35. EFFECT OF TRUSTS ON PRICES…

35. EFFECT OF TRUSTS ON PRICES

§ I. HOW TRUSTS MIGHT AFFECT PRICES

[Sidenote: Economics of the trust problem]

1. The economist's task, strictly confined, is to explain the relation of trusts to prices, not to solve the problem of their political control. The question of trusts is such a large one that its discussion here must be confined to those aspects having close relation to the central subject of economic study,--the laws of value. These laws were by the older economists thought to be true only within the limits of free competition. Seeing that in various ways this freedom is interfered with not only by caste, custom, organized labor, but by patents, political privileges, and the power of large aggregations of capital (in short by all things that check the flow of ability and of agents from one industry to another), the question occurs: Are the abstract laws of rents, profits, and wages of any significance or of any help in discussing the great practical questions of to-day? Are not prices determined by the personal whim of industrial despots who can bid defiance to the laws of price? The control of trusts by legislative action is largely a political problem, but it must be guided by a correct economic analysis. Proposed legislative measures often assume or imply that in no way, directly or indirectly, is competition found in the problem. It should be the aim of economic study to make clear the true bearing and force of monopoly power in practical problems of value.

[Sidenote: Limited power of trusts]

[Sidenote: Monopoly and supply]

2. The fundamental principles of market value cannot be changed by a trust; a selling monopoly can affect price only as it affects supply or demand. The strongest "trust" yet seen has not been omnipotent. Many careless expressions on the subject are heard even from ordinarily careful writers and speakers: "The trust can fix its own prices," "has unlimited control," "can determine what it will pay and for what it will sell." This implies that trusts are benevolent, seeing that the prices they charge are usually not far in excess of competitive prices in the past. Such a view overlooks the forces that limit the price a monopoly can charge. The law according to which the value of products on the market is determined, is as valid where there is a trust as anywhere else. The marginal utility of goods to the consumer determines the price of any given supply. If the supply remains the same, no trust can make the price go higher. What it gets in exchange are the services or the wealth of the rest of the public. At what rate can it exchange its products for the products of others (including other trusts)? The monopoly usually directs its efforts to affecting the supply, leaving the price to adjust itself. (This is the case of the selling monopoly; the statement must be adjusted where it is a buying monopoly.) It can affect the supply either by lessening its own output or by intimidating and forcing out its competitors. It is true that this logical order is not always the order of events. The trust does not first limit the supply, and then wait for prices to adjust themselves; it first raises its prices, but unless it is prepared to limit the supply in accordance with the new resulting conditions of demand, such action would be vain. The control of the sources of supply is the logical explanation of the higher price, even though the limitation of supply is effected later by successive acts found necessary to maintain the higher price.

Monopoly price is therefore a rational thing, not a mystery entirely out of harmony with the simple law of value laid down for consumption goods. The trust works as the magician does, not as was thought of old, in defiance of natural laws, but in harmony with them and by their aid. The view the public took of the trusts was at first medieval. That should not be the view to-day.

[Sidenote: Monopolistic gains from successful combination]

3. The economies of large production after a successful combination may be divided in varying proportions among monopolists, workmen, and consumers. If the great economies of large production are effected by a new combination which makes no attempt to fix a higher price and limit production, where will the fruits of these economies go? They will go first to the owners of the trust, because, unless inspired by motives of philanthropy, they have no need to lower prices. Though they are in possession of special facilities, they will try to secure as high a price as before. A wider margin permits greater profits on each unit without limiting the output or the sales. They may retain this so long as they do not yield to the temptation to increase the output in proportion to their new facilities.

[Sidenote: Gains to workmen]

These economies, may, however, at times inure to the benefit of the workmen in higher wages if they succeed by any means whatever in squeezing the employers at this time of exceptional gains. The suggestion has even come from employers that in order to allay labor troubles there should be a union of capital and labor to squeeze the consumer, by doing away with all competition in fixing prices. This proposition to divide the plunder of monopoly has been viewed approvingly by some leaders of organized labor, but it does not look especially alluring to the general public, to which is assigned the humble part of paying the bill.

[Sidenote: Gains to consumers]

Part of the advantages will go to the consumer whenever there is a motive on the part of the large establishment to increase supply in order to get a larger profit or to forestall new competition. As the improvements become matters of public knowledge, most of the new economic methods can and will be adopted by new enterprisers, and other large aggregations of capital will be induced to come in to reap the benefits. The effect, of course, is an increase in supply and a lowering of prices. The fiat of the trust to prices to remain fixed while supply increases is as vain as a mortal's commands to the waves to be still. The undesigned result of the economies of large production, therefore, where control is not great, is to lower the prices and to diffuse the benefits among the public.

[Sidenote: Social burden of monopoly profits]

4. If the trust succeeds in raising its prices it gains at the expense of the community. If a producer has some monopoly power, recognizes and uses it, his gain does not correspond with an increase in production. It is taken from those who buy these products, it is deducted from the psychic incomes of other members of society. This raising of prices actually reduces technical production, for the output is limited in order to secure the higher price. The probably less urgent wants of the receivers of monopoly incomes are gratified in place of the probably more urgent wants of the average purchaser. The result is a decreased social income, with an increase of the inequality of distribution. There is an analogy here with the effects of trade-unions. If the trade-union succeeds in forcing prices higher than the competitive prices, it gains at the expense of the other portion of the community. But while its gains appear to be more largely at the expense of the richer elements of society, the gains of the trust are more likely at the expense of the poorer elements. If the success of organized labor means to some extent a leveling up of income, the success of the trust means a still further inequality. Hence a difference in public sympathy in the two cases.

[Sidenote: The praise and blame for trust prices]

5. The responsibility for either the rise or the decline of trust prices cannot always be determined. Prices are changing constantly under competitive conditions. In this active, moving world, changes of demand, the exhaustion of sources of supply, new processes, expiration of patents, opening up of new lines of transportation, affect prices in a multitude of ways entirely independent of organization. Trust-controlled industries are open to all these influences. Economic forces cannot be isolated as can elements in a chemical laboratory, and, therefore, trusts claim the credit for all the reductions of price that have occurred. By such a calculation the trusts usually make a showing of progress, as, until 1896, for twenty years the tendency of prices in most lines was downward. Always getting the highest price they can under the market conditions, they yet pose as benefactors. They would claim that the economies possible only under trust organization cause even a monopoly price to be less than a competitive price would be. Critics of the trusts, on the other hand, charge them with causing all the increase that occurs, and with checking the decline in prices. The critics compare the percentages of decline in price during the decades before and after the combination was formed, and as it is impossible for a geometric rate of decrease in price, as a result of improvements, to be long maintained, this showing is very unfavorable to the trusts. A method has been found, however, of testing, in the case of a few leading industries, the effects they have had on the price of their portion of the productive process.

§ II. HOW TRUSTS HAVE AFFECTED PRICES

[Sidenote: Trusts raise prices]

[Sidenote: The oil trust]

1. Examination of the course of prices in the case of some notable trusts shows that, wherever effective, they raise prices above the competitive rate possible to smaller production. The most instructive study in the subject is that undertaken by J. W. Jenks a number of years ago, and later developed by him when working with the Industrial Commission from 1898 to 1900. Its results are embodied in a series of charts. It appears that the price of refined petroleum, in 1871, was twenty-five and seven tenths cents per gallon; in 1880, eight and six tenths cents; in 1887, seven and eight tenths cents; in 1900, seven and eight tenths cents. A writer in the "North American Review" claims that this decline was due to the economies accomplished by the Standard Oil Trust. It will be noticed, however, that prices fell most rapidly (from twenty-five and seven tenths cents to eight and six tenths cents) between 1871 to 1880, a period of intense competition, when the industry was new, and when the independent companies, fighting for their existence, introduced many improvements and began the construction of the pipe-lines that were later secured by the Standard Oil Co. Despite this rapid decline, the smaller companies still could have maintained a profitable business had it not been for the ruinous discrimination of the railroads against them. Because of this, the Standard Oil Co., in 1880, obtained almost complete control. The price twenty years later than that date was less than a cent cheaper. In the meantime the price for a time continued to fall. Competition was never quite stilled. The small competitor, wherever he saw a chance, has nibbled off a bit of the tempting profits. The rise from 1898 to 1900 was in accord with that occurring in other lines. A much lower cost of production is now possible to the great monopoly with its larger sales and more economical methods. The by-products, unknown at the beginning of the period, now yield large sums, yet the price remains much the same as a quarter of a century ago. The trust has succeeded in retaining a large part of the increasing margin of price over cost.

[Sidenote: The sugar trust]

The influence of the sugar trust may be studied by what is known as the method of differentials. The differential in sugar is the difference between the cost of the raw sugar and the refined granulated sugar. Raw sugar is the main material and the principal fluctuating item of cost beyond the control of the trust. Changes in the differential reflect the changes in profits except as modified by a cheapening of the process. The period from 1880 to 1887 was one of great competition. In 1880, the differential was one and ninety-two hundredths cents on each pound of refined sugar, but it fell steadily till, in 1887, it had reached sixty-four hundredths cents. In the fall of that year the trust was formed; and the next year the differential had risen to one and twenty-five hundredths cents, in 1889 to one and thirty-two hundredths cents. Tempted by the enormous profits, the rival refineries of Claus Spreckel were started, and with competition the differential fell, in 1890, to seventy hundredths cents. The rival factories were then bought up and under the new combination the differential went sailing up to one and three hundredths in 1892, and to one and fifteen hundredths in 1893. Rival factories again arose and competition grew stronger, reducing the differential to ninety-four hundredths in 1894. It was in that year that the firm of Arbuckle Brothers and Claus Doscher each opened a great refinery, and in the next year the differential fell to fifty hundredths cents. In 1900, some agreement, the terms of which were unknown to the public, was entered into by the rivals and the differential had risen, in March, 1901, to ninety-five hundredths cents. In every case the differential fell when competition was effective and went up when monopoly power was regained.

[Sidenote: The nail trust]

The differential of steel-wire nails is the difference between the cost of the steel billets and the price of the wire. Between 1890 and 1895 there was a steady decline in the differential. In 1895 was formed the nail pool, an agreement to share the profits, a form of combination. A rapid advance took place, both in the price and in the differential. In the fall of 1896 the pool was broken and then occurred a fall in prices and in the differential during 1896-97. In January, 1899, the nail trust was formed, controlling sixty-five to ninety-five per cent. of the output of wire nails, and a rapid advance occurred in the price and also in the differential.

[Sidenote: The tin-plate trust]

The tin-plate industry practically had its origin in the United States, in 1892, under the McKinley tariff. As competition increased, prices and the differential fluctuated and declined. At the end of 1898 the tin-plate company was formed and prices at once started upward with a rapid increase in the differential. Cause may, in a measure, be mistaken here for effect. In these cases the part of the rise in price due to the rise of materials is not brought about by the trust. The differential represents its part of the productive process and its source of profits. The power to make the differential high is due in part to the general conditions of business in the last three years considered. The profits of all industries in those years increased. While prices may have risen partly because the trust was formed, it may have been possible to form the trust because prices were rising. The general conclusion is that trust prices are always raised when, and to the extent that, control is secured. They are lowered below normal prices when competition becomes troublesome. Fluctuation of prices probably has been more rapid and more spasmodic under trusts than it has been under ordinary competitive conditions.

