a store to do chores, worked up to a clerkship and, enlisting the confidence of men of wealth, was enabled to establish a business of his own and become an employer? Others have won promotion from the ranks to the head of a large industry in which they secured at last a controlling interest. Employees that have proved their ability may be selected by the directors of a stock company. Men that have worked their way up from the ranks may bequeath their business positions to their sons and grandsons, as in the case of the Vanderbilts and the Goulds. And finally, but rarely, there may be selection by fellow-workmen in the case of coöperative business.

[Sidenote: Success as the evidence of ability]

2. There is a constant selective process: dropping out the weak and advancing the efficient organizer. There is, to be sure, an element of chance in this selection. The process in general is a rude one. Accidents and unforeseen changes, industrial crises, failure of health at a critical moment, fraud and crime, may defeat men of ability and they may never regain their foothold. Lack of experience may lead to disaster a naturally able but youthful heir, too suddenly burdened with the responsibilities of a fortune. On the other hand, men of limited ability may inherit fortunes and preserve them by caution, without enterprise. It is not always true, even in America, that "It is but three generations from shirt-sleeves to shirt-sleeves," although many fortunes slip away from the sons of rich fathers. In general, success in retaining the control of a business is an evidence of considerable ability. By loss of fortune unwisely risked, through unforeseen changes in methods, and after manifold blunders, the less capable drop out. Thus, by the ceaseless working of competition, the higher places are taken by those most capable of filling them, and the efficiency both of the employers and of the workmen is increased.

[Sidenote: Various modes of business organization]

3. In the various kinds of business organization the merits of men and of methods are tested. The independent producer working entirely alone, directing his own industry, is analogous to the animal organism of a single cell. More complex is the family partnership found often in early stages of industry but more rarely now, where the father directs the work of his children and all share in common. The simplest form of the wage system is the single employer with a few assistants. When the employer is in danger of losing valuable assistants, he sometimes gives them a share in the business. In the ordinary partnership, two or more men divide the ownership and duties, agreeing as to the division of control. Coöperation among workmen, though rare, gives an unusual opportunity for the discovery of special talent. The dominant form of organization to-day is that of the stock company, or corporation, the ownership of which is divided among the holders of shares of stock, or of certificates of membership.

[Sidenote: Many chances to try ability]

This variety of organization affords opportunity for a two-fold test: that of the ability of men and of the merits, in varying circumstances, of the different forms of organization. Methods of organization are constantly tested by their results. Men having money to invest are asking whether they would be better off to go into business by themselves, or to join with a partner, or to buy stock in some large corporation. Each of these forms of organization has its peculiar advantages. A stock company can better enlist large amounts of capital, while the individual employer is generally more free from dictation and can adapt his business more quickly to changing conditions. At the same time this variety of organization offers better opportunities for managing ability to show its metal. On the watch towers of industry are many observers sweeping the horizon for the appearance of men of business talent. Some characters develop better under direction; others prove that nowhere does native ability count for more, and mere book-schooling for less, than in business administration. There is some ground for the belief that a college education does not increase executive capacity in business. Such ability often seems to be a freak of nature and a product of practical experience, rather than the result of college training.

30. COST OF PRODUCTION

§ 1. COST OF PRODUCTION FROM THE ENTERPRISER'S POINT OF VIEW

[Sidenote: The enterpriser's cost]

1. The task of the enterpriser is to get together the essential factors to secure valuable products. The enterpriser must first decide what product he will endeavor to secure, and the kind, the place, the time, the quantity, and the quality. He must then select in the right proportion the materials, labor, plant, and machinery necessary for that product. He must purchase these factors in the market at the lowest price he can, unite them and sell the product to recover the expenses in the selling price. A thousand items enter into the cost and perhaps a single product emerges. What the business man thus pays out, expressed in money form, are the costs that are here to be considered.

[Sidenote: Several meanings of cost]

2. The term cost of production is used in several senses, the chief of which are money cost, psychic cost, and alternative cost. The ambiguity of this term is a source of much confusion. Psychic cost is the pain, fatigue, irksomeness of labor. This is not definitely measured except at rare points. When the pain of work more than offsets the value of the product, the worker who is free to determine the length of his own working-day, stops. At that point the psychic cost and the utility of the marginal unit are almost equal in intensity--the one as a positive, the other as a negative quantity. But the value of the product as a whole cannot be related to the psychic cost or sacrifice, and therefore it cannot serve as a measure of cost in every-day business. Alternative cost is any good or gratification that must be given up when any other good is chosen. One may stay at home and read a book or go on a picnic; the pleasure of reading the book will cost the pleasure of the picnic. A good dress may cost a happy vacation that must be given up for it. In this sense, each thing is a cost of every other thing that might be chosen in the place of it. Alternative cost is therefore manifold and indefinite. The thought is significant at the moment of a choice, but it is not constantly measurable for practical purposes. The money cost is the practical cost generally implied in the term cost of production. It expresses not the pain of the laborer in doing the work, not the sacrifice of the owner of the capital in saving the money, but merely the sum of money paid out by the producer. There is frequent confusion of these ideas in economic discussion, few even of the leading economists of the nineteenth century having quite escaped it.

[Sidenote: The cost of the factors is their market price]

3. The enterpriser, looking upon the cost of most of the factors as fixed, seeks to combine them as economically as possible. Whether the enterpriser is running a factory or a farm, is engaged in a retail or a wholesale store, is conducting a school, or a railroad, he has to solve much the same problem. By close attention, good judgment, skilful bargaining, he may be able to buy slightly cheaper than his competitors, and thus have an advantage over them at the outset. When he does this, it is usually by searching out a better market in which to buy, buying at a better time, and judging better than his competitors the quality of goods. If, in a given market at a given time, goods are sold to one more cheaply than to others, it is an act of generosity. Even the best buyers pay nearly the prevailing market price for agents. The most successful enterprisers are not found to be those paying lower wages or lower ground-rent than their competitors. It must not be forgotten that the main forces fixing the prices of agents are impersonal, and can be only slightly modified in most cases by a particular buyer. He looks therefore upon the cost of the elements as an ultimate fact which he can change little, if at all, and he shows his judgment chiefly in the selection of quality. Cost determines and limits the extent of his business and determines the price at which he sells.

[Sidenote: The right proportioning of the factors]

4. The right proportioning and skilful substitution of the factors is a delicate technical task for the enterpriser. Good buying and good selling must precede and follow the central part of the enterpriser's task, that is, the combining of the various factors. Each factor is applied, subject to diminishing returns, up to a point where its addition will not secure the value attributed to it in its cost. The enterpriser is constantly studying the question whether the application of another unit of any one factor at the price will add to the value of the product as much or more than the cost. This calculation is made for every one of the minor factors entering into the business, and for the business as a whole. The proper proportion varies at different prices, or costs. If wages rise, "it pays" to get machinery; if wages fall, it pays to let the machinery deteriorate and to do more by hand-labor. Likewise there is constant substitution of the various materials. The right proportions change constantly with inventions. A model factory is so proportioned that the buildings hold the right number of machines, with the right amount of space for the workmen, and the right amount of power. If there is more of a single factor than the ideal proportion, it is an unnecessary cost. Even the model factory begins to be out of date almost as soon as the walls are dry, and the latest method is to build as nearly as possible on the unit system, so that new parts may be added without the loss of harmony and proportion.

[Sidenote: Pressure of price toward cost at certain points]

[Sidenote: The enterpriser in contact with costs]

5. The enterpriser's costs determine the lowest price at which he can continue to sell, but if successful he may have a wide margin of profits. New factories are constantly arising with new and better adjustments. In industries of competing products, also, the processes are changing. Hence there is always a pressure of competition on some enterprisers who constantly complain that they must sell below the cost of production. The organizers of a trust always declare, some no doubt truly, that they have been selling below the cost of production. Business men say that competition is destructive, and it certainly does destroy the less favorably situated enterprises. Each enterpriser's price is the highest he can get in the market for his product; it may far exceed his costs; it may even fall below them, but only temporarily, for if sales continue to encroach on capital, the sheriff soon closes the doors. Successful competitors are constantly pressing upon the marginal enterpriser, fixing a price that leaves themselves a profit, but is below his cost. Even the most successful enterpriser comes into contact with cost, and seems to be compelled by it. He reaches out for trade, and sells some (not all) goods at a price which leaves him no profit. He enlarges his factory and ships goods farther, paying the freight, which means a lower price at the factory. The expanding business, therefore, comes at length to the point where it cannot go farther at the prevailing prices. Hence the business man's view of the costs is that they determine value. It is true in the sense that the supply of a particular product in any market is at last limited by cost of marginal producers or of marginal portions of supply. But it is not true of all the units of product that costs determine, or equal, market price. There is a margin above costs to the successful enterpriser on a large portion of his output. The margin may be narrow or wide, according to the business. The margin is "profit," or the gain of the enterpriser.