[Sidenote: Effective trusts injure various producers]

2. A large degree of monopoly control may lower the incomes of producers of materials, the value of competitive plants, and prices in special local markets. A strong selling monopoly tends to become also a buying monopoly. A great industry using great quantities of materials may either own the sources or purchase from small producers. The steel trust owns mines, and ships and railroads to bring the ore to the furnaces; but the tobacco trust buys from the farmers. If the packing, refining, and marketing of a product is monopolized, the sellers of the raw or partly finished product are subject to one-sided competition. The small producers of tobacco, of crude oil, and of anthracite coal claim that the effect of the trusts is to give them lower prices for their products. Some have been severely punished by the monopolies for refusing to take the first offer made. Monopoly is thus likewise able to purchase competing plants at ridiculously small sums, by first making them valueless through fierce price-cutting, or by threats of it. "Rich" is often a relative term, and it is said that many a small millionaire producer has anxiously waited to see whether the great trust would next turn its attention to him.

[Sidenote: The persistence of competition reducing prices]

3. Competition of less capable producers works in most cases to prevent the great or continued rise of trust prices. Early trusts overestimated their power. The persistence of competition in industries where the trusts have had great advantages in position and resources has been astonishing. The wall-paper trust, though for many years it kept prices above competitive rates, was repeatedly undermined by competition. The whisky trust, while it frequently raised prices, was as often forced by the growth of small distilleries to lower them below competitive rates. Competition in the oil industry has persisted under the greatest difficulties. The smaller companies have hauled the product by wagon when the trust was moving it by pipe-lines. The continuance of high prices by a trust depends on a high degree of control of supply. A recognition of the limits of their power has led trusts in some cases to a policy of moderate prices, affording a good profit, but not encouraging competition.

[Sidenote: Supply as the condition of low prices]

The limits of the power of the trust to control prices are strikingly shown by the fact that it cannot even insure low prices if the market conditions do not justify them. The steel trust, in 1902-3, declared that it would not advance the price of steel rails above twenty-eight dollars, and this was hailed as a beneficent effect of trust control, which, by equalizing production, could prevent excessive fluctuations of price. But the trust's declaration was a bit of inexpensive humor on the part of the managers; the trust had nothing to sell at the price quoted, as its entire product had been sold out months in advance. While, therefore, the trust continued calmly to quote steel rails at twenty-eight dollars, competition raised the market price to thirty-three dollars a ton; twenty-eight dollars or more was paid for second-hand rails, and a proportionate price for other iron products. Such exceptional conditions, raising prices to abnormal levels, are followed by a decline disastrous not only to the small producer, but to the trusts as well.

[Sidenote: Modes of controlling trusts]

4. The control of the trusts must be sought in the direction of maintaining potential competition through fair and free conditions of industry. Many of the remedies suggested are reactionary and would give up the benefits of large production. Measures must be sought in harmony with the economic principles of price. Since many of the trusts have grown wealthy by special shipping privileges from the great quasi-public corporations, the railroads, and by special favors from public or corporation officers, who have been false to their duties, the solution must be a political and moral one; it must be sought in the development of honest citizenship and of a more efficient social regulation of quasi-public industries. The conditions of competition may be made fairer by requiring publicity of accounts, and by making it impossible for great corporations to strangle their local competitors by special and temporary prices. The state here has the same duty to perform that it has to protect the weak man from personal violence at the hands of the strong. This will not prevent competition, but it will determine the ways in which the rivalries of men can be manifested. Any measures for controlling the great combinations must start from a right understanding of the law of value, neither underestimating nor overestimating their economic power. Public sentiment toward the trust question has changed somewhat in recent years, because the nature of trusts and the extent of their power are better understood. There is now less fear of them, and more confidence that they can be tamed and made to serve the welfare of society.

36. GAMBLING, SPECULATION, AND PROMOTERS' PROFITS

§ I. GAMBLING VS. INSURANCE

[Sidenote: Unavoidable chances]

1. Many forms of chance are inseparable from the individual enterprise. There are what may be called natural chances chances, arising from the uncertainties of the seasons, from rainfall, heat, hail, storm, flood, lightning, land-slides. Such chances must be taken both by the small enterpriser and by the large. In an earlier condition of society natural chance almost dominated industry, and it still remains and must always remain an important factor to deal with. There are political chances, as war and riot; as legislation on money, tariffs, credit, and business relations. These are caused, it is true, by the action of men, but it is a collective action out of the control, to a greater or less degree, of the individual--absolutely out of the control of most individuals. Men of greater political influence can to some extent control these chances, possibly in their own favor. There are chances of carelessness causing fire, explosions, wrecks on misplaced switches, and involving penalties and losses that must be met. There is the chance of physical or mental collapse, as the sudden insanity or the sudden death, unforeseen and unpreventable, of one performing responsible duties. Sickness often wrecks the plans and the fortune of a whole family. There are economic changes, such as those in methods of production, in machinery, in methods of transportation; such as the growth of fashions or the growth of population changing demand in some directions and for some materials.

[Sidenote: Average of chances in each industry]

Some of these chances are more connected with money-lending, others with manufacturing; some with agriculture, others with commerce; but all are present in some degree in every industry. In the broadest view they are not chances, for on the basis of experience it can be foretold that they will occur to some one; but no individual can tell when and how they will occur to him. A general average of chances in different lines of business causes some to be called safe, others extra-hazardous. The chance is averaged and added to the profit or gain of that industry, for an extra-hazardous industry must in general afford a higher average of profit in order to induce men to engage in it. It is folly to take a risk without ascertaining its degree, so far as general experience enables one to choose. But inasmuch and in as far as the gains and losses fall unequally upon different individuals, income depends on chance.

[Sidenote: Other chances artificial and avoidable]

2. The essence of gambling is the attempt to gain by taking chances that are not the unavoidable incidents of productive enterprise. The chances just enumerated are not sought, but avoided as far as possible; yet they must be borne by some one, and the burden must be distributed throughout society. There are unquestionably many kinds of chance-taking which differ from these in economic, and therefore in moral quality; but it has taxed the ingenuity of philosophers to lay down an abstract definition of gambling that would permit ready and certain distinction in practice between gambling and legitimate chance-taking. Typical gambling is the transfer of wealth on the outcome of events absolutely unpredictable, so far as the two gamblers are concerned. Examples are the shaking of unloaded dice or the honest dealing of a pack of cards. There can be no doubt of the entire lack of a productive economic basis in the betting on prices carried on in so-called bucket-shops by ignorant persons having no connection with the market of real things, and seeking to get something for nothing as a result of mere chance.

[Sidenote: Cheating and gambling]

Cheating is not a necessary mark of gambling, although the cruder kinds of dishonesty, such as the loading of dice or the collusion of horse-owners or of horse-jockeys to deceive the betting public, are so common that they seem often to be its essential feature. Gamblers recognize fair as opposed to unfair methods. Fair gambling is a kind of minor morality within the immoral field of gambling, like the honor found among thieves. Gambling bears somewhat the same relation to legitimate chance-taking that play does to labor. The chance-taking in gambling has no useful purpose or result outside itself. The gamblers constitute themselves a little fictitious economic circle, and they transfer gains and losses on the turn of events that have no practical objective result within their circle except to determine the direction of the transfer.

[Sidenote: Various cases of a mixed nature; partisan bets]

3. Legitimate forms of chance, or risk-taking, shade off into illegitimate forms, or gambling. Ranging between the extremes of legitimate risk-taking and of gambling are a number of cases of a mixed nature. The bets made on college games, races, and contests differ from ordinary bets only in the added feature of so-called college loyalty (a travesty on the real sentiment). These college gambling contracts are supposed (according to a mode of reasoning found also among primitive peoples) to exercise a subtle and irresistible influence upon the result. A crew that enters the race with the odds against it is unnerved and undone, thinks the patriotic collegian.

[Sidenote: Knowledge and skill affecting the result]

In nearly all wagers, judgment in some degree influences the choice of sides. One man bets on a horse whose pedigree and performances he knows thoroughly; another judges by the horse's appearance as it comes upon the track. The professional book-makers have the latest possible and most exact information on which to base their bids.

In the bets made on one's own prowess, as on speed in running or rowing, or in playing cards (wherein also the element of pure chance is mingled) the chance-taking is still far over on the uneconomic side of the border-line. The running is for the sake of the wager, not for a useful purpose. A premium won by a runner for speed in delivering a message of economic importance is in striking contrast to the winnings in a wager.

Finally, the very border-line of difficulty is reached in the purchase and sale of goods in the market with a view of profiting by chance changes in price. Land speculation, the purchasing and holding of lumber, grain, cattle, and other tangible and useful things, must be judged liberally. The quality of gambling depends somewhat on the motive as well as on the ability of the actor. The enterpriser dealing with real wealth, and fitted to take the risks, both because of his resources and of his exceptional knowledge, needs the motive of gain, and in a sense can be said to earn socially what he gets. The motive of the uninformed must be a blind trust in luck, and a hope to gain from a rise in prices which they are quite unable to foresee or rationally to explain.

[Sidenote: Gambling an economic loss to society]

4. In its relation to value, a bet, or wager, is the exchange of the chance of loss for the chance of gain, involving a social loss. Even when fairest, the average results of such an exchange must be unfavorable to society. One person loses a part of his income that gratifies relatively urgent wants; another gains something that gratifies only less urgent wants than were represented by the sum he risked. The area that is subtracted from the loser's psychic income is larger than the area added to the winner's psychic income. The result would be different on the impossible condition that it were always the poorer man that gained and the richer one that lost. Betting, then, does not produce wealth; it merely transfers ownership in a way that reduces the total want-gratifying power of wealth.

The effects that gambling and betting have upon character are still more important and dangerous than their effects upon income. Motives of economic activity are reduced; energy is diverted from productive enterprise; society is demoralized through dishonesty of men intoxicated by gambling; speculation and embezzlement occur; and there is a reduction both of production and of enjoyment in society. These things can be reasoned out with mathematical certainty by means of the law of marginal utility.

[Sidenote: Insurance as a wager]

5. Insurance is, in outer form, a bet; but its essential purpose is the useful one of equalizing and eliminating chance. In its early form insurance was a bet made by a ship-owner to protect his cargo from loss. The chance of loss in shipping was even greater in the Middle Ages than now, and it became customary for the ship-owner to bet with a wealthy man that the ship would not return. If it did come back, the owner could afford to pay the bet; if it did not, he won his bet and thus recovered a part of his loss. It was what is called to-day "a hedge," that is, one bet made to neutralize, or offset, another. This gave to the smaller merchant the advantage of distributing his losses over a number of voyages, as was done by the owner of many vessels. Antonio, the wealthy merchant, is made thus to express his security:

"My ventures are not in one bottom trusted Nor to one place; nor is my whole estate Upon the fortune of this present year. Therefore my merchandise makes me not sad."

Gradually there came about a specialization of risk-taking by the men most able to bear it. They could tell by experience about what was the degree of uncertainty, and could lay their wagers accordingly. When several insurers were in the same business, competition forced them to insure the vessel and cargo of the ordinary trader for something near the percentage of risk involved. The insurance thus tended to become a mutual protection to the ship-owners; what had to be paid in premiums to cover risk came to be counted as part of the cost of carrying on that business.

[Sidenote: Insurance as mutual protection]

Modern insurance is mutual in nearly every case: the total premiums equal the total losses plus operating expenses, the interest on the reserve of premiums counting as part of the premium. Each one gets protection for the loss of his property in return for the payment of a sum that will cover the losses on others' property. Such an exchange is a profitable one. The premium comes from marginal income; the loss of house or property would fall upon the parts of income having higher marginal utility. The less urgent wants of the present are sacrificed in order to protect the income that gratifies the more urgent wants of the future. In insurance each party gives a smaller utility for a greater; each has a margin of advantage; while the greater certainty in business stimulates effort and rewards it. This is quite the opposite of the working of betting and gambling.

[Sidenote: Conditions of sound insurance]

6. To be economically sound, insurance must have to do with real productive agents, and with somewhat regular, ascertainable events beyond the control of the insured. The difficulties that arise in case of fire-insurance are due largely to the failure to meet these requirements. When the insured sets fire to his own buildings, fire insurance ceases to be a legitimate thing. Constant efforts are made by insurance companies to guard against these "moral risks," the least calculable of any. Merchants whose stocks have been mysteriously burned two or three times find difficulty in getting insured. In life-insurance it was the custom formerly to refuse to pay death-losses in case of suicide; but now that condition is attached only for the first two or three years. It being reasonable to suppose that no man would plan suicide years in advance, death by one's own hand some years after taking life-insurance is regarded as coming under the ordinary rule of chance.

§ II. THE SPECULATOR AS A RISK-TAKER

[Sidenote: An element of speculation in all business]

1. Every enterpriser is to some extent specializing as a risk-taker. This familiar idea may be taken as a starting point in discussing speculation. In its broadest sense speculation means to look into things, to examine attentively, study deeply, contemplate, meditate. In a business sense the speculator is one who studies carefully the conditions and the chances of a change of prices; hence arises the thought that speculation is connected with chance. The enterpriser can estimate these chances better than most men. He stands on a hilltop sweeping the horizon, and can see farther than the workingman can. He relieves the other agents of part of the risk, and he insures both laborer and capitalist against future fluctuations of prices. Some of the profits of successful enterprise in countries where no system of regular insurance has grown up, and in certain lines here where no insurance is possible, are speculative gains of this sort. Offsetting them, however, in large measure, are the speculative losses, by which in many cases the investment has been swept away altogether. The cautious business man tries to reduce chance as much as possible by insurance, and to confine his thought and worry to the parts of the productive process where his ability counts in the result. The wise have found out that it is better to shift the risk to some specialist who can take it better than they. For a man who has his thought and effort concentrated on running a flour-mill, it is foolish to take the risks of fire, of loss in shipment, of a rise in the price of grain needed to fill outstanding orders--it is as foolish as it would be for him to make his own machinery. Insurance being the economical way to cover risk, the reckless will, in the long run, be eliminated from the ranks of enterprisers.

[Sidenote: Specialization of risk taking]

2. In some lines the risk of marketing and carrying large stocks becomes highly specialized, so that ordinary enterprisers shift it to a small group of risk-takers. In buying and selling large quantities of produce there is required the closest and most exclusive attention of a small group of men. The marketing of some staple products requires the most minute acquaintance with world conditions. To foretell the price of wheat one must know the rainfall in India, the condition of the crop in Argentina, must be in touch as nearly as possible with every unit of supply that will come into the market. Such knowledge is sought by the great produce speculators in the central markets. If all means of communication--telegraph, cables, mails--are open to all, competition among these speculators becomes intense, and the result is the extremest efficiency. Their survival depends on the development of acute insight into market conditions. It is the testimony of expert witnesses and of writers in the report of the Industrial Commission that the margin at which farm produce is sold has fallen greatly in the last few years. These products are marketed along the lines of the least resistance, that is, of the greatest economy. The function of the commercial specialists is to foresee the markets, and to ship to the best place, at the right time, in the right quantities. If a product shipped to Liverpool will, by the time it arrives there, be worth more in Hamburg, there is a loss. Such difficult decisions can be made best by a small group of men selected by competition. When handling actual products they perform a real economic service.

[Sidenote: Produce speculators as insurers]

[Sidenote: Source of legitimate speculators' gain]

3. Even some mere speculators on the produce markets may and do at times perform a productive service as risk-takers. Many of the speculators in staples, wheat, corn, wool, rarely handle the material things, the real products. They make it their business to study the world conditions, to foresee prices, and in a sense to bet upon them. Regular merchants buy and sell fictitious products of these men. When a miller buys ten thousand bushels of wheat that will remain in the mill three months before they are marketed as actual flour, he at the same time sells that number of bushels to a speculator for future delivery; or selling flour for future delivery the miller buys a future in wheat. In either case he cancels the chance of loss or gain, giving up the chance of profit in the rise of wheat in exchange for protection from the loss of the product on his hands. To him this is legitimate insurance, for he is striving not to create an artificial risk, but like the medieval ship-owners, to neutralize one that is inseparable from the ordinary conditions of his business.

One may ask, How, if the miller in the long run benefits, can the speculator gain? He does not intend to perform this service for nothing. Yet as the sales in the whole market equal the purchases, some say that there can be no profits to the speculator. There are unsuccessful speculators and at any rate their losses go to the successful as a sort of gambling profit. Speculators do not dine entirely on "lambs"; they are anthropophagous. But, further, the sales to legitimate purchasers should net a gain to the abler speculator. In proportion as his estimates are correct, there will remain a regular slight margin of profit to him. If he agrees to sell wheat at eighty-five cents to be delivered in three months, he expects it to be a little less at that time. In the long run the ablest speculator probably buys at a little less and sells at a little more than the price really proves to be. This means that the merchants in the long run pay something for protection against changes in prices, just as they pay something for insurance. And yet this is the cheapest way to eliminate risk, and a man engaged on a large scale in milling is, it is said, at a disadvantage if he neglects this method of marginal buying.

[Sidenote: Ignorant and dishonest speculation]

4. The buying of margins by the "lambs" is simple betting, and much manipulation of the market is dishonest. What has just been described is the more legitimate phase of marginal buying, not its darker aspect. One who, having no special opportunities to know the market, buys or sells wheat, or other commodities or securities, on margin, is called a lamb. He is simply betting. He has no unusual skill; he cannot foresee the result. The commission paid to brokers "loads the dice" slightly; the opportunities of the larger dealer of anticipating information load the dice heavily against the lambs. Secret combinations and all kinds of false rumors cause fluctuations large enough to use up the margins of the small speculator. At times a number of powerful dealers unite to cause an artificially high or low price, a situation called "a corner." But this is little other than gambling between betters. The general public gains and loses little if any by these operations, except in the evil effects they entail socially.

§ III. PROMOTER'S AND TRUSTEE'S PROFITS

[Sidenote: The promoter's service to the owners]

1. The promoter of trusts performs in some ways a substantial economic service. A promoter is one who undertakes to convert a number of unrelated factories, or establishments, into a trust, or combination. He gets options on different factories, that is, the right to buy them at an agreed price within certain time limits. He gets some banking house to underwrite the combination, that is, to agree to dispose of a number of shares to the investing public. A certain number of shares go to the owners, a certain number to the banking house for its services in underwriting, and a substantial number, it may be ten or twenty per cent, of the enormous capitalization, to the promoter himself. This is payment for his ability to water the stock successfully, to capitalize it for more than its former value. Evidently the owners think he earns the money or they would not pay him. So far as there are economic advantages in large production, and inasmuch as there is always friction in the forming of new industrial arrangements, there is a real social service performed by the promoter. The gains of the promoter are in part the legitimate price of progress.

[Sidenote: The loss of the investors]

2. A large part of the profits of promoter and of owners is unfairly taken from the investor. The larger modern business is less and less attached to particular neighborhoods. A much smaller proportion of investments is made in industries which the investor himself can control or even see in operation. Business, therefore, in these days is done largely on faith in other men. Especially the investor takes great chances. The prospectus announcing a reorganization is frequently misleading. It frequently misrepresents the sources of income and the probable dividends, conceals essential facts, and makes misleading statements. The capitalization often is absurdly high, compared with the value of the different establishments. In one case eight million dollars of stock were issued to represent factories whose combined value had been five hundred thousand dollars. So far as the capitalization is based on the increased profits due to the monopoly power, the profits of reorganization are taken out of the pockets of the public. But in fact even monopoly earnings cannot support such valuations, and from the outset if fair dividends are paid, they are falsely paid out of capital, not out of earnings. With the approach of bad times there must be a suspension of dividends, a fall in the value of securities, and a loss falling upon the investors. Such practices are a serious evil, for the stability of industry depends on the opening up of opportunities for safe investment to the average man.

[Sidenote: The speculating trustee]

3. Corporation officers and trustees, speculating in the stocks of their own companies, are reaping illegitimate gains. It is recognized by public sentiment and in law that for public officials to let contracts to themselves is bad morals and bad public policy. It is the duty of legislators not to make laws for companies in which they are interested. One of the greatest scandals in American public life, "the Credit Mobilier affair," was caused by the acceptance by members of Congress, virtually as a gift, of shares in a company that was seeking favoring legislation. Such action must be looked upon as a sort of industrial treason, comparable to the old form of political treason. Corporation officers are in a position of public trust toward the investors quite comparable to that of government officers toward the citizens. The power of directors and of other officers to manipulate earnings and dividends, and thus to affect the market value of the stock, leaves the investing public helpless. The practice by officials in great corporations of speculating in their own stocks, whose prices they can manipulate, is so common as scarcely to attract comment. Large fortunes result from this betrayal of the trust imposed by the shareholders. This is not legitimate speculation; it is like loading the dice, pulling the horse, drugging the pugilist--things despised and condemned even in gambling and sporting circles.

[Sidenote: Two types of speculation]

It appears, therefore, that in the complex conditions of modern business there is a legitimate concentration of risk in the more capable hands, but also a growth of opportunities for illegitimate speculation and for large dishonest gains that were not possible before. These two types of speculation should be distinguished, as far as possible, in thought and in practice; but this it not easy in concrete instances, which vary almost indistinguishably from the clear case of honest earnings to the other extreme of illegitimate gains.