§ II. COST OF PRODUCTION FROM THE ECONOMIST'S STANDPOINT

[Sidenote: Money cost not the ultimate explanation of value]

1. The economist should view money cost as an intermediate and not as an ultimate explanation of value. The value of all things must be traced back to gratification, to the relation of goods with psychic income. This being true, the value of the factors which the enterpriser uses must be derived from the value of the products, and not the reverse. This does not mean that the business man is deceived into the belief that he has in cost of production a final explanation of value. He simply is not interested in that question. He knows that there are many influences determining the cost of the factors he buys, but they are distant; he cannot influence them, and in the single stage of his production they seem to fix the price. In some purchases, and on the stock exchange, a marvelous recognition and analysis of the most distant influences is necessary; but in general a superficial view of value is taken in business; it does not pay to do other. The logical treatment, however, must go deeper into the question and trace the cost of agents back to the ultimate cause of value, that is, to want-gratifying power. To say that the price of a product is determined by the money cost, or price, of the factors is simply to postpone the answer to the question of value; one has still to ask, What determines the money cost, or price, of those factors themselves?

[Sidenote: The cost of agents is fixed by their marginal utility in alternative uses]

2. The demand for any factor entering into products is reflected, in an increased price, to its cost in all competing products. Figuratively speaking, products compete with each other for the factors that enter into them. According to location, quality of the soil, and improvements, a certain area of land has various rival uses. These uses bid for the land, or put in an economic claim for it. Products of a higher value outbid and exclude those of a lower. If fine wine can be raised on a piece of land, potatoes ordinarily will not be planted in it. But if there is such a supply of that quality of land that it continues to be used side by side for both products, it will have the same value and yield the same rental in both uses. The least utility yielded by any portion of the supply fixes the value of all the units. Machines are usually made for some product determined in advance, but often they are only partially specialized and within limits they can be adapted. Sewing-machine factories were readily turned to the making of bicycles at the time of greatest demand, and bicycle factories later were used for the making of automobiles. Thus, in general, machinery is used for the product to which it contributes the most value. Any enterpriser seeking it for any other use finds its "cost" affected by its various alternative uses. The same is true of all the materials and of all the grades of labor entering into products. The enterpriser's cost is therefore the reflection of the want-gratifying power of the productive agent in all its other uses as well as in the particular product he desires. To the enterpriser, cost seems the cause of the value of a product. To the economist it should be clear that the utility found in the various products is the basis of value in the factors, i. e., of the costs.

[Sidenote: A single source of a single product]

3. The genealogy of value may thus be traced through the various intermediate products to consumption goods. A single product having a single source of supply shows most clearly the reflection of value directly from the product. The discovery of a mineral spring or of a good quality of building-stone on worthless land, will cause a value to attach at once to the source of supply. When a great singer like Adelina Patti commands several thousand dollars for each appearance in concert, the source is the magical throat of the singer, and the salary reflects the utility of the music in the minds of delighted hearers.

[Sidenote: One source of several products]

When the one source of supply yields several different kinds of products there is just one new condition which confuses the thought and suggests the error that value begins in the source (with costs therefore) and not in the product. Looking at the products severally, no one of them explains the value of the source, and, on the contrary, each one is seen to have a value independent of the particular use to which it is put. To make the illustration most simple: a savage finds in a wreck on the coast a number of bars of iron. His fellows wish them for various purposes: to make arrow heads, spears, knives, hatchets, hoes, ornaments, nails, needles, etc. Value is in this case derived in part, through the source, from the alternate uses. Taken jointly and considered as one sum, the value of the various products accounts as completely and exclusively for the value of the source as if they were merged into one product. The source (S) is distributed to each of the products in accordance with their marginal utility, and therefore the value of the various products from any source of supply constantly tends to equality. Any unit of product sought for any purpose must be paid for according to a marginal utility determined in all the applications. The genesis of the value is in the utility of the product; the value of the source is derived.

[Sidenote: Complex conditions with intermediate products]

In actual life the problem is far more complex, and yet, through its settlement runs just the same principle. There is constant bidding for materials, and through their price the claims of rival products are adjusted. A point is reached where it does not pay to use any more of an agent in a certain industry; the production of another unit results in a loss. There is a most complex relation among many different industries using the same factors, the value of a unit of product (at a) being reflected up to the source, and through successive links to the most distant product (z). The effect of this is to reduce the sale (of z) and correspondingly the use made of the agent in question. A higher price of leather, due to the increased use of shoes, raises the value of hides and cattle (this increasing the extent of cattle raising) and raises thus the cost of carriage-trimmings, pocket-books, foot-balls, leather belts, and every other leather product. As the price rises, substitutes for leather, and imitations of it, are used for such of the products as cannot bear the increased cost of leather.

[Sidenote: The enterpriser the medium of price movements]

[Sidenote: Costs are an expression of consumers' estimates]

4. The enterpriser does not fix the value of products or of agents, but is the medium through which consumers express their estimates. The enterpriser who anticipates aright and satisfies the public taste is the good medium. He readily transmits and accurately focuses the rays of public judgment. One that misjudges is a poor medium. The enterpriser is himself the servant of costs. Laborers sometimes assume that the employer can dictate wages, prices, and markets, can rule things with a lordly hand. With rare exceptions the ultimate control in these matters by business men is very slight. In the main the enterpriser masters the situation only by bowing to it, just as the scientist and the engineer gain mastery over nature because they know when to bend and how to obey. The consumer, by deciding to buy this or that product, sets in motion waves of value. The consumers of products are the true purchasers of labor, materials, and uses of agents. The enterpriser must conform closely to cost, to the price prevailing for the moment, or his competitors in this day of narrow margins will seize the opportunity. The enterpriser is merely the distributor or equalizer of cost among all the different products for which different agents can be used. If he acts efficiently, profits arise.

31. THE LAW OF PROFITS

§ I. MEANING OF TERMS

[Sidenote: Broadest use of the term profit]

1. The term profit is popularly used as any gain or advantage secured by any means in business. The terms used in economics, being taken from popular language, vary in meaning according to the context. It is necessary to clear thinking to reject some words entirely and when using others to define them more strictly. The broad usage of the term profits just noted includes every kind of return to industry: such as interest on capital, and wages or services of the man owning the industry. Precise thinking requires its use in a much narrower sense.

[Sidenote: Used of gross gains on sales]

2. A common meaning of profits in retail business is the gross gain on a given sale. Buying an article for one dollar and selling it for two dollars, is said by the merchant to be selling at one hundred per cent. profit, jocularly called, "The Dutchman's one per cent." The cost price is considered to be that paid to the manufacturer or wholesaler. In different lines of goods there is added regularly to this cost twenty, thirty, or fifty per cent., as the case may be, as the merchant's profit on the sale. This is of course a gross profit, and not net, or true profit. It leaves out of account rent, interest on capital, clerk hire, freight, and many other minor items that enter into the cost of running a store. It often happens that the Dutchman's way of reckoning is nearer the truth, and that the gross profit of one hundred per cent. proves at the end of the year to be only a net profit of one per cent. This evidently is a loose meaning, impossible in the discussion of theoretical questions. This meaning is sometimes developed, making profits the sum of all the gross profits on separate sales within a year, or the difference between the wholesale and retail prices of goods sold within the year.

Another meaning given to the term is gross profit (as above) compared with the capital invested. The "profit" in this case varies partly with the rate of the turnover. To illustrate: if the amount invested in a printing-office is $100,000, and the annual business done is $300,000, the capital is said to be turned over three times; if the gross profits on sales averaged twenty per cent., they would be sixty per cent. on the investment; but, if the capital had been turned over four times, the gross profit would have been eighty per cent. on the investment.

[Sidenote: Of net gains as a percentage of invested capital]

3. Another meaning of profits is the annual net gain of the business, as compared with the average investment of capital. This is a long step toward greater definiteness. If at the end of a year it were found that after paying all outside expenses there were $10,000 to set aside, this would be accounted a profit of ten per cent. on $100,000 invested. But confusion still reigns because of wide variation in the methods of estimating costs before fixing net profits. In one case the enterpriser rents lands and buildings, in another he owns them; in one case he has borrowed money and counts interest as a cost, in another he is free from debt; in one case he counts as a part of cost an estimated fair salary for himself and his partners, in another (usually in a small business) no such allowance is made Such a variation in business usage is most perplexing. In all these cases one must have the exact conditions in mind before it is possible to make any comparisons and draw any conclusions as to the relative profits of different industries.

[Sidenote: Profits in economic theory]

4. In the narrower and exacter sense profits are the net gain of the enterpriser after counting the rent of material agents and contract wages of employees at the prevailing rates. Into the practical problem of cost and profit many factors enter, and the theoretical problem is to determine just how much ought to be attributed to each. In a large business usually the practical bookkeeping problem is not unlike that of economic analysis. A stock company counts as cost, as a part of fixed charges, interest on capital borrowed either from banks or bondholders. Its managers are paid salaries, counted as a part of cost. The net balance, after deducting these and all other expenses, is counted profits and paid in dividends to stockholders. The economic student is not attempting to get a theory of profits that is in contrast with practice. Rather, he is trying to analyze profits generally, just as they are analyzed in the few cases where the books are properly kept. In economic theory, therefore, profits are the part of the gain of any business that is logically attributable to fortunate investment and good management; profits are the income attributable to the enterpriser's services.