37. CRISES AND INDUSTRIAL DEPRESSIONS

§ I. DEFINITION AND DESCRIPTION OF CRISES

[Sidenote: Broader definition of a crisis]

1. In a broad sense, a crisis is a decisive moment or turning point; hence, in industry, a collapse of prosperity. In the course of a fever the crisis is the point where there is a turn for the better or for the worse. The figure of speech as applied to industrial conditions would seem to fail, in that what precedes is apparently exuberant health, not disease. Business conditions do not move along uniformly. There are waves of prosperity. Profits are apparently great, then may be suddenly swept away. The profits of the prosperous time are partly illusory, or exist only on paper. The situation has all the unhealthiness of the fever-patient. Men trade in promises and when the crisis comes, they have only promises for profits. The discussion of business management and profits is not complete without a consideration of this rhythmic movement of confidence and prices.

A crisis in the business affairs of an individual, in the sense of a collapse of prosperity, may occur from many mischances. A local crisis may be felt in some one neighborhood as a result of flood, of fire, or of other accidents. Such a case was that which occurred in 1864, in Manchester, England, when the cotton factories were compelled to close because the supply of cotton was cut off by the blockade of the ports of the South in the Civil War. Such a local crisis sometimes results from a change of transportation, throwing a town out of the line of trade. These have been mentioned in discussing chance and risk; but the phenomenon known generally as an industrial crisis is of wider extent and of a more peculiar nature.

[Sidenote: Various types of crises]

2. In a more special sense a financial crisis is the confusion and loss that mark the end of a period of rising prices; an industrial depression is the period of hard times that follows. The word crisis suggests a brief period, a moment, something that is severe, sudden, and soon over. The term financial panic is frequently used as a synonym for financial crisis. A crisis in the narrower sense has to do with prices--is always connected with money in some way. While, therefore, crises may be divided into industrial, speculative, and financial, according to their immediate occasion, all of them are financial in the sense that they have to do with a change in the general price level. A crisis is a jolt to prices which shatters the credit of some banks, brokers, merchants, and manufacturers. Crises are thus peculiar to the money economy and to a developed industry. Not every business misfortune is to be called an industrial crisis, but only those where prices and credit are generally depressed. A long period of hard times is sometimes called a crisis, but it is better to distinguish it by the term industrial depression.

[Sidenote: Industrial conditions preceding a crisis]

3. The period leading up to a crisis is one of general prosperity. Industry in successive decades does not pass through an unvarying series of changes, but history repeats itself with sufficient regularity to justify the view that a certain series of changes is typical in modern industry. When prices are at the lowest point many factories are closed, and much labor is unemployed. Conditions are worse in some industries than in others. General economy and great caution prevail; few new enterprises are undertaken. To those having available money this is a good time to buy, and property begins to change hands. Then hoarded money begins to come out of its hiding-places. Money flows in from other countries, particularly if business conditions are better abroad than here, for low prices make a country a good place in which to buy. At the same time that the money in circulation thus increases, there is a general return of confidence that increases credit. Not only are there more dollars, but each does more work. Then old enterprises are resumed and new ones are undertaken. The purchase of materials in larger quantities causes a rise in prices and an increase in costs. The surplus labor on the margin of efficiency gets employment, and wages begin to increase. The only classes not sharing in this improvement are the receivers of fixed incomes. As prices rise, the purchasing power of their incomes gradually falls.

[Sidenote: The crisis and its results]

4. The crisis is a moment of widespread loss, which is followed by a long period of small profits to most enterprises, and of enforced economy. As prices cease to go up rapidly, the question arises in many minds whether the movement can continue, and if not, when it will cease. Men wish to hold on for the last profits, and are willing to risk something to gain them. When foreign prices do not rise in as great proportion as domestic prices, foreign imports are stimulated and the quantity of exports falls. This disturbs the equilibrium of money and requires at length large and continued exportation of specie. This checks prices, and, reducing the specie reserves of the banks, compels them to be more cautious. The fall in the value of many stocks and securities held by the banks forces many brokers and speculators to convert their resources into ready money. This is the moment of danger; weak enterprises find their foundations crumbling, and there are many failures. The falling prices, the shattered credit, and the financial losses force many factories to close; many workmen are thrown out of employment, and business must again enter upon a period of retrenchment, for it has completed the cycle of changing prices.

§ II. CRISES IN THE NINETEENTH CENTURY

[Sidenote: No financial crises in the Middle Ages]

1. The periods of industrial hardship in the Middle Ages were connected with adverse conditions of production, not with the collapse of prices. Periods of exceptional hardship in medieval times were mostly due to political oppression, famine, wars, pestilence, and scourges of nature. There being very little of the money economy, there was no development of credit and of credit prices. The money economy began, as has been noted, in the cities. As the use of money spread, as larger commercial enterprises were undertaken, as borrowing and the payment of interest became common, there began to appear in city trading circles, on a small scale, the phenomena of the modern crisis.

[Sidenote: European crises of the eighteenth and nineteenth centuries]

2. In Europe general industrial crises date from 1763 and have occurred at more or less regular intervals since. It frequently is said that the cycle, or period, of crises is ten years, but it takes an elastic imagination to find support for this in history. The crises of the eighteenth century occurred in 1763, 1783, 1793, these dates marking the close of wars of some magnitude. The crises were not widespread or general, but were more marked in England, which was most developed industrially and in its money economy. Likewise in the nineteenth century, the crises were of unequal force in the various countries, usually being severer in England. The English crises may be roughly dated 1803, 1825, 1838, 1847, 1857, 1864, 1875, 1890. These were attributed to various causes; that of 1825 to over-trading abroad; that of 1847 to railroad-building; that of 1864 to the interruption of the cotton trade and of commerce, as a result of the Civil War in America. While in many parts of England the crisis of 1864 was unusually severe, in other countries it was of little moment. Germany, after several years of great speculative prosperity, had a most severe crisis in 1875; while France (a somewhat significant fact), although prostrated by the war of 1870-71, losing a large amount of wealth, and paying a thousand millions of dollars to Germany as a war indemnity, escaped a commercial crisis almost entirely at that time.

[Sidenote: Crises in the United States]

3. In the United States there have been five marked crises: the first in 1817, the last in 1893. These crises were of date 1817-20, 1837-39, 1857, 1873, 1893. Major crises thus occurred about twenty years apart, and minor crises in several instances alternated with them, notably in 1866, 1884, and we might add, 1903. These crises were the culmination of different kinds of speculation, usually spoken of as their causes. The crisis of 1817 was due to over-trading and to the immense importation following the war of 1812 and the resumption of commerce with Europe in 1816. In 1837-39 came in quick succession two crises, not quite distinct from each other, the second similar to the relapse of a fever patient. The immediate occasions were over-speculation in lands, a great issue of bank money, national expansion, and over-confidence, possibly in some degree the heedless financial measures of Andrew Jackson. The crisis of 1857 followed a period of great prosperity marked by the discovery of gold in California in 1848, by great expansion of commerce, by the building of railroads, and by a great increase in foreign trade. The crisis of 1873, probably the severest in our history, is attributable to great speculation, especially to railroad-building on an unexampled scale following the war. The blow, when it fell, was intensified by the contraction of currency leading to the return to a specie basis and lower prices. The crisis of 1884, a comparatively slight one, occasioned (rather than caused) by the discussion of the money question, was followed by some years of noticeable depression. The years 1889 to 1892 witnessed a prosperity that culminated in a crisis in September, 1893, (likewise generally explained as due to the unsettled state of our monetary system) followed by a period of depression lasting until 1897.

The period from 1897 to 1903 has been marked by great prosperity and by rising prices. The over-hasty prophecies of collapse in the last two years have thus far been falsified,[3] but there is now a general feeling of distrust in investing circles. Already there has been a reduction of dividends in leading industries, and here and there a fall in the value of stocks. High prices have greatly checked building. The great credit advances made on "industrials," the stocks of manufacturing corporations, are one of the main sources of danger. Caution, however, has been learned by experience; the banking interests are more closely coördinated and give better mutual support than in the past, and a considerable decline in stocks has already occurred without as yet affecting general prices of commodities. Various novel features in the situation make prophecy difficult, but a period of liquidation and lower prices appears to be at hand.

[Footnote 3: These statements are retained as they were made in March, 1903. In the following September occurred a very remarkable panic in stocks which had the minimum of effect on general business. While stock prices have somewhat recovered since that time, general business conditions, on the whole, tended for a while toward the worse until the spring of 1904.]

[Sidenote: General features of crises]

4. Irregular in time, and unlike in their immediate occasions, crises show some general features. The chief of these are told in the brief story of the course of prices. Crises are less severe in countries with less developed money and credit systems. They are harder in the United States and England than in Germany, harder in Germany than in France, harder in western Europe than in eastern Europe, harder in Christendom than in heathendom. They are less severe in rural districts, where prosperity depends more on crop conditions, and business has in it less of financial speculation. Their effects are least felt in the staple industries, for when hard times come, people economize on the less essential things. The glove-factory, the silk-factory, the golf-club-factory are more likely to close than the flouring-mill. They are felt less by classes with fixed incomes than by those with variable ones. They affect wages and salaries less than profits. The rate of wages is affected only in a moderate degree, but laborers suffer in the loss of employment. The money-lender who has eliminated chance as far as possible and has taken a low rate of interest loses little; the risk-taker who draws his income from dividends on stock probably loses much.

§ III. VARIOUS EXPLANATIONS OF CRISES

[Sidenote: Glut theories of crises]

1. Over-production and under-consumption theories are those most widely held. In the first annual report of the United States Commissioner of Labor (1886) is given a long list of theories, more or less wild, that have been advanced in explanation of crises. It is simply a catalogue, not a logical grouping. Most of the views can be classed as under-consumption or over-production theories, which are but two aspects of the same idea. One view is that too many things are produced, another that too few are consumed. The over-production theorist, seeing that warehouses are filled with goods that cannot be disposed of for what they cost, that factories are shut down and men are out of employment for lack of demand, declares that productive power has grown too great. The under-consumption theorist, seeing the same facts, says that the trouble is lack of purchasing power. He admits that there are people who would like to buy these things, but he asserts that such people lack money because production grows faster than wages, wages being fixed, as he believes, by the minimum of subsistence--a theory akin to the iron law of wages. In both over-production and under-consumption theories the inequality of demand and supply is looked upon as a general one. There is supposed to be not merely an unequal and mistaken distribution of production, but a general excess of productive power.

[Sidenote: Defects of glut theories]

The wide vogue held by these views would justify a fuller discussion and disproof of them here, did space permit. It must suffice to indicate merely that they have the same taint of illogicalness as the "fallacy of waste," the "fallacy of saving" and, still closer likeness, the "fallacy of luxury." They overlook the fact that an income, either of money or of other goods, coming even to the wealthiest, will be used in some way. It may be used either for immediate consumption or for further indirect use in durable form. Through miscalculation there may be, at a given moment, too many consumption goods of a particular kind, but the durable applications can find no limit until the inconceivable day when the material world is no longer capable of improvement. At the time of a crisis, there is unquestionably a bad apportionment of productive agents, and a still worse adjustment of their valuations, but these in no wise negative the basic economic fact of the scarcity of wealth.

[Sidenote: Money theories of crises]

2. Another group of theories explains the crises as being due to money, either too much or too little. The unregulated issue of bank-notes has been assigned as the cause of crises, especially under the circumstances accompanying such crises as those of 1837 and 1857 in America, when bank-note issues chanced to be the agency most marked in the undue and unsound expansion of credit. The issue of government paper money, leading to inflation and speculation, is assigned as a cause leading up to such a crisis as that of 1873, following our Civil War. The reverse view is taken by the advocates of a cheap and plentiful money. They say that these crises were caused, not by the expansion, but by the reduction of bank-notes; for example, not by the inflation of prices through the issue of greenbacks in 1862 to 1865, but by the contraction of the currency from 1866 to 1873.

[Sidenote: Their inadequacy]

There is only a fragment of truth in these various views. It is always lack of money at the moment of the crisis that causes any particular failure, and in that sense it is always lack of money that causes a crisis. But the question is, whether in any reasonable sense it can be said that it was lack of a circulating medium before the crisis that brought it on. There is no support for this view, except in the rare case when the money standard is undergoing a rapid change, as in the United States from 1866 to 1873, and the statement then needs much modification and explanation. The money theories of crises are nearer to the truth than are the over-production type, for the crisis is always connected with money and prices. But it cannot be said that the absolute amount of money in circulation in the period preceding crises gives occasion to them. In a few instances a rapid change in the amount has had an important effect, but this fact does not explain crises in general.

Lack of confidence is said to be a cause of crises. This is a truism, but the lack of confidence is not without reason and cause. Over-confidence in the period of expanding prices is succeeded by extreme depression when many false hopes are shattered.

[Sidenote: Capitalization theory of crises]

3. Crises must be explained essentially as the forcible and sudden movement of readjustment in the mistaken capitalization of productive agents. Capitalization runs through all industry. The value of everything that lasts for more than a moment is built in part upon rents that are not actual, but expectative, whose amount, therefore, is a matter of guesswork, or "speculation." Many unknown factors enter into the estimate of future rents. The universal tendency to rhythm in motion (material or psychic) manifests itself in an overestimate or underestimate of rent and of every other factor in value. This is emphasized by a psychological factor called the "hypnotism of the crowd," Most men follow a leader in investment as in other things. The spirit of speculation grows till it becomes almost a frenzy, and people rush toward this or that investment, throwing capitalization in some industries far out of equilibrium with that in others.

The use of credit enhances the rhythm of price. A large part of business is done practically on margins. If the value of a thing fully paid for falls in the hands of the owner, he alone loses; but if the value of a thing only partly paid for falls so much that the owner is forced to default in his payment, the loss may be transmitted along the line of credit to every one in the series of transactions. A credit system, highly developed, is a house of cards at a time of financial stress. There is an element of credit in all modern business. Enterprisers enter into strenuous rivalry to secure the profits of a rise, ever hoping to get out whole before the crisis comes.

[Sidenote: Psychological nature and objective conditions of crises]

The fundamental cause of crises thus is seen to be psychological; it is the rhythmic miscalculation of rents and of capital value, occurring to some degree throughout industry, but particularly in certain lines. But this subjective cause in men is given full opportunity for action only when certain favoring objective conditions are present. Most noteworthy of these besides the credit system is a dynamic condition of industry. The past century has opened up new fields for investment on an unexampled scale. Investment has advanced both intensively and extensively in a series of great waves. New machinery and processes have given undreamed of opportunities for enterprise in the older countries, and the physical frontier of investment has moved outward with the march of millions of immigrants to people the fertile wilderness. Such factors disturb the equilibrium of prices both in time and space, give a powerful impulse toward higher values in the older lands, and stimulate the hopes of all investors. When the balance between the capitalizations of various industries and between the rents of the various periods proves to be false, the inevitable readjustment causes suffering and loss to many, but particularly in the inflated industries. But, because of the mutual relations of men in business, few even of those who have kept freest from speculation can quite escape the evils.

[Sidenote: Widespread effects on incomes]

4. Crises must be discussed in connection with other subjects than profits. In the text-books the subject of the crisis is variously classified. It may well be discussed with money, credit, and banking. It has its bearings on wages, justice in distribution, the theory of interest, and the consumption of wealth. But the reasons for taking it up in connection with the subject of profits are strongest. In no other connection is the presence of the element of speculation and of chance profit and loss in business so forcibly seen.

[Sidenote: Their probable mitigation]

The income of every class of society is to some extent affected by these more or less periodic fluctuations. They are in part the price paid for progress under the constantly shifting conditions of our dynamic industry. In part they are the proof of industrial maladjustment. The force of the shocks will no doubt be much reduced by better banking and business methods, and by a sound currency system. More important still, the development of moderation, conservatism, and a less speculative spirit among the leaders of business will do much toward softening the asperity of these scourges of industry.

III. THE SOCIAL ASPECTS OF VALUE

DIVISION A--RELATION OF PRIVATE INCOME TO SOCIAL WELFARE

38. PRIVATE PROPERTY AND INHERITANCE

§ I. IMPERSONAL AND PERSONAL SHARES OF INCOME

[Sidenote: Functional vs. personal distribution]

1. Under the title "the social aspects of value" are to be considered the influences exerted upon incomes by various social acts, ideals, and institutions. The incomes from the wages of free labor and those from the rent of wealth, as studied in the abstract theory of value, are alike in their impersonal aspect, their relation to utility. But while wage flows from a personal source--is an income appearing to reward the personal effort of the laborer, the income of the wealth-owner is due to the uses of goods. In the abstract theory of value we do not seek to get behind this impersonal phase of rent. The income arising from goods goes to the de facto owner of the goods. We do not ask how the goods first came into his possession, whether through labor or as a gift, whether stolen or inherited. Indeed, the economic theory of competitive rent may be said not to recognize the personal fact of ownership; it is concerned with the impersonal fact of usufruct. The theory of economic rent, of time-value and capital, and of wages, as measured by efficiency, is impersonal, is a study of functional distribution. In the problem of monopoly the personal factor is more prominent, but the economic study of rent cannot well stop there.

[Sidenote: Social institutions and personal incomes]

An answer, at least in broad outline, must now be given to the question why some men are permitted to hold wealth as their "own," that is, as "property," while other men are propertyless. Why do the owners exact payment for the use of goods, and why are they allowed by their fellows to do so? Back of these facts is a great system of social institutions that helps to determine what men will do. Market value is a social fact; price is determined by the bidding of men under the existing social and political conditions. These broader social aspects of value remain for consideration. The influence of lawmaking, of collective action, and of social institutions on value must be noted. Incidentally, this has been done in speaking of patents, political monopolies, and related questions; but mainly the subject has been viewed from the individual standpoint; now it must be looked at more fully from the social side.

[Sidenote: Harmony of the studies of impersonal and of personal distribution]

2. The study of personal distribution should include a further explanation of the various elements that unite to form the individual's income. "Distribution" in economics is the reasoned explanation of the way in which the total product of a society is divided among its members. It is a logical question and not an ethical one. The economist first asks, What is the effect of utility on value? and, next, What is the relation of these goods to the personal incomes of the members of society? It is not his peculiar part to say whether this is the best distribution in an ethical sense, yet in pursuing the question of distribution one comes to the border of certain moral questions.

The impersonal and the personal views of distribution are not, however, contradictory; they are different aspects of the same question. It cannot be said that the analysis of economic rent is a purely abstract piece of work. In fact, the impersonal view of distribution is essential to an understanding of the personal view of it. The one gives general principles, the other the special cases. In the practical economic issues of the day, the most urgent need is a better popular understanding of the abstracter theory of value. It is a guiding thread through otherwise bewildering mazes.

[Sidenote: Composition of personal incomes]

The actual incomes of individuals are made up of different elements. The wage-earner and the salaried man are rarely quite without material wealth. The enterpriser gets some income also in the form of contract interest, or as rent from machinery. Actual personal incomes are therefore a sum of various functional or impersonal incomes. The earnings of every agent may be thought of as always going either to some individual or to some group. By social convention the receiver of incomes that are not personal gifts is supposed to have produced them. This involves the great assumption that the owner of a piece of land has produced or contributed in some way to society an amount equal to the rent. This may be true in many cases, but in many cases this view cannot be accepted without close scrutiny.

[Sidenote: Law in relation to wealth]

3. Property and wealth are respectively the personal and the impersonal, the legal and the economic, aspects of productive agents. Law holds an important place in the discussion of actual economic questions. This fact was not overlooked by John Stuart Mill, and it has been far more clearly recognized in the last few years, especially by the German economists. Political law in the broadest sense, as embodied in the state, is, in the first place, a set of rules to guide the conduct and regulate the relations of men in society--a legal code; it is, in the next place, a governmental machine to determine disputes between men--a judicial system; and it is, finally, physical power to bring contestants into court and to secure and protect their rights--a police force. Whether acting through legislature, courts, or police, in all its dealings with wealth the law is predominantly personal. The question the law asks and answers regarding wealth is not What, but Who? Who is the owner, who should control, receive, enjoy the income? Economic wealth consists of scarce things, of valuable agents, and because they are scarce, men quarrel over them. Because of the impersonal economic fact that a field and a machine produce scarce goods, arises the legal question as to which man is entitled to enjoy them.

[Sidenote: Property and wealth]

In the case of material things, property value and capital value must be exactly equal. Property rights cover the ownership of a material thing. Material property consists of things viewed with reference to ownership; capital consists of the same things viewed with reference to their economic services. There are other property rights besides those in material things, various immaterial rights controlling the action of the individual and thus giving a sort of ownership of the individual's actions. Such are patents which forbid other men making a particular kind of machine; copyrights which forbid other men printing certain writings; legal contracts that limit the action of men in various ways, and thus appear to abridge their liberty.

§ II. THE ORIGIN OF PRIVATE PROPERTY

[Sidenote: Property and income]

1. Property is ownership, the legal control over the sources of economic income. The Latin word property means ownership, and hence that which pertains to the individual, that which is a man's own. The control of property is greater or less. The law makes between property rights and equity rights certain subtle distinctions which have their reason in the history, if not in the logic, of the law, but which are not essential to economic discussion. What we are interested in are the equitable claims of men to wealth rather than the technical property rights. With that thought let us consider the value of the control of wealth. If a farm worth ten thousand dollars is mortgaged for five thousand dollars, its economic worth is ten thousand dollars after as before the mortgage, but the equitable claim is divided into two shares of five thousand dollars each. The value of the property right cannot, in a reasonable view, be greater than the value of the economic wealth it covers. There is much confusion in the law of taxation on this point. The law treats the farm as property and the debt upon it, whether secured by a mortgage or not, as another body of property. Needless to say, this leads to absurd conclusions in reasoning, and to gross injustice.