[Sidenote: Profits a species of wages]

5. Typical economic profits are thus a species of wages but are marked by peculiar features. In some of the older treatises on political economy, profits are treated merely as a combination of "wages of management," and of interest on capital invested. A man hired at a fixed sum to manage a business is receiving simply contract wages. Economic profits are not contract wages, not being paid by agreement, but being yielded impersonally by the industry. Profits are, however, economic wages or the earnings of services. As business has developed, it has been seen that the enterpriser's work has its peculiar character and deserves special attention. The old English word "enterpriser," used of the "adventurer" who embarked in foreign trade, may fittingly apply to the organizer and director of business to-day. Foreign trade then, more often than now, was most uncertain, and there were many chances that the ship would be lost, or the venture prove a losing one. In the simplest business to-day there is this element of enterprise, or undertaking, combined with ordinary capital and labor. As industry develops, this special service stands out more clearly. In the corner-grocer and in the manager of the little news-stand, the elements of enterprise and labor are not apart. In the large wholesale house, the enterpriser is seen to be not merely an abstractly thinkable function, but a separate and concrete person. The typical enterpriser is the man who gives his time and energies to the launching and guiding of business.

§ II. THE TYPICAL ENTERPRISER'S SERVICES REVIEWED

[Sidenote: The enterpriser's skilful use of capital]

1. The enterpriser guarantees to the capitalist-lender a fixed return. Agents will yield the highest economic rent of which they are capable only in the hands of those who can use them with exceptional skill. Owners of capital who for any reason, such as youth, inexperience, ill health, incapacity, or conflicting duties, are not able to make agents yield the average rent, seek out, or are sought out by, those who in general can make the agents yield more than the average. The interest contract between them is one of mutual advantage, in that the enterpriser pays a definite sum to the investor unable himself to apply his productive agents. Immense sums of capital are now put into the hands of small enterprisers, such as Western farmers improving their lands, builders of city homes and business blocks, and small manufacturers. But stocks and bonds of corporations give a wide variety of investments which shade off from the safer or capitalistic type, to the more uncertain, or enterpriser's type. First-mortgage bonds, being a first claim on the income and property, have the highest security and yield generally the lowest interest. Even national bonds are not absolutely safe, and for that reason as well as because of their fluctuation in price, even their purchase has something of the nature of an enterprise. Stocks are the enterpriser's type of investment, the dividends being more uncertain, but giving the chance of a higher return than the average. It is because some stand ready to assume the risk of making goods yield average returns or more, that others can sit and enjoy a fixed income with little effort and in comparative security.

[Sidenote: The enterpriser's insurance of the lender's capital]

2. The enterpriser gives up the certain income to be got by lending his own capital, and, becoming a borrower, offers his capital as insurance to the lender. Every business has an element of uncertainty in it, and some one must meet the risk. A man with marked ability as an organizer of industry is rarely found long without capital of his own. But even a penniless man who can gain the confidence of investors is able to get backing and to secure the necessary funds to engage in business. The lenders in such a case, however, run a greater risk than when the enterpriser is a man of some means, and they therefore ask a higher rate of interest than if they were loaning to a wealthy man or to a wealthy company. They are in part the enterprisers. When, as usually, the enterpriser invests some of his own capital, it is a guarantee of his good faith, a sort of insurance reserve to protect the lender from loss. The first loss falls on the enterpriser, and the chance of loss to the lender is in large part, though not entirely, eliminated. It is characteristic of modern loans that the borrower may be rich, not poor,--often richer than the lender. The mortgage on real estate and the creditor's claim on a merchant's property usually give security of far greater value than the loan.

[Sidenote: The enterpriser's insurance of the laborer's production]

3. The enterpriser gives to other workers a definite amount for services applied to distant ends. In discussing the wage system it was pointed out that most labor at the present time is put upon future goods. It is not known what they will be worth a month or a year later when they mature as consumption goods; their present worth can merely be estimated. If they prove to be worth little, the profits may be nothing or less than nothing. The enterpriser, however, buys the services for ready money, embodies them in goods, and assumes the risk; the goods may sell for more or less than the wages. It is sometimes said with a certain irony that if the enterpriser assumes the risk he is very careful to pay so little for labor that he does not lose. In this naive view the enterpriser is so independent of the market that he can pay much or little as he pleases. In fact in many cases he gains little, and in many he loses and loses largely.

[Sidenote: The risk of the enterpriser's services]

4. The enterpriser risks his own services and accepts an indefinite chance instead of a definite amount for them. Assuming the risk for the right conduct of industry, he backs himself, expresses his faith in himself as a manager who can make labor earn more than the prevailing wages and make capital yield more than the prevailing rate of interest. If it were otherwise, he would loan what capital he has instead of borrowing more; instead of employing others, he would himself seek employment in some other industry. Men are constantly shifting from the class of hired workers to that of enterprisers. It is a rude and often tragic process of adjustment and selection that enables men having ability as enterprisers to continue in that work, and forces others into the class of employees.

[Sidenote: The enterpriser the intermediary in industry]

5. The enterpriser is the economic buffer; economic forces are transmitted through him. In a more primitive industry each man is wage-earner, capitalist, and enterpriser combined in one. As industry develops, some of the factors of cost become distinguishable, and relatively stable and calculable. A low rate of interest, ranging from three to four per cent., can be secured with practical certainty by putting one's money into good corporation securities, into the savings-bank, or into national bonds. Contract wages in each class of labor also are fixed by competition at a point where they are a medium or average of gains and losses. The enterpriser is the most movable element. As the specialized risk-taker, he is the spring or buffer, which takes up and distributes the strain of industry. He feels first the influence of changing conditions. If the prices of his products fall, the first loss comes upon him, and he avoids further loss as best he can by paying less for materials and labor. At such times the wage-earners look upon him as their evil genius, and usually blame him for lowering their wages, not the public for refusing to buy the product at the former high prices. Again, if prices rise, he gains from the increased value of the stock in his hand that has been produced at low cost. If the employer often appears to be a hard man, his disposition is the result of "natural selection." He is placed between the powerful, selfish forces of competition, and his economic survival is conditioned on vigilance, strength, and self-assertion. Weak generosity cannot endure.

[Sidenote: Fluctuation of profits]

6. Profits therefore fluctuate more from industry to industry and from man to man than do other incomes. As a somewhat exceptional case, small employers in industries such as baking and tailoring, may for long periods get less for their work than their employees get in wages. The pride in being an employer and occasional chances of greater gains perhaps explain the fact. The fluctuations of the market may sweep away from the enterpriser not only all his "profits," but all his accumulated wealth. As a consequence, profits may be at other times very high, for men will not take the risk of great losses unless there is a chance of large gains. While the income of the salaried man is occasionally advanced, and then for long periods remains unchanged, the profits of enterprise come in waves. In seasons of prosperity the income of the employer swells with a dramatic swiftness while rents and wages move tardily upward. But for years again the employer earns a return hardly exceeding a low interest on the capital invested in the enterprise, or runs the business for a time at a loss. Profits of this kind should not be spoken of as a percentage. Greater or less, they are the net result attributable to the enterpriser's skill, and bear no fixed or calculable relation to any capital investment.

§ III. STATEMENT OF THE LAW OF PROFITS

[Sidenote: Antisocial or pseudo-profits]

1. Some apparent profits are due to antisocial or criminal acts. Cheating, lying, breaking of contracts, bribery of public officials, and many similar acts may greatly increase individual incomes. These are not profits, as the term is here understood, but they are hard to distinguish from profits in practical life. One man gains a temporary success by acts that are later punished as crimes; another, guilty of like deeds, escapes conviction for lack of evidence or on technicalities, and enjoys ill-gotten wealth. More fortunes, however, are due to actions on the border-line of ethics, which society is not yet honest enough to condemn or wise enough to prevent. No code of laws can be framed that will make possible the punishment of all antisocial acts. Any law that would catch all the guilty would injure many of the innocent. Economic analysis may exclude from the concept of profits the gains made by such means, but only omniscience could distinguish them in every actual case from "swag and boodle."

[Sidenote: Chance profits]

2. Some profits are the result of pure chance or luck. What is luck? A result that is not calculable, coming to pass in conditions where a rational choice is not possible, is called luck, for lack of another name. Now pure luck often brings temporary profit to the individual, but chance does not in the least account for the average and abiding profits. There is bad luck as well as good luck. According to the law of chance, in the tossing of a coin for "heads and tails," one side is as likely to come up as the other, and in the long run the number of heads and tails will be equal. Where cases are numerous, losses and gains distribute themselves about a general average, and may be eliminated by insurance, as that against fire, flood, lightning, against sickness of the employer, which would cripple the business, or against his death, which would check it. But many factors evade all attempts to reduce them to rule, and chance remains a considerable factor in the success of many individuals. It still sometimes appears better to be born lucky than rich.

[Sidenote: Profits due to a union of chance and choice]

3. Some profits are temporary gains from happy but not entirely accidental choice of the best course. Many cases of profit said to be due to chance are found on closer knowledge to be due to superior judgment. A slight advantage in choice will give now and then apparently chance gains. The adventurer who, on the discovery of gold, goes at once to California or to Alaska, may stumble upon a gold-mine. It is luck; but if he stays at home it is more likely, according to the theory of chances, that he will stumble over an ash-heap. In places where gold-mines are comparatively plentiful, one takes chances between a load of lead and a bag of money. Throughout life there is constant opportunity, but it must be sought. One who has the good judgment to be ever at the right time at the place where he has the best chance of stumbling upon a good thing, usually gets the advantage, and men call it luck. The more the causes of success in general are studied, the larger is found the element of choice, the smaller that of luck. Some writers make these temporary gains the essence of profits. Considering that profits are always due to the introduction of new and better methods, and not to the continued use of better ones, they argue that as the knowledge of these becomes common property profits will disappear. But this in our view is a partial truth.

[Sidenote: Skill the essential condition of continuing profits]

4. Continuing profits arise from the continued exercise of superior judgment. After all the chance elements are taken into account, there remain differences in the abilities of men, and a continued and ever-renewed need of organizing power. Profits, being recognized as due to these differences in the abilities just as rent is due to differences in the fertility and efficiency of goods, have therefore been called differential gains. There would be no objection to the term were it not intended to emphasize a supposed difference between profits and rents on the one hand and interest wages on the other.

[Sidenote: Risk of loss reduced by skill]

Some writers have so magnified the thought that the enterpriser's function is to assume risk, as to make it a denial of the view that profits are the earnings of ability. The risks of business are not those of the throwing of dice in which (if it is fair) skill plays no part, and gains in the long run offset losses. Business risks are rather those of the rope-walker in crossing Niagara; the task is easily undertaken by the skilful Blondin, it is fatally dangerous to the man of unsteady nerve and limb. Profits are due not to risks, but to superior skill in taking risks. They are not subtracted from the gains of labor but are earned, in the same sense in which the wages of skilled labor are earned. So long as some men have better organizing ability than others, have better judgment, are better able to take the risks, there is reason to believe that profits will continue.

Profits are the share, or income, of the enterpriser for his skill in directing industry and in assuming the risks. Despite the complex influences, they are determined by his contribution to industry essentially as is the value of any skilled service.

32. PROFIT-SHARING, PRODUCERS' AND CONSUMERS' COÖPERATION

§ I. PROFIT-SHARING

[Sidenote: Nature and definition of profit-sharing]

1. Profit-sharing is rewarding labor with a share of the profits in addition to contract wages. The essential mark of profit-sharing is that the additional payment depends on the net profits of the whole business at the end of the year. It is not to be confused with a free gift, or with special privileges granted by the employer, such as lunch-rooms, bathrooms or houses at a low rent. Profit-sharing is a contract made in advance, not a free gift. Nor is it the same as a bonus or premium for a larger output, made contingent on the physical product, on the increased number of pieces turned out by the workmen, individually or in groups. Premium for output is given for something directly under the influence of the worker. The amount of profits is affected by the amount of output, but also by a number of other things that are quite outside the control of the workmen.

[Sidenote: The possibilities of profit-sharing]

2. The purpose of the employer in adopting profit-sharing is to stimulate the industry of the workers, thus reducing waste and cost of labor and supervision. The employer adopting the plan does not intend to lose by it; he believes that if he can get his workmen to take an interest in the business his costs will be reduced. He offers to divide with them the resulting savings. There is, in every factory, greater or less waste of materials, destruction of tools, and loss of time, that no rules or penalties can prevent. If the worker can be made to take a strong enough personal interest he will use care when the eye of the foreman is not upon him. The product also can be slightly increased in many ways by the workmen's exertions or suggestions. In some cases the quality of the work cannot be insured by the closest inspection as well as it can be by a small degree of personal interest. Either responsibility for the fault cannot be fixed, or the defect is one not measurable by any easily applied standard. Strikes are averted, good feeling is promoted, and contentment is furthered if the interest of the worker can be made to approach, and actually to be in harmony with, that of the employer. The economic result of the plan, if it can be made to work, must be to reduce the costs of these establishments below what they are. The crucial question is whether this alone insures that the costs will be less than those of competitors, thus giving a source out of which an increased amount, really a wage, can be paid to the laborer. This additional wage is made conditional on the employer's success in gaining a net profit on the year's business.

[Sidenote: Its successes and failures]

3. The profit-sharing plan is now successfully working in over one hundred firms in America and Europe. The plan was first tried in Paris by Leclaire, a house-painter. In house-painting there is often a great waste of materials and time by men working singly or in small groups in different parts of the city. By this new method Leclaire enlisted the aid of the workmen, reduced the costs, and increased the profits. It is a remarkable fact that the plan has been continued successfully by the same firm to the present time. The most important examples of profit-sharing in the United States are the Pillsbury Mills in Minneapolis, Procter and Gamble's soap-factories at Ivorydale, O., and the Nelson Mfg. Co. at Leclaire, Ill. In some cases both manufacturer and workman value the system highly. N. P. Gilman, the author of "Profit Sharing," puts the ratio of successes very high. Others declare that the failures are mostly lost sight of and are very many. The proportion of business done in this way is not large. One hundred firms is a very small fraction of one per cent. of the total number of firms in Germany, France, England, and America. A still more important fact is that this method of remuneration did not spread in the ten years preceding 1900.

[Sidenote: Objections to and difficulties in profit-sharing in practice]

4. The failure of profit-sharing to grow is due to objections on the side both of the employer and of the workman. On the side of the workman there is the bookkeeping difficulty. He is suspicious, and he lacks knowledge of the business. If at the end of the year the books show no profits, the workman loses confidence, considers the plan to be mere deception, and rejects it. Moreover, the plan puts a limitation upon the workman's freedom to compete for better wages by changing his place of work. It is almost indispensable to make length of service a condition to the sharing of profits. Workmen coming and going, working only a few months, cannot be allowed to share; the percentage given to the others increases with length of employment. Whenever men are thus practically subject to a fine (equal to the amount of shared profits) if they accept a better position, there is danger of a covert lowering of wages. The plan tends to break up the trade-unions, which is one of the reasons that the employers like it, and is the reason that organized labor opposes it. The employer on his part objects to the interference with his management, the troublesome inspection of the books, and the constant grumbling and complaint of the workmen. It makes known the amount of his profits; if they are large, the advertising of his success invites competition; if they are small, publicity injures his credit and depresses the value of his property. In view of all these difficulties it is not surprising that while the plan often starts promisingly, it usually loses its efficiency after a short trial. Business methods are severely subject to the principle of the survival of the fittest. Through competition and the survival of the firms that adopt improvements, better methods must eventually supplant poorer ones. If a method fails to spread when it has been tried for fifty years and all are free to adopt it, there must be some defects inherent in it. That must be our conclusion as to profit-sharing.

[Sidenote: Defective character of profit-sharing]

5. It is usually better to make wages depend on the worker's efficiency rather than on the profits of the whole business. The strongest motive to efficiency is present when reward is connected immediately and directly with effort, not with some result only slightly under the worker's control. In profit-sharing the added share is only partially due to increased effort of the worker. Labor is but one of the groups of costs. Profits are the net result of many influences. Chief among these is the wisdom of the enterpriser in planning and conducting the business. The "profits" may be nothing, though the worker may be exerting himself to the utmost. The plan is, therefore, reactionary, not in accord with the general progress of the wage system, which is tending constantly to centralize responsibility, to put the risk into the hands of competent managers, and to secure to the worker a definite amount in advance, as high as conditions make possible. The system of premiums, or bonus payments, for output, gives in most cases better results and is rapidly spreading. It is sounder in conception and works better in practice. This premium depends on the increase by the laborer of the output of his particular machine or process as compared with a standard based on the experience of some definite period.

§ II. PRODUCERS' COÖPERATION

[Sidenote: Purpose of producers' coöperation]

1. Producers' coöperation is the union of workers in a self-employing group to do away with any other enterpriser than themselves, and to secure for themselves the profits. Its object is not to do away with any return on the capital investment. Capital may be borrowed either from outsiders or from the individual coöperators, and is paid a stipulated interest apart from the profits. The source of the gain is to be found in the saving of what the worker looks upon as the needless drain of profits into the pockets of the employer. The hope is that the enterpriser's function (if it is admitted that he has any useful function) will be performed by the workers collectively or through their representatives. They undertake to furnish brain as well as muscle, management as well as hand-work. The hope is even to increase the profits through increasing the stimulus to the workers and by saving in friction, disputes, and strikes.

[Sidenote: Its limited success]

2. Practically the plan has been made to work in a comparatively few simple industries. The most notable examples of successful coöperation in America have been the cooper-shops in Minneapolis. There were a simple problem of costs, few and uniform materials, patterns, and qualities of product, few machines and much hand-labor, simple well-known processes, a sure local market. Mr. Lloyd, in a recent book, describes many successful societies in England, but they are all of a simple sort of industry, as agriculture and dairy-farming. Within the whole field of industry, this method of organization makes little if any progress. Most experiments have failed and the successful ones often become ordinary stock companies with the most able men in control. Therefore, whether losing or making money, they nearly all cease to exist as coöperative enterprises. This result has disappointed the prophecies of many wise men of seventy-five years ago. In the time of John Stuart Mill, great expectations were entertained of the future of productive coöperation, which was thought to be a solution of the whole social problem.

[Sidenote: Its main difficulty]

3. The main difficulty in productive coöperation is to secure managing ability of a high order. There is no touchstone for business talent, no way of selecting it with any certainty in advance of trial. This selection is made hard in coöperative shops by the jealousies and rivalries, and by the politics among the workmen. A man thus selected by his fellows finds it almost impossible to enforce discipline. In coöperation there is occasionally developed good business ability that might have remained dormant under the wage system; some workmen showing unusual capacity cease to be handicraftsmen. But the unwillingness on the part of the workers to pay high salaries results in the loss of able managers. Having demonstrated their ability, the leaders go to competing industries where their function is not in such bad repute, and where higher salaries can be earned; or they go into business independently, being able easily to get control of the necessary capital.