[Sidenote: Forms and modes of ownership]

There are different forms of ownership: first, private, as that of individuals, families, partnerships, or corporations; second, public or state, as the ownership of the state house, the highway, the Adirondack forest-reserve or the Erie Canal. These are equally effective as against the claims of outsiders, but the rights of those inside the circle of ownership differ. For example, the rights of one shareholder against another, or the rights of one member of a family as against another, are not the same as the rights against outsiders. Private property is the characteristic feature of our present industrial society, but it exists side by side with state property and with many intermediate grades between private and common property. Private property, while attacked on some sides, is usually accepted without question; but in this age of inquiry its origin should be examined, its limits and the reasons for them should be noted, and its purpose, faults, and effects should be set clearly before the judgment.

[Sidenote: Various theories of property: Occupation]

2. The older theories of the origin of private property are those of occupation, conquest, labor, natural rights, and law. The theory of occupation is that property is based upon the priority of claim of one who finds wealth without an owner and appropriates it. This, to be sure, is a statement of what happens in the settlement of new countries, but it is not an explanation of the property rights that are arising every moment, nor does it give a logical reason for the continuance of ancient property rights.

[Sidenote: Conquest]

The same can be said of the conquest theory, the theory that property is based on force. It applies to the invasion of the Roman provinces by the barbarian tribes who divided the country and enslaved the population. But it rarely applies to present-day happenings and at its best it cannot, to modern minds, "justify" present property rights.

[Sidenote: Labor]

The labor theory, meeting some queries where others fail, is that ownership is based on production, on the right of a man to that to which his brain and his muscle have imparted value. It is evident that this test leaves without explanation or justification a great number of things that do exist and have existed as property.

[Sidenote: Natural rights]

The natural-rights theory is that property is necessary for the realization of the dignity of human nature. This, if true, would be not so much an explanation as a condemnation of private property as it has existed in most cases, as millions of men are in every land all but lacking in property, and inequality of possession is everywhere marked. This theory expresses, however, one of the worthy ideals of modern democracy. Although, in common with the various other "natural rights" theories, it must to-day be deemed too absolute and too individualistic, it contains a far-reaching truth, of which due account must be taken in our social philosophy.

[Sidenote: Law]

The legal theory is that property exists because the law says it shall. This expresses a truth, but is no more than a truism. The law determines the limits of property, but what determines the limits of the law? What practical or social justification is there for passing and continuing such law? The legal theory does not explain anything finally. Each of these theories has its defects, but each points to some fact important and significant, at certain times and places, in the explanation of this widespread institution.

[Sidenote: Property in early societies]

3. The institution of private property has evolved under diverse conditions; the question of its origin is not the same as that of its present justification. In early societies individual property rights were not very clearly marked. Every tribe asserted against other tribes, and tried to uphold, by war, its claims upon its customary hunting-grounds; but the claims of the individual hunter and fisher within the tribe did not often come into conflict. Private property at the outset was in personal possessions, ornaments, weapons, utensils, which were very meager in that primitive society where it was the custom "to go calling with a club instead of a card-case." Only later came individual property in land. A few years ago it was generally believed that the organization of the old German tribes was politically an almost perfect democracy, and economically a communism wherein all had equal claims on the land. To-day this opinion is very seriously questioned. It seems probable that the so-called communism was really an oligarchy of the favored, and that the masses lived in subjection, cut off from all but a meager share in the public property.

[Sidenote: Origin vs. present justification of property]

However that may have been, strong forces within historic times have put an end to the common ownership and tillage of land as it existed among the serfs of Europe. The common tillage of land was shown by experience to be wasteful. Not only did competition tend to bring the economic agents into more efficient hands, but the movement was furthered by many acts of injustice and violence on the part of those in power. Inquiries into the origin and development of this social institution are interesting and helpful in forming an estimate of its present significance, but the problems of the past are not those of to-day. Whether or not the ancient beginning of property in Europe was in violence and evil has but a remote bearing on the question as to the present working of it. Social conditions and needs have not changed more than have the forms and limits of property itself. Each generation has its own problems to solve, and each must test existing institutions by their present results, ignoring for the most part the evils of the past.

[Sidenote: Social expediency the ground of private property]

[Sidenote: Shifting limits of the law of property]

4. Private property may now be justified mainly on the grounds of social expediency. This is a broad explanation under which can be brought the many varying conditions; but it has the fault of a broad explanation, that it needs be further explained. Conceding that private property works hardship to the individual in many cases, it must be justified on the ground that, on the whole, it furthers the progress of society. Private property is looked upon by some as merely reflecting or expressing the economic inequalities of men; the man poor in ability is the man poor in property. It is looked upon by others as exaggerating, indeed at times reversing, the economic abilities of men. In general, it must be judged by this test: Does it further the welfare of society better than would any alternative plan for the control of economic wealth? The question is not whether it is faultless, for no human institution is so. Nor must it be assumed that property is a fixed and uniform mode of control; there are many kinds of property. Different parts of wealth may be treated in different ways: there may be private property in wagons, and public property in roads; private property in houses, and public property in forests; private property in automobiles, and, in some countries, public property in railway-carriages. But any rule of property, like any other workable human law, must be applicable to all individuals that meet the conditions. Hence any human institution must be judged by its average working, not by exceptional cases.

The very acceptance of the theory of social expediency implies the need of a readjustment of the institution of private property; for private property, as it is found to-day, is complicated by many historical accidents. Survivals of ancient injustice and relics of feudal institutions that rest on no vital reason remain in our new country as well as in the older ones. The limits of property in many respects are determined, not according to the logic of expediency, but by the social inertia which often governs succeeding generations.

§ III. LIMITATIONS OF THE RIGHT OF PRIVATE PROPERTY

[Sidenote: Public interests limiting property rights]

1. Unmodified private control of property is unknown: the public makes many reservations in its own interest. Few realize the manifold ways in which property rights are limited. There is, first, a whole set of limitations to prevent nuisances. An owner in many situations is not free to build a slaughter-house or to start a glue-factory on his land. Property is governed by general public utility, and anything that threatens to become a nuisance or a danger is excluded. When, under the right of eminent domain, the state or the railroad takes the old homestead from its owner who would live and die there, the payment of money damages to him does not make this the less a limitation of his property rights. Rights of way on property exist either through contract or by prescription permitting its public use. Most important of all limitations is the right of taxation, by which society takes more or less of private incomes for purposes of which the individual owners may in no way approve.

[Sidenote: Private claims limiting property rights]

2. The law enforces a multitude of private claims against private owners. A variety of rights called easements or servitudes may attach to private property, modifying its exclusive use. Leases for any period are a virtual limitation of the control and division of the ownership. Both the holder of the lease and the owner of the property have certain rights before the law. The lender of money secured by mortgage has a legally recognized and enforceable interest in the mortgaged wealth. Property is left in trust for the benefit of persons or of institutions or of the public, and is administered by trustees who are strictly bound to the execution of the terms of their instructions. Contracts of many sorts are entered into by owners, limiting their control in manifold ways, and the law enforces these contracts. These all form a complex of equitable claims, which together equal in value one undivided property right, which in turn equals the value of the wealth. These claims mutually limit each other (whether they be called equitable claims, or liens, or property rights), and wealth is not multiplied by multiplying the claims, as the lawmakers unfortunately sometimes assume to be the case.

[Sidenote: Limitation of bequest]

3. The right of bequest, or of gift at death, is limited in various ways in different countries. The term bequest implies a will, usually a written will in which the person, foreseeing death, has expressed his wishes as to the disposition of his property. It is said sometimes that bequest is a "logical" result of private property, but the law does not treat it as such. In countries where hereditary aristocracies exist, primogeniture is in some cases required by law, in others so strongly favored by public opinion that it is practically always followed. Custom limits bequests in England to members of the family, and wills giving outside the family are rare, and are almost always broken in the courts. John Stuart Mill contrasts this with the frequent practice by rich men in America of giving for public purposes. In France the right of bequest outside the family is legally limited; only the share of one child can be willed away by the father, and the rest must be equally divided among the children. Settlements and fidei commissa are limited in many countries, because of the recognized social evils resulting from the tying up of estates for generations. Throughout the history of England, Parliament has given attention to the question of mortmain, which chiefly concerned the drifting of great estates into the hands of the church or of corporations, as a result of bequests by the pious. Only recently in England, and to a less extent in this country, has been seriously discussed the policy of permitting unlimited endowments to charitable institutions, and new legislation has diverted from their original purposes some of the old endowments. These varied and often strict limitations of the right of private property are all determined by some thought, wise or foolish, of social expediency.

[Sidenote: Limitation of right of inheritance]

4. The law of inheritance varies greatly with time and place. Inheritance, in contrast with bequest, usually means succession to the property of one who has died intestate, that is, has made no will. The old idea of family unity survives in great measure in modern laws of inheritance. The nearest living relatives, no matter how distant they may be, inherit property when there is no will. When a miser dies in solitude and neglect, the world must be searched over to find a remote cousin to take the hoarded wealth. Inheritance is limited largely at present by the power of taxation. The view is growing that the claims of the society in which wealth has been acquired are stronger than those of relatives distant alike in space, in blood, and in affectionate interest. This view is reflected in many recent inheritance-tax laws which take from the shares of distant relatives a goodly portion for public purposes.

The question is raised in many minds, If private property is not an absolute right, what shall be its limits? What changes should be made in it? The essential thought in the various attacks on the institution of private property is that, because it occasions inequality in incomes, it is not socially expedient. The conviction is growing that, in some general way, incomes should correspond to, and reflect, social service. It is well to consider more closely what the terms social expediency and social service imply.

39. INCOME AND SOCIAL SERVICE

§ I. INCOME FROM PROPERTY

[Sidenote: The justice of property questioned]

1. Property rights must meet the test of social expediency. If private property is defended on the ground of social expediency, it must show good social results. It is not a sacred thing; it is open to examination, and must be judged by its fruits. Of all the forms of income, that from property has been most strongly attacked. The thought is that enjoyment of wealth should not be found apart from labor, and that it should bear some proportion to services performed. The enjoyment of an ample income by one who does no more than to draw checks or to sign coupons seems to many minds to be unjust; and it is often questioned whether there is any social service performed by the receivers of the rent from land. Property seems in many cases to be distributed without rule or reason. It does not correspond with beauty, strength, wit, wisdom, temperance, gentleness, or charity. Since the beginning of the Christian era, reformers have assailed and preached against the prevailing inequality of wealth. The idea that incomes, if not equal, should correspond to social service has always been present in some vague way in the minds of men.

[Sidenote: Social effect of the right to give]

2. The right to transmit property by inheritance or by gift may be judged with reference to its effect on the giver, on the receiver, and on society at large. It is well to take these three points of view. The right to dispose of property either during life or at death has undoubtedly in many ways a good effect on the character of men. It stimulates the father to provide for his children, the husband to provide for his wife. There is a joy in giving, a joy in the power to bestow one's wealth on those one loves. The right to give stimulates industry, frugality, ingenuity, and yields productive results. Much of the existing wealth probably never would have been created if men did not have this right of gift. But there is a limit to the working of this motive, and other motives often are much more effective. Many men after gaining a competence continue to work for love of wealth and power in their own lifetime, as the miser continues to toil for love of gold. When men without families die wealthy, when men that have not the slightest interest in their nearest relatives labor and amass wealth till their dying day, it is evident that the right to bequeath property has little to do with their efforts. Love of accumulation and love of power in these cases supply the motive. A more limited liberty to dispose of property at death might still suffice, therefore, to call out the greater part of the efforts now made to accumulate property.