[Sidenote: Coöperators under-value the enterpriser's function]

4. Most coöperative schemes have suffered from a lack of good theory, an inability of the workers to see the importance of the enterpriser's service. Most men make a very imperfect analysis of the productive process. They see that a large part of the product does not go to the workmen; they see the gross amount going to the enterpriser, and they ignore the fact that this contains the cost of materials, interest on capital, and incidental expenses. They ignore further that the enterpriser's function is a productive and essential one. The theory of exploitation, or robbery, as explaining the employer's profits, is very commonly held in a more or less vague way by workmen. With a body of intelligent and thoroughly honest workmen, keenly alive to the truth, the dangers, and the risks of the enterprise, coöperation would be possible in many industries where now it is not. The producers' coöperative schemes usually stumble into an unsuspected pitfall. When a heedless and over-confident army ventures into an enemy's country without a knowledge of its geography, without a map, and without leaders that have been tested on the field of battle, the result can easily be foreseen.

§ III. CONSUMERS' COÖPERATION

[Sidenote: Nature and kinds of consumers' coöperation]

1. Consumers' coöperation is the union of a number of buyers to save for themselves the profits of the merchants or agents. There are many classes of consumers' coöperation, but the chief ones are: (1) to sell goods (retail stores); (2) to provide insurance (coöperative insurance companies); (3) to provide credit or capital (coöperative banks). These are also productive enterprises, for the merchant's work adds value to the goods, the insurance company and its agent do a real service, the profits of the small bank are, ordinarily, earned fairly under existing conditions. The terms producers' and consumers' coöperation merely set in contrast the part of the productive process that is undertaken. Producers' coöperation is concerned with the earlier steps, usually stopping when the product is disposed of to wholesale or retail merchants. Consumers' coöperation (often called distributive coöperation) is concerned with the later steps, the placing of a consumption good (rarely also productive agents) into the hands of the final user. It imparts the same value to goods that the retail merchant does. The one thing this class of coöperators is sure of when they begin is a number of consumers to make use of the service or products they purpose to supply; hence the name.

[Sidenote: Costliness of competitive mercantile business]

2. The waste of competitive mercantile business is the source from which it is expected that the savings of the coöperative enterprise will come. It is a great expense to the retail dealer to secure a body of customers. Rent of store-room, clerk hire, interest on invested capital are fixed charges, which can be met only on condition of a regular and frequent turnover of the stock. To attract customers the dealer must have a well-located store, must advertise, keep open long hours, and pay idle clerks. Frequently he must give credit, raising the price enough to cover the expense of bookkeeping, collection, bad accounts, and loss of interest. The public's likings, whims, lack of judgment, and lack of business analysis make these charges necessary. There are many communities where it would be impossible to carry on a cash business even at considerably lower prices. Customers are exacting and require the costly delivery of small packages; two horses and a driver must travel two miles to deliver a spool of thread or a half-dozen oranges. Frequent changes of fashion and the shifting of customers from one store to another keep the merchant always insecure in his trade. A number of buyers mutually agreeing to pay cash, to buy at certain times, to place all their orders with one store, to go to a cheaper location, down an alley or into a basement, can save much of this cost on one condition: that the management approaches in its efficiency that of ordinary competitive business. In spite of all these advantages, if there is inefficient management the final cost will be no less than that of ordinary business.

[Sidenote: The more successful coöperative stores]

3. Despite the possibilities of saving, most coöperative stores fail through a lack of good management. Note first the greater successes. Since 1842, from which time it dates, the coöperative-store movement has progressed steadily in England, where the scores of retail societies are federated and own large wholesale stores. The long experience has developed good methods and a conservatism almost inconceivable to an American mind. They are practically great stock companies in which one can buy a share at a small cost and become a purchaser at usual prices, receiving a dividend later according to the amount of his purchases. Coöperative stores in American universities are generally successful, apparently because they don't coöperate. Some get into politics and go the way of the wicked. The survivors gravitate into the hands of a committee of the faculty, which tries to employ an efficient manager, and administers the business as a public trust without private profit. The wastefulness of multiplying orders for text-books to be used by a class whose number is definitely known in advance, and the comparatively uniform character of the supplies, make economy peculiarly easy in this case. A large part of the services of the coöperative store, however, are indirect; it reduces and regulates the charges in the stores near by.

[Sidenote: The failures and their causes]

Nearly all the Granger stores, started thirty years ago in great numbers, and most of the coöperative stores among American workmen, have failed. The failure is easily explained by the ignorance of danger, by lack of harmony, by credit sales, and by inefficient management. The wastes of competitive business are partly a tax imposed upon men (taken collectively) by their lack of business method; the community is not intelligent enough, honest enough, or self-sacrificing enough to do business in the most economical way. Partly they are the price paid for variety and change, and for the cherished American right "to kick"--something difficult for the members of a coöperative store to do without hurting themselves.

[Sidenote: Profit-sharing and coöperation in relation to the enterpriser]

[Sidenote: Continued need of the enterpriser]

4. The experience with these plans verifies the analysis of the enterpriser's function: pure profits are the earnings of a productive service. Comparing these three plans, they are seen to be alike in seeking to make workers share some of the profits, to change the destination to which profits would go. The first would create profits by the effort of the workers, and give them a part of the saving. The second would have collective workers perform the enterpriser's work in the factory and get his reward. The third would have collective buyers do the work of the merchant and save his profits and other costs. The last is the easiest to do. Profit-sharing is next in difficulty, and producers' coöperation is the hardest of all to put into practice. In some cases, under some conditions, the enterpriser's services may be more economically performed than at present, for the waste is great. But taking men as they are and things as they are, in most places the enterpriser's service is necessary and must be paid for. His contribution to the success of the industry depends on his nature and ability, and it can be distinguished theoretically and practically from the contribution made by the workmen. Nothing but changes in human nature, in education, and in morality can diminish the necessity for his service.

33. MONOPOLY PROFITS

§ I. NATURE OF MONOPOLY

[Sidenote: Difficulty of fixing the meaning of monopoly]

1. The term monopoly is used loosely and in many senses. In popular discussion monopoly means almost any wealthy corporation or the power the corporation possesses, a power which is usually thought of as oppressive. Even economists have held the vaguest ideas regarding monopoly. The recent rise of trusts and monopolies has given a large new body of facts bearing upon the subject, but all the resulting discussion by the public and by economists has not brought agreement upon a definition entirely satisfactory. When usage has not settled upon any one meaning, the selection of a definition is in a measure arbitrary, though it may be guided by logic and considerations of expediency. Let us state the various meanings and indicate the one adopted in this discussion.

[Sidenote: Monopoly is not merely scarcity]

2. Monopoly should not be used as synonymous with scarcity. Scarcity is the essential condition of all value. The simplest things--bricks, sand, the commonest unskilled labor--would have no value were there not a degree of scarcity relative to the wants that may be gratified. "Monopoly," whatever else it means, always conveys the idea of some exceptional kind of scarcity, scarcity due in part to some source or cause not ordinarily present. It is a bad practice in definition to apply two words to one idea, leaving the other idea unnamed, as is done when monopoly is made synonymous with scarcity. Both words are needed. Such a usage unfortunately is common in economic literature. Many economic writers, for example, have called landownership monopoly, saying that land being the work of nature cannot be increased by men, and therefore must always be scarce. Even if it were true that in the economic sense land could be produced by man, there still would be confusion here between a general class of goods and a special thing. The fact that a particular field cannot be duplicated does not make a monopoly of land as a whole, any more than the existence of desert land in Arizona makes land valueless or a free good. Nor is a land-owner a monopolist any more than is the owner of a valuable machine. The owner of forty acres of land worth four hundred dollars, or the owner of a village lot worth a hundred dollars, can hardly be called a monopolist. It leads to absurdity to use the word monopoly with reference to landownership indiscriminately. Neither mere scarcity nor the limitation of natural stores should be called monopoly when ownership is scattered and combination between owners does not exist.

[Sidenote: Monopoly is not merely superior economic power]

3. The ability of superior material agents and of skilled workers to secure higher returns than do poor ones does not constitute monopoly. The free competition assumed in abstract discussions of value, does not mean equal capacity or efficiency, but the legal freedom and personal willingness to move a productive agent into the highest industrial place it is capable of holding. The rocky field does not compete with the fertile one in the sense that it can yield the same uses. The field fit only for potatoes does not compete with those rare and favored localities that can raise the best wines. The gardener earning two dollars a day does not compete with the skilled physician with an income of twenty thousand dollars a year, for he has not the economic capacity to do so; but he is free to compete (as is the owner of the rocky field) unless law, caste, class legislation, social prejudice, or some other objective factor forbids. Anything, however, that prevents the labor or capital of buyers or sellers from application for which they are fitted, defeats free competition. To use the term monopoly of any and every limitation of economic ability is to extend it to every case of value. To use it of the high wages of skilled workmen, where no union to suppress competition exists among them, is to make it a colorless synonym of scarcity. It should be confined to a narrower and more exclusive use. Some special kinds of limitation should be connected with the idea of monopoly.

[Sidenote: Monopoly consists in unified control]

4. The limitation connected with monopoly is not that of economic capacity but that of ownership and control. The derivation of the word from the Greek points to the general thought: monos, alone, poléo, to sell, a single seller, the sole source of supply in a given market. The term was first used in England of special grants or patents of monopoly from the crown to make or deal in specified articles, such as soap, candles, etc. The political power of the state created and defended the monopoly. This policy is pursued in a limited degree to-day for the encouragement of invention, in the granting of patents and copyrights. In the current definition, "The exclusive right, power, or privilege of dealing in some article or trading in some market," the term "dealing in" is well chosen, for it is broad enough to cover cases of buying as well as selling, and includes power derived from political as well as from other sources. But the term "exclusive" is too absolute, allows of no gradations, and makes the definition applicable only in the rarest cases.

[Sidenote: Definition of monopoly]

[Sidenote: Monopoly limits supply]

5. Monopoly is such a degree of control over the supply of goods in a given market that a net gain will result to the seller if a portion is withheld. Every producer has control over some agents and some portion of the supply of products; but ordinarily the portion controlled by any one is so small that withholding it entirely from sale would not cause the market price to rise in any appreciable degree. The producer in such a case regulates his action as if the market price were fixed beyond his control, and he uses his productive agents fully up to the point where costs equal price on the marginal unit of product. A skilled worker getting five dollars a day loses that sum every day he is idle. A landowner whose land can command a competitive rent of ten dollars an acre must take that sum or less, or nothing; he cannot get more. How can a net gain ever result from a smaller sale? As a reduction of supply results in a higher price, it is possible, as is seen in the paradox of value, for a situation to arise in the case of some goods, where a smaller number of units yield a larger sum in the market than a larger number of units. But the seller's interest lies not in the increase of total sales, but in that of net gains. Net gains, being the product of the number of units sold multiplied by the gain on each unit, increase at a much faster rate than do total sales. The existence of monopoly power in any degree depends therefore on several factors: the effect of contraction of supply in raising prices, the effect on costs, the number of units remaining in the ownership of the one contracting supply, and the possibility of preventing others from increasing supply later to profit by the higher prices.

§ II. KINDS OF MONOPOLY

[Sidenote: The sources of monopoly power]

[Sidenote: Political monopoly]

1. Monopoly gets its power from political, economic, and commercial sources. A political monopoly derives its power of control from a special grant from the government, forbidding others to engage in that business. The typical political monopoly is that conferred by a crown patent bestowing the exclusive right to carry on a certain business. A second kind is that conferred by a patent for invention, or the copyright on books, the object of which is to stimulate invention, research, and writing by giving the full control and protection of the government to the inventor and writer or their assignees. In this case the privilege is socially earned by the monopolist; it is not gotten for nothing. Moreover, the patent is limited in time, expires and becomes a social possession. A third kind is a government monopoly for purposes of revenue. In France, the government controls the tobacco trade, and the high price charged for tobacco makes the monopoly yield a large income. A fourth kind are public franchises for public service, as street-railways, lights, gas, waterworks, etc. These are granted to private capitalists to induce them to invest capital in something which has public utility.

[Sidenote: Economic monopoly]

Economic monopoly arises when the ownership of scarce natural agents, as mines, land, water-power, comes under the control of one man or one group of men who agree on a price. Economic monopoly is a result of private property that is undesigned by the government or by society. It is exceptional, considering the whole range of private property, but it is important. The oil-wells embracing the main sources of the world's supply have come under one control. One corporation may control so many of the richest iron-mines of the country as to be able to fix a price different from that which would result under competition. Coal-mines, especially those of some peculiar and limited kind, such as anthracite, appear to become easily an object of monopolization. Economic monopoly merges into political monopolies, such as patents and franchises. Private property is a political institution designed to further social welfare, and only rarely is any particular property a monopoly. Private control of great natural resources doubtless would have been prohibited had it been foreseen.

[Sidenote: Commercial monopoly]

Commercial monopoly, variously called contractual, organized, or capitalistic monopoly, arises where men unite their wealth to control a market, to overpower or intimidate opposition, and to keep out or limit competition by the mere magnitude of their wealth. These various kinds so merge into each other that they cannot always be distinguished in practice. A patent may help a capitalistic monopoly in getting control of a market; great wealth may enable a company to get control of rare natural resources.

[Sidenote: Special classes of monopoly]

2. Monopolies may, for special purposes, be classified also as selling and buying, producing and trading, lasting and temporary, general and local. The terms selling and buying monopoly explain themselves, though the latter conflicts with the etymology. Under conditions of barter the selling and the buying monopoly would be the same thing in two aspects. A selling monopoly is by far the more common, but a buying monopoly may be connected with it. A large oil-refining corporation that sells most of the product may by various methods succeed in driving out the competitors who would buy the crude oil. It thus becomes practically the only outlet for the oil product, and the owners of the land thus must share their ownership with the buying monopoly by accepting, within certain limits, the price it fixes. The Hudson Bay Company, dealing in furs, had practically this sort of power in North America. Many instances can be found, yet, relatively to the selling monopolies, those of the buying kind are rare. A producing monopoly is one controlling the manufacture or the source of supply of an article; a trading monopoly is one controlling the avenues of commerce between the source and the consumers. Monopolies are lasting or temporary, according to the duration of control. By far the larger number are of the temporary sort, because high prices strongly stimulate efforts to develop other sources of supply. Yet the average profits of a monopoly may be large throughout a succession of periods of high and low prices. Monopolies are general or local, according to the extent of territory where their power is felt. At its maximum where transportation and other costs most effectually shut out competition, monopoly power shades off to zero on the border-line of competitive territory.

[Sidenote: Relativity of monopoly]

[Sidenote: The test of monopoly]

3. Degrees of power to affect price result from varying extent of control; monopoly is a relative term. The term monopoly by its derivation has reference to a single seller; but there are other thoughts in the concept. Monopoly has reference also to the amount of the supply controlled. The frequent use of the adjectives partial, limited, and virtual are implied but usually superfluous recognitions of the relative character of monopoly. Ownership of a particular knife, pencil, book, makes one the unique seller of it, but confers no monopoly power, as the power of substitution is practically absolute; the welfare of no one depends in any appreciable measure on that particular pencil. Ownership of an important fraction of an entire species of goods gives more power to affect value. One owning a large part of the desirable building sites or houses in town may gain by occasionally letting one stand vacant in order to drive better bargains with tenants. A trade-union may control most of the labor-supply of one kind in a town. But the test of monopoly is that a gain results from a higher price and fewer sales. It begins at the point where there is a motive to limit the supply in accordance with the paradox of value. The control of an entire species of goods gives price-fixing power, limited only by substitution of goods. Even though one person controlled all the coal and wood in any market, their prices still would be limited. If there were but one possible source of meat-supply, most people could live without meat. The monopoly of great species of goods can thus be seen gradually to merge from one grade into another. It is a matter of quality as well as quantity. There is more or less of it in the different industries, and, as noted in the preceding paragraph, it varies over time and territory.

§ III. THE FIXING OF A MONOPOLY PRICE

[Sidenote: Forces governing competitive prices]

1. A competitive producer gets the highest price that will permit him to dispose of his product. The enterpriser seeks to get the highest price for his product that the market will afford. His ability to continue making a profit at a lower price does not induce him to reduce the price unless the reduction is to his interest. The ordinary competing manufacturer is limited in his price by two things: first, his customers may cease to buy such articles entirely and may substitute other goods if the price is too high; secondly, they may buy of other sellers. Between his wish to keep the price up, and the customer's wish to buy as cheaply as he can, the price is fixed at a point where there is no inducement for others to come in and reduce his sales, or for him to seek a better market. There may be under these conditions a potential but very limited monopoly power. The sole druggist in a small town might occasionally get extortionate prices from particular customers in times of dire need, but he would thus drive away much of his custom, and would tempt a fairer and less grasping competitor to come in. Thus, when men and capital are free to come and go, there results an average or normal return for ability and agents of a certain grade. Prices come to equilibrium where each is selling his total product.

[Sidenote: Monopoly's greater control of price]

2. Where a monopoly exists to a greater or less degree, there is less reason to fear loss of custom to competitors. The degree of control determines the fear of competitors. If the control is slight, a very small rise of price will bring in competitors. The monopoly profits in this case either must be very small or they will be very brief. Those outside, controlling a large supply, will be tempted by large profits to market it at once and to increase it as fast as possible. Even where a large part of the supply is under one control, the fear of substitution puts a limit on the price demanded. If the control were extended to all wealth, the monopolist would be the absolute despot of the lives of his fellows. But as things are, the monopolist aims, just as the competitor does, to get the price that gives the maximum gain. The monopolist, however, is in a more or less favored position, as he can raise his price considerably before losing the most of his customers. Much depends on whether the costs increase or decrease as output grows. Where a large increase in output greatly decreases the cost, lower price may leave a larger margin between the cost and the selling price. A general monopoly price is therefore not an unlimited price. It is higher than the competitive price if the same cost of production is maintained. It may conceivably be lower than the former competitive price if the economies of combination greatly reduce the cost and justify a large increase of the output.