[Sidenote: Effect of the right to receive]

That the effects on the receiver of the property are good is somewhat more doubtful. It is true that children raised in great comfort or luxury would be more than ordinarily unhappy if plunged into poverty or even into humble circumstances on the death of their parents. There is much social justification for permitting families to maintain an accustomed standard of comfort. Few would deny that a moderate provision by parents to provide education and opportunity for their children is commendable and desirable. But the evil effects of waiting for dead men's shoes are proverbial. Many a boy's greatest curse has been his father's fortune. Men of native ability wait idly for fortune to come, and opportunities for self-help slip by unheeded. The world often exclaims over the failure of the sons of noted men to achieve great things, for, despite confusing evidence, men still have faith in heredity. A too easy fortune saps ambition and relaxes energy; and thus rich men's sons, if not most carefully and wisely trained, are made pitiable paupers in spirit, while the self-made fathers think their boys have chances they themselves did not enjoy. The greater social loss is not the dissipated fortunes, but the ruined characters.

[Sidenote: Broader social effects of inheritance]

The effects of inheritance on the community are good in so far as it secures efficient management of wealth. If the son or relative has been in business with the deceased, there is a reason that he should inherit the property, and his succession to it makes the least disturbance to existing business conditions. But every profligate son is an argument against inheritance; every incompetent heir is an argument in the hands of the enemies of the existing order of society. It is to society's interest that no able-bodied member shall stand idle. Every child should have presented to him the motive to devote his powers to the social welfare in economic or other directions. Moreover, many feel that the great fortunes now accumulating through successive generations in the hands of a few families are endangering our free society, even if these fortunes should continue to be well administered. There is a widespread feeling that the heredity of great wealth is, like the heredity of political power, out of harmony with the democratic spirit--though this may easily become a misleading comparison. Still, democracy wishes to see men as individuals put to the test, not profiting forever by the deeds of their forebears. This feeling is shared by those who cannot be charged with radical prejudices. A few years ago the Illinois Bar Association passed a somewhat startling resolution favoring moderate limits to inherited fortunes. Every year sees bills of this purport introduced in the legislatures and in Congress. Andrew Carnegie says it would be a good thing if every boy had to start in poverty and make his own way. Cecil Rhodes recorded in his will his contempt for the idle, expectant heir.

[Sidenote: The test of wise inheritance laws]

3. Social expediency will limit the right of intestate inheritance to persons in essential economic and social relations. Public opinion is not yet crystallized in favor of this formal proposition, but tends strongly toward it. The foregoing considerations show that the right of gift in the lifetime of the giver should be the freest. The right of bequest, that is, of gift by will, should be liberal. The man who has acquired wealth may well be trusted to decide who bear to him a close social or personal relation, and to say whose lives have in a measure furnished the motives of his activity. But the right of intestate inheritance by distant relatives is one that stands on weak social foundations to-day. It appears to be an unreasonable survival from more patriarchal conditions. The true test is whether the wish to provide for these heirs has furnished the motive for the producing and preserving of the wealth. The claims of those nearest in blood and closest in personal relations are strongest. Family affection and friendship form the strongest of social ties, and it is socially expedient to cultivate them. Motives for abstinence and industry must be strengthened. But the same test shows that the zealous regard of the American law for the rights of grandnephews in Australia, or even of brothers long absent in distant quarters of this country, is irrational, and is unjust to the community where the fortune lies.

[Sidenote: Social services of favored classes]

4. Many fortunes built on favoring legislation are defended as due to social service. In the Middle Ages kings often granted great estates to nobles as rewards for past merit and as a payment for expected public actions. The great landlords were the magistrates, military leaders, and supporters of social order, and thus, in the judgment both of the king and of the commonalty, the nobles earned their incomes by their social service. While this practice has disappeared under constitutional government, large grants are still made to royal families. Many Englishmen who are democratic at heart uphold such grants as the price of social stability. Regard for royalty is so deep-rooted in the minds of the people of any long-established monarchy that there is always danger in change. England must pay many millions annually as the price of loyal and conservative sentiment. So long as this is true, a family of royal figureheads and idlers performs a social service.

[Sidenote: Possible social service of protected industries]

Protective tariffs sought by wealthy manufacturers are granted, not ostensibly to help them, but to help the country. The argument is that the benefits are diffused. Aid to enterprises in private hands, such as ship subsidies or as the grants to the Pacific railroads, are defended on the ground that, as a whole, society benefits by thus increasing the income of one class. The promise of social service is most urged by those who get the immediate benefit. Their eyes are keenest. The manufacturer sees clearly the benefits that will come to his factory from a protective tariff, but before he can get it he must convince many others that they too will gain. The majority of the American electorate is not voting a special favor at the polls, but is recognizing what it believes to be in its own interest. Most students of social questions doubt the wisdom of most of these grants to the wealthy on grounds of social service. The burden of proof is on their advocates, but few to-day are so rash as to say that such a claim of social service is never sound.

[Sidenote: Private property in land questioned]

5. Property in natural agents is the most strongly attacked. In the case of great natural deposits, such as those of coal or iron, the social service that is performed by the mine-owner is hard to see. Great incomes are drawn in the form of royalty or rent by those who never lift a pick or direct a stroke of work. Agricultural land in the hands of absentee landlords yields an income not very clearly due to social service, and this phase of property has been especially assailed during the past century. The modern form of this discussion is concerning "the unearned increment," the rise in the value of lands as a result of social growth. It is proposed to appropriate by "the single tax" the entire rental value of the land for the use of the public.

The defense of property in land is first positive: taking not the extreme but the usual case, private property secures the discovery and development of natural resources and their thorough use and good management (not necessarily by personal labor with the hands). If this is true, it is well for the individual and for the community to have this wealth in private hands. But in other cases there is merely a negative argument for property in land: no other better method of employing it has been devised and found practicable The experience with state ownership of mines, forests, and estates has not definitely answered in every case the question whether the social results of state ownership are more favorable than those of private ownership. In some cases they clearly are not, in others they may be; and as the balance of opinion inclines in the direction of public ownership, other reforms will doubtless be undertaken.

[Sidenote: Inequality of fortunes]

6. The present inequality of wealth, not private property as such, is often attacked. It is estimated that in the United Kingdom two per cent. of the families own seventy-five per cent. of all the wealth, while ninety-three per cent. own less than eight per cent. In the United States it is estimated that one per cent. of all the families own more than the remaining ninety-nine per cent.; and at the other part of the scale eighty-seven per cent. of all the families own less than twelve per cent. of all the wealth. The trend has been toward concentration of fortunes and a larger proportion of the growing income from property is in a few hands. Many feel that the law of property is defective when this is possible, although at the same time the average income of the wage-earner is increasing. Yet, it is not the institution as a whole that is attacked, but its details. The custom of equal division of property among children in the United States has not been as effective in keeping fortunes small as was expected. The wealthy American families have averaged small, and in some of the most prominent the rule of equal division has not been followed. Opportunities for the investment of small savings at low interest are not lacking, but the great fortunes overtower the little ones, securing the great profits and great political and economic power. The farms and the villages are refuges for the small industry and for the small fortunes, and this fact has a great influence on our national character. The whole social atmosphere in the cities, with their extremes of wealth, differs from that in the country, and this contrast promises to become greater as the years go on.

[Sidenote: Private property vs. socialism]

7. The ideal of property rights is that they shall furnish the highest motives for efficient social service. Private property furnishes such a motive in a broad way, but its most ardent defenders will recognize that it does so imperfectly. It is an institution that has been tried and that does the work, while other methods suggested to do away with it are found to be dreams. The ideal of socialism is the abolition of private property, the centralizing under the control of the state of all wealth, except the simple personal belongings, clothing and other consumption goods. But history and human nature unite to testify that extreme socialism is an unworkable plan, excepting under special conditions, as in barbarous times and under a political despotism. The modern ideal for the control of wealth is the best attainable harmony of liberty and efficiency. If private property as it is, falls short of that ideal, at any rate it works either on a small or on a large scale, and socialism does not work at all. Property rights as they exist are not a product of pure reason. They are the result of social evolution, of historical accidents, of class legislation, and of selfish interest in many cases. Changing social conditions and ideas are bringing many changes in law, and further change must be expected to come.

§ II. INCOME FROM PERSONAL SERVICES

[Sidenote: Some anti-social speculative gains]

1. Incomes from legitimate enterprise and speculation correspond roughly to social service. It has been recognized above that there are many grades of chance, of speculation, and of enterprise. The extreme cases are bald crimes and are punished as such. Over some men that never directly break the law there always hangs a suspicion of guilt. It is the purpose of the law to make dishonesty unprofitable, but how imperfectly it does so! There are many cases of chance gains where the lucky man without social service legally enjoys his fortune. The law must be framed in broad terms, and cannot provide for every case. It may broadly forbid lotteries whose evils clearly exceed their benefits. But what would be the effect of taking away reward for the discovery of a gold-mine, even though sometimes it is awkward stumbling, not industry, that reveals the veins of metal? Society has studied that question in the past; even now changes are being made in the laws; and in their turn the citizens and legislators of the next generation must decide the question. It is always under consideration.

[Sidenote: Reward and enterprise]

Are the rewards of the successful enterpriser greater than he deserves? How shall it be judged what he deserves? The answer is in the form of a question, Could society have the service without the reward? Society may be thought of as hiring the services of the efficient business man at the lowest price. Does it wish the services of Cornelius Vanderbilt in organizing a great system of railroads, of Andrew Carnegie, of Pierpont Morgan? What can it get them for? It must appeal not only to their love of money but to their love of power. Large services and large results can be bought only with large rewards. The shrewd enterpriser is not to be paid with abstract social gratitude. He is not to be tricked, as is a Chinese god, with tissue-paper gold.

[Sidenote: Unmeasured gains of vast wealth]

But in many ways fortunes appear to grow without social services, and sometimes with social harm. Russell Sage, the noted capitalist (who should know something of Wall Street), in speaking of the greatest of American corporations, said: "They dominate wherever they choose to go. They can make and unmake any property, no matter how vast. They can almost compel any man to sell out anything, at any price." Henry Clews, the well-known New York banker, said of a certain group of financiers: "Their resources are so vast that they need only to concentrate on any given property in order to do with it what they please.... There is an utter absence of chance that is terrible to contemplate. This combination controls Wall Street almost absolutely. With such power and facilities it is easily conceivable that these men must make enormous sums on either side of the market."