[Sidenote: Discriminating monopoly rates]

3. A monopoly often seeks to avoid a general market price, and it adjusts its charge in each small market separately. This is a most important aspect of the monopoly problem and a most important modification of the principle just stated. A market price is the expression of the least urgent demand that aids in carrying off a given supply. It is a maxim that there can be but one price at a time in a given market. The baker ordinarily sells the loaf at the same price to every one buying a given quantity. If he had a monopoly of the bread-supply, however, he might deal with each customer separately, ascertain, by personal inquiry into the lives of the citizens and by the aid of a force of detectives, just how much each could or would pay rather than do without bread. The policy of varying prices is thus followed by monopolies, though usually in a less inquisitorial way, to enable them to get the highest possible returns. Under the name of "charging what the traffic will bear," it is practiced by the railroads as local and personal discrimination. The endurance of some communities and of some individuals being greater than that of others, the burden is adjusted to the back, being made not as light but as heavy as each can be forced to bear.

[Sidenote: Low rates to destroy competitors]

Large monopolies dealing in commodities use an adaptation of this method to kill off small competitors who, within a certain district, sell at less than the monopoly price. Prices are suddenly reduced in that community below cost until, the small competitor being ruined, the monopoly rate is reëstablished perhaps higher than before. Fear of suffering a like fate prevents others from attempting competition even when prices offer a great attraction and give a high monopoly profit.

[Sidenote: The source of monopolistic profits]

The profits of monopoly can be explained by the ordinary laws of value, yet evidently they form a peculiar economic and social problem. They appear to be due not to the services of the enterpriser in increasing production, but to his success in limiting it. There is, therefore, an antisocial element in them not found in the profits of ordinary industry. This deserves further and closer study.

34. GROWTH OF TRUSTS AND COMBINATIONS IN THE UNITED STATES

§ I. GROWTH OF LARGE INDUSTRY IN THE UNITED STATES

[Sidenote: Distinction between large capital]

[Sidenote: Large production]

[Sidenote: And monopoly]

1. In the discussion of the so-called trust problem three things must be distinguished: large individual capital, large production, and monopoly power. Capital, in the sense of valuable agents, is found in the smallest as well as the largest industry, and every owner, from the small shop-keeper to the wealthiest bondholder, is a capitalist. In popular discussion, however, the word frequently implies great wealth in a single hand, though this wealth may be invested in a large number of small industries. Large production is the concentration of capital into large units of industry. The capital may be the same as before, the ownership may or may not be widely diffused, but the control and management are unified. Large factories may or may not have monopoly power; as factories grow in size, competition among them often becomes more, not less, complete and severe. On the contrary, monopoly, as before defined, may exist where the industry is small, as the waterworks in a small town, or a small factory for making patented articles. In periods of depression a business with a capital of ten thousand dollars may go on and prosper, while one with millions may be forced into bankruptcy. These three ideas--great individual wealth, large industry, and monopoly power--are often hopelessly confused in the discussion of present-day questions.

[Sidenote: Stages of tools and household industries]

[Sidenote: Of simple machines]

[Sidenote: And of large industry]

2. Three industrial stages may be broadly distinguished: that of tools, that of machines and small factories, and that of large production. Men are prone to forget that all the world is not doing just as they are. Over two thirds of the people on the globe are still in the first industrial stage. One billion people use only tools, and have no better source and means of power than domestic animals. This is true in the most of Asia and Africa, in the greater part of South America, and in many portions of North America. About two hundred million people live in the stage of simple machines and small factories. These are found in eastern and southern Europe, small portions of South America, some parts even of the United States. In this stage there is not enough manufacturing power in the community to supply much more than its own needs. About two hundred million people in the United States and western Europe have reached the third and highest industrial plane, where the highest mechanical devices are employed and industry becomes highly specialized. These differences are broadly stated; there are contrasts within every nation. Three hundred miles from here, in the Alleghanies, people still can be found spinning and weaving and wearing homespun as in colonial days. In a trip of twenty miles in Tyrol or Switzerland one can observe every one of these industrial stages. The most striking development, if not the typical form, in America to-day is large or concentrated industry.

[Sidenote: Household industry in America]

[Sidenote: Recent changes in number of factories]

3. In the last half century the unit of organization in leading industries has tended to grow larger. Seventy-five years ago a tool-using household industry, on farms and in homes where the greater part of the things used were produced in the family, was still the typical organization in the United States. The early factories growing out of the household industry were small. A family specialized in producing cloth and exchanged with its neighbors; so with shoes, candles, soap, canned goods, cured meats, etc. Since that time two counter forces have been at work to affect the ratio of manufacturing establishments to population. The number of establishments has been increased by specialization of farming which has called for many industries to produce the things once made on farms, and by increasing wealth and invention, which has made possible many small industries supplying things before almost unknown. The number of establishments has been diminished as the staple products that can be transported have come to be made in larger factories. The resultant of these movements during the thirty years ending in 1900 is somewhat surprising: the ratio of factories (with an output worth five hundred dollars) to population has somewhat increased. In 1870 there were two hundred and fifty-two thousand establishments; in 1890, three hundred and fifty-five thousand, and in 1900, five hundred and twelve thousand, a ratio to population of one to one hundred and sixty-two, one hundred and seventy-seven, and one hundred and forty-four respectively. The last date was one of great industrial prosperity, and doubtless many ephemeral enterprises had been called into existence, thus giving a somewhat abnormal result. Moreover, there has been a large increase in the number of things made in factories which were formerly made in the homes, and which then did not appear at all in the census of manufactures.

[Sidenote: Large production in some industries]

In cotton-weaving, however, the unit of industry is growing, factories in 1870 numbering nine hundred and fifty-six; in 1890, nine hundred and five; in 1900, one thousand and fifty-five, the later increase being due to the fact that many new factories in the South have been started in the last decade. The population meantime doubled. This movement has been going on for seventy years, there being about the same number of mills in 1900 as in 1830, though population had multiplied six-fold. Iron- and steel-mills numbered one thousand three hundred in 1880, one thousand in 1890, and nine hundred and sixty-five in 1900. In industries having local markets and sources of supply for materials, the change has been less rapid. There were twenty-four thousand grist-mills in 1880, eighteen thousand in 1890, and twenty-five thousand in 1900, a change of ratio from two thousand one hundred to three thousand population per grist-mill. There were twenty-six thousand sawmills in 1880, twenty-two thousand in 1890, and thirty-three thousand in 1900, a change from about one thousand nine hundred and twenty to two thousand two hundred and seventy persons per sawmill.

But while the number of establishments in these staple industries was decreasing, the number of employees per establishment in most cases was increasing. The average in all industries, in 1870, was eight; in 1890, twelve; in 1900, ten and four tenths. In cotton-mills, in 1870, the average was one hundred and eighty-four; in 1890, two hundred and forty-four; in 1900, two hundred and eighty-seven. The grist-mills, in 1880, had two and four tenths persons per establishment; in 1890, three and four tenths. The sawmills, in 1880, averaged six employees each; in 1890, fourteen; iron- and steel-mills in 1880, one hundred and twenty-one each; in 1890, one hundred and ninety-six.

[Sidenote: Growing concentration of capital into large industries]

4. The amount of capital per establishment is tending to increase in the leading lines of industry. The amount of capital is not so easy to determine as the number of employees, and it is recognized that the census figures on this subject are only approximately correct. We are told that in cotton-mills, in 1830, the average capital invested was fifty thousand dollars; in 1890, nearly four hundred thousand dollars; in 1900, four hundred and forty thousand dollars. It is easy to observe the large increase in investment of capital in flouring-mills since the new processes came into use. The average capital of all industries does not grow as in the staple ones, for many smaller industries have come into existence. In 1880, the average capital was eleven thousand dollars; in 1900, it was eighteen thousand dollars.

[Sidenote: Recent formation of combinations]

The years between 1890 and 1900 saw the rapid formation of trusts and combinations, and of larger industries. Consolidation took place on a great scale in railroads and in manufactures. Much of this has been of such a kind that it does not appear at all in the figures showing the number of establishments and of employees. Many discrepancies appear in the data regarding this movement given by different authorities, as there is no generally accepted rule by which to determine the selection of the companies to be included in the lists, and as the conditions are changing from day to day. A competent financial authority[1] gives the following figures regarding the "industrial" trusts (manufacturing and commercial) and gas trusts, organized in the United States between 1860 and 1899, not including combinations in such businesses as banking, shipping, railroad transportation, etc. The figures refer to the reorganization and consolidation of industries into larger units, some of which have much and others little or no monopoly power.

Decade Number Organized Total Nominal Capital 1860-69 2 $13,000,000 1870-79 4 135,000,000 1880-89 18 288,000,000 1890-99 157 3,150,000,000 --------------- --- ------------- Total, 40 years 181 $3,586,000,000

The number organized and the capital represented by this movement in the last of these decades are eight times as great as in the thirty years preceding. In the last ten years can be traced the influence of general industrial conditions.

Year Number Organized Total Nominal Capital 1890 6 $82,000,000 1891 13 168,000,000 1892 13 140,000,000 1893 5 226,000,000 1894 2 35,000,000 1895 7 104,000,000 1896 3 40,000,000 1897 6 93,000,000 1898 22 574,000,000 1899 80 1,688,000,000 --------------- --- ------------- Total, 10 years 157 $3,150,000,000

[Footnote 1: Compiled from data given by "The Journal of Commerce and Commercial Bulletin," reprinted in "The Commercial Year Book," Vol. V, 1900, pp. 564-569.]

The first three years enjoyed great prosperity and the number of combinations were six, thirteen, thirteen. In 1893, the number was less, but the total nominal capital (preferred and common stocks and bonds) was still the greatest it had ever been in any year. Then came the period of depression, 1894-97, when both the numbers and the capital were comparatively small. Then followed the period of the greatest formation of trust companies the world has ever seen, which extended from 1898 to 1901, and ended in 1902.

[Sidenote: Trust statistics for 1904]

In a list recently revised by another authority[2] it appears that the data for all "industrial trusts" (nearly, but not quite, comparable with the foregoing figures), are in round numbers as follows:

Number of Plants Acquired Total Date Number or Controlled Nominal Capital Jan. 1, 1904 318 5288 $7,246,000,000

[Footnote 2: John Moody, "The Truth About the Trusts," 1904.]

These figures would indicate that the industrial trusts more than doubled within four years, most of the growth being within three years. The same authority, in a more comprehensive list, classifies in six groups all so-called "trusts" of the United States, at the date of January 1, 1904, as follows (the figures just given above are the totals of the first three groups):

No. of Plants Acquired or Total Groups Number Controlled Nominal Capital

1. Greater industrial trusts 7 1528 $2,660,000,000

2. Lesser industrial trusts 298 3426 4,055,000,000

3. Other industrial trusts in process of reorganization or readjustment 13 334 528,000,000

4. Franchise trusts 111 1336 3,735,000,000

5. Great steam railroad groups 6 790 9,017,000,000

6. Allied independent railroad groups 10 250 380,000,000 --- ---- --------------- Total, 445 8664 $20,000,000,000

§ II. ADVANTAGES OF LARGE PRODUCTION

[Sidenote: Economical use of machinery in large production]

1. A great technical advantage of large production is the better and fuller use of machinery. A large factory with a large output can keep a special machine adjusted for each pattern and process, whereas in a small factory much time and energy are wasted in adjusting one machine for various processes. The machinery in a large factory is thus more fully utilized. Compare the machinery used in a large ax-factory with that used in twenty-five small ax-factories having the same total output: the one hundred and fifty workmen in twenty-five small factories would use twenty-five shears, one hundred trip-hammers, fifty grindstone-pits, fifty polishing-frames, a total of two hundred and twenty-five machines; the same one hundred and fifty men in one large factory would require three shears, a saving of twenty-two; twenty trip-hammers, a saving of eighty; thirty-seven grindstone-pits, a saving of thirteen; thirty polishing-frames, a saving of twenty; a total of ninety machines, a saving of one hundred and thirty-five machines. The difference in cost due to machinery is not so great as these figures indicate, as the unused machines last longer; but in the small factory there is more depreciation from rust and decay, and a larger proportionate investment of capital for which interest must be earned. The average amount of stock and materials required in a large factory is not so great in proportion to the output.

[Sidenote: Economy in labor power]

2. In a large factory the division of labor may be more complete and effective. The technical economies of the division of labor can be realized in large measure only when a number of men work together. Partly because of the advantages in the use of machinery, but partly from other causes, labor in a large group is proportionately more effective than in a small group, especially in producing form-value. In making plows, nine men working separately will average sixty-six plows each per year, while one hundred and eighty men working together will average one hundred and ten each per year, the output per man being increased sixty-six and two thirds per cent. In a rifle-factory with a daily output of fifty, eight men are needed for the same product that can be supplied by three men in a factory with an output of one thousand daily.

[Sidenote: Miscellaneous economies]

3. In the larger industry the costs of management, supervision, and marketing are relatively less. Division of labor decreases the difficulty of supervision in larger factories, where the processes are divided, systematized, and made a matter of routine. The necessary inspection of the results is more rapid and easy. The advertising of certain kinds of goods involves a large and inevitable outlay, which is relatively less for a larger business, as the greater the output the smaller the burden on each unit of the product. Combination effects a great saving in the number of commercial travelers, a result partly due to the decrease in competition, but partly also to better organization. Each of twenty different factories must send its drummers into every part of the country to seek business. In combination they can divide the territory, visit every merchant and get larger orders at smaller cost. Supplies can be purchased more cheaply in large amounts, and shipments in car-load and train-load lots make possible special (sometimes illegal) concessions from railroads and from carriers on waterways.

[Sidenote: Limits to the growth of a single factory]

4. There are some disadvantages in a large industry which put a limit to the growth of a single local establishment. There is practically a limit to the advantages of size in a factory. When each man is working on the smallest possible subdivision of the product, doubling the number of employees will not increase his skill. When the finest machinery can be kept constantly in use, economy in its use has reached the maximum. As large factories tend to create cities around them, land rises in value and higher wages must be paid the workmen. Small factories are constantly seeking out lower rents, taxes, wages, salaries, cheaper local sources of materials, cheap though limited sources of power, and thus they compete successfully in many markets. The point is reached in the growth of establishments where oversight cannot be as perfect and complete; the eye of the master cannot be over all. The market that can be reached by one factory is limited by distance, as the cost of transportation finally offsets all the other advantages of large industry.

[Sidenote: Do not necessarily limit consolidation]

It is evident that most of these reasons apply to a single local factory with far greater force than to a federation of locally scattered plants. It was once believed that the growing disadvantages of large industry would set an early limit to consolidation. While there is a truth in this thought not to be overlooked, the effects must now be recognized to be more distant than was supposed. The limits to the advantages of combination have been removed by the application of the federative plan which makes possible under one management the maximum of advantages with the minimum of the disadvantages in large industry. That was the discovery of the early promoters of the trust movement.

§ III. CAUSES OF INDUSTRIAL COMBINATIONS

[Sidenote: Trusts in the legal and the popular sense]

1. Trusts are large combinations of capital with some degree of monopoly power. The original, legal meaning of the term trust does not include the idea of monopoly. The old legal idea of a trust is the confidence imposed in a trustee. The method that was adopted by the early combinations was the trust method, that is, they made use of this legal device: the stock of the separate companies was put into the hands of a board of trustees to whom was thus given the right to control. As it has been found possible to accomplish the same end without the use of this legal method, the popular meaning of the word trust, as applied to a monopoly, no longer agrees with the legal meaning. The word trust is popularly used of any large industry, though usually there is connected with it the idea of some evil power to raise prices to the consumers. A large number of the corporations called trusts have, however, little monopoly power, and some have none at all. They are simply large establishments.

[Sidenote: Economies of combination]

2. A strong reason for combination of competing plants is found in the legitimate economies of large production. The economies that are possible within a single factory may be still greater in a number of combined or federated industries. The cost of management, amount of stock carried, advertising, cost of selling the product, may all be smaller per unit of product. A large aggregation can control credit better and escape loss from bad debts. By regulating and equalizing the output in the different localities, it can run more nearly full time. Being acquainted with the entire situation, it can reduce the friction. A strong combination has advantages in shipment. It can have a clearing-house for orders and ship from the nearest source of supply. The least efficient factories can be first closed when demand falls off. Factories can be specialized to produce that for which each is best fitted. The magnitude of the industry and its presence in different localities strengthens its influence with the railroads. Its political as well as its economic power is increased.

[Sidenote: Integration of industry]

A recent phase of corporate growth is the "integration of industry," that is, the grouping under one control of a whole series of industries. One company may carry the iron ore through all the processes from the mine to the finished product. A railroad line across the continent owns its own steamers for shipping goods to Asia or Europe. Large wholesale houses own or control the output of entire factories. The possibilities in this direction have only begun to be realized.

[Sidenote: Combination prevents competition]

3. The men uniting to form a trust always declare that its formation is the necessary result of excessive competition. The statement is often true in the sense that a hard fight and lower prices have preceded the formation of the trust. But as this excessive competition usually is for the very purpose of forcing the combination, this explanation is a begging of the question. It is fallacious also in that it ignores the marginal principle in the problem of profits. Profits are never homogeneous from factory to factory, and to those that are on the margin competition may appear excessive. It is generally the largest and strongest factories, in the more favored situations, that, in order to get rid of troublesome competitors, force the smaller, weaker, industries to come into the trust. When, therefore, it is said that competition is destructive, it may be a partial truth, but more likely it is a pleasantry reflecting the happy humor of the prosperous promoters of the combination.

[Sidenote: Financial gains of combination]

4. Another strong motive for the combination is the profit to promoters and organizers. There are indirect as well as direct gains to the managers of a large business. There is the gain from the production and sale of goods to consumers, and there is the gain from the financial management, from the rise and fall in the value of stock. The promoters of a combination often expect to make from sales to the investing public far more than from sales to the consumer of the product. A season of prosperity and confidence, when trusts and their enormous profits are constantly discussed, has an effect on the public mind like that of the discovery of a new El Dorado, a California, or a Klondike. Then is the time for the wily promoter to offer shares without limit to investors.

These considerations show that the trust is not simple in its cause, nor in its nature. In a sense the most artificial of industrial arrangements, in another sense it is a natural evolution of industry. More and more it is being recognized that though it has in it something of evil, it has as well something of good, and certainly much of the inevitable.