[Sidenote: Antisocial use of rare ability]

2. The high pay of rare ability and skilled labor reflects in general a high social service. The large income of some men reflects service to a narrow class, not to society as a whole. Lawyers as a class aid in maintaining right, but a corporation lawyer may get enormous fees for defeating just public claims; a skilful criminal lawyer may grow rich aiding the guilty to escape justice. Other service ministers to the whims, follies, and vices of the men who pay the bill. Such a service is "social" in a mean sense, corresponding to the low standards of desire in that social group. But what of the high rewards of skilled service ministering to worthy ends? Such favorites of fortune as Jenny Lind and Patti have received five thousand dollars for a single concert. Is this because they are the lucky possessors of a rare gift, or because they perform a social service deserving such reward? Certainly many of their auditors get what they want and believe they are getting the worth of their money.

[Sidenote: General social result of rewarding talent]

In general the legal right of everyone to get the highest pay he can in a free and open market is essential to the calling forth of ability. In a particular instance it is possible that the service would continue if one half or more of the income were confiscated by the public; but such a personal discrimination would introduce an arbitrary and demoralizing uncertainty into the problem. Who can tell how far the exceptional money rewards have inspired to the highest cultivation of great genius and of many minor talents? In a broad but very true sense, therefore, it appears that high personal achievement, large economic reward, and large social service are connected.

[Sidenote: Social service of manual workers]

3. The low income of unskilled labor seems to fall short of its social service. This does not refer to the feeble-minded or utterly inefficient, but rather to honest, industrious, "day-laborers," and to the low-paid manual workers in field, on railroad, and in factory. Their service is essential to the existence of society as it is, to all the higher arts, to the sciences, and to the amenities of life; their tasks are the roughest, most painful, most dangerous; yet their pecuniary rewards are the lowest. There is such a unity in society that each more fortunate man is dependent on the services of the humbler laborers who make up a large part of society. According to the breadth of social sympathy their claims seem more or less urgent.

[Sidenote: The problem of increasing their reward]

There is a vaguely recognized and growing conviction that these hewers of wood and drawers of water should enjoy a larger income. But how are they to get it? How is society to grant it to them? They get what they can under the competitive conditions, they get what their service is worth in the market. Are the conditions of the competition fair? If not, what will be the effect of a change? If they get more, others will get less; and with what result? However great the wish for better things, the attempt to change conditions fundamentally in a forcible and artificial way is both dangerous and foolish. Improvement must come through the coöperation of many indirect agencies gradually changing the nature and direction of the deeper economic forces.

[Sidenote: Imperfect social and individual estimates of service]

4. The services of each are being measured and paid for by each and all. In two ways society is putting its valuation on the economic services of other members of society: first, by law, or formal social convention; secondly, by individual estimates. By formal law is determined what institutions shall be continued. If the class of property owners is considered worthy of this reward, the institution of property will be continued; if not, it will be altered or destroyed. These decisions are made imperfectly, but as well as men of limited intelligence and honesty can make them. If men were more capable in both these ways they would enact better laws. Again, individuals are putting their estimates on others in bidding for services to minister to wisdom and virtue or to ignorance and vice. If there is to be a much juster estimate of social service, there must be wiser men in society.

[Sidenote: The ideal of social service]

Does the world owe each man a living? No; on the contrary, each man owes the world his services in exchange for his living. The pauperism of spirit that consists in taking something for nothing is found in every rank of society that enjoys the blessings of progress without giving its best services in return. The ideal of a better adjustment of reward and service grows in the minds of men. Social evolution, shaped by this changing ideal and by accumulating experience, will bring into closer relation the social services and the economic rewards of men.

40. WASTE AND LUXURY

§ I. WASTE OF WEALTH

[Sidenote: Loss of wealth in an isolated or an exchanging economy]

1. The accidental destruction of wealth is a loss to the owner, rarely with benefit, on the whole, to others. In the consumption of wealth the loss of its utility is accompanied by the gratifying of wants; in the destruction of wealth utility is lost without the gratifying of wants. In a simple society, without exchange, the result of such a loss is evident. If food is destroyed, men suffer from hunger or gratify appetite less perfectly; if clothing is destroyed, they are cold; if houses are destroyed, they have no shelter. Likewise, if the self-sufficing family on a farm loses wealth by fire or storm or blight, its economic environment is made less fitted to gratify wants. In the conditions of our society, where goods are exchanged, the result appears to be different. The need to replace the lost goods makes a demand for special kinds of labor or goods. There may be, therefore, an immediate benefit to some, which obscures the corresponding loss to others. If a part of the income of the loser must be diverted from other uses to replace the wealth destroyed, those from whom he would have bought suffer an unexpected falling off of their sales, and he has himself gained nothing. The net result is a loss of wealth and gratification to the community as a whole.

There is a real exception where the accidental destruction removes some social difficulty. The great fire in London and the great fire in Chicago resulted in wonderful improvement. When an old city is built almost entirely of wood, each owner may think it to his interest to keep the old buildings. A great fire sweeps them all down and compels the rebuilding of the city on a new and higher standard. But the usual social result of accidental destruction is a loss. It is a use of wealth without a fulfilling of the purpose of production, the gratifying of wants.

[Sidenote: Intentional destruction of wealth by the owner]

2. The intentional destruction of wealth by the owner, to make trade good, benefits neither himself nor others. The case in mind is one where there is full choice between keeping or losing the good, not such a case as the throwing overboard of a part of the cargo when the ship is in danger of sinking, in the hope thereby of saving the rest, or as the blowing up of buildings to prevent the spread of a fire. In such cases the destruction is inevitable without man's action; he merely tries to minimize it. The case in mind is the deliberate destruction of wealth that might be kept for use. One labor leader, for example, boasted that when he drank pop he always broke the bottle "to make trade good" by helping the glass industry. The refuting of this fallacy is one of the time-honored tasks in political economy. There is, it is true, an increase in the demand for glass and glass-blowers' labor, but without an increase in gratification; but at the same time there is a decrease in the demand for other goods which would afford additional gratification. The proverb, old in Shakespeare's time, runs, "Nothing can come of nothing." What is spent for one purpose cannot be for another; "you cannot eat your cake and have it too." A given income can be spent in one of many ways, but not in all ways or even in two ways at once. It is a question of this or that. At the same moment that the demand for pop-bottles is increased, the demand for other things is decreased, possibly that for pop-corn or pop-guns or Populist papers--who can tell? Such a form of benevolence is a mistaken, uneconomic attempt to provide labor for one man by taking it from another.

If the advocate of wealth-destruction would be consistent, he should break, not merely the pop-bottle, but the water-pitcher and the table as well; he should make a bonfire at least once daily of his clothing, his house, and its furnishings; he should advise blowing up the steamboat and ripping up the railroad when they have carried a single load of passengers. Thus, when all men were naked and starving, and civilization had sunk to savagery, trade would have been made as "good" as, by the policy of destruction, he could ever hope to make it.

[Sidenote: Intentional destruction of others' wealth]

3. The intentional destruction of wealth owned by other persons is falsely thought to benefit trade in general. The cases referred to are not acts done with criminal motives, but those done with a view to the public interest. If one sets fire to the property of another, seeking revenge or plunder, he is guilty of the crime of arson. But what shall be said of volunteer firemen that let an old house burn down to provide labor for carpenters and "to make business good"? The duty of firemen is to put out fires, no matter what the building is; but they choose sometimes to be ministers to the social interest as they interpret it. The more spent for carpenters' work out of any income, the less can be spent for other objects. It is true, however, that if in a small town the money to rebuild is borrowed from a distant loan or insurance company, there is an increase in employment in that town for one season; and that is as far as most men try to carry their economic analysis. Let the student carry it further.

[Sidenote: The seen and the unseen]

Servants sometimes excuse the breaking of dishes and furniture on the ground that it makes work, and that the employer can afford it. But income is thus diverted from other expenditure, either for production or for consumption. In the light of the theory of wages, it would appear that carelessness reduces the servant's own efficiency, and in the long run the loss comes, in part at least, off the wages of that particular servant. Bastiat's discussion of the broken window-pane is often and deservedly quoted. What is seen is a certain immediate benefit that the glass-maker and glazier get; what is not seen is that the power to expend an equal amount for other things is thereby lost by the owner of the house.

[Sidenote: The wasteful use of wealth]

4. The destruction of unnecessarily large value to secure a given gratification is not economically sound. The careless use of wealth to secure an inadequate result is likewise justified as "making trade good." The blunder that compels the rebuilding of a wall in a rich man's garden is an occasion for congratulation to those who see in it a happy provision of work for the unemployed. It is easy to forget that the proper use of goods is the final step in production. According as goods are well or poorly used, the production--that is, the real income or gratification they afford--is large or small. Differences in skill in the use of wealth are great. A French cook, we are often told, can make a palatable soup from what goes from the average American kitchen into the swill-pail. Waste in the use of goods is more likely to be found in new countries where wealth comes more easily and necessity does not enforce frugality.

The praise of waste implies the error noted in the preceding propositions. Deliberately securing less than the maximum result from wealth is merely a minor degree of the intentional destruction of wealth. The mistaken view is essentially that of the opponents of labor-saving machinery. It may be true, if the interests of a small class of workers or of tradesmen for the moment are looked at; it is false, if the interests of society as a whole be considered. Far more of wisdom lies in the proverb, "A penny saved is two earned." The economic use of wealth as surely adds to wealth (and, ultimately, to the income of society) as any other mode of production.

[Sidenote: Waste in public outlay]

Some government expenditures, as for river and harbor improvements, are sometimes favored, not because their immediate purposes are good, but because they "make work" and "distribute money" throughout the country. This money comes from taxation, and no matter what the system of taxation, the burden falls on some one, reducing the incomes at the disposal of the people to expend for objects of their own choice. If the work is not worth doing for itself, the collection of money in small amounts from many taxpayers and its expenditure as a large sum in one locality results in a net loss to society as a whole. Where the result is worth something, but not enough by itself to justify the expenditure, the fallacy of the destruction of wealth is present in a smaller degree. Examples are seen in the extreme use of pensions and in some public subsidies.

[Sidenote: The fallacy of waste]

5. The supposed benefits of destruction and waste are due to a narrow and incomplete view of the question. Let us restate the ideas that have been touched upon. In many cases it is possible that one person may benefit by another's mishap or folly in the use of wealth. The complex interrelations of men in society make this inevitable. But, to appreciate the final effects of such action upon society, one needs but to go back to the essential thought of wealth and its purposes. As the average efficiency and bounty of the world fall, so fall the income and welfare of men. As it rises, the social and economic levels rise also. Every kind of economic wealth has potentially two kinds of uses: to gratify wants--thus fulfilling its destiny--or to be converted into higher and more efficient agents--consumption or production. That the possibilities of the latter are boundless is overlooked in the fallacies here criticized. An efficient world would be the result of "economy" and saving; a wasted and used-up world, the result of the fallacy of the destruction and waste of wealth.

§ II. LUXURY

[Sidenote: Luxury defined]

1. Luxury, while variously defined, involves always the thought of great consumption of wealth for unessential pleasures. It is not possible to define luxury absolutely; it is a relative term. Those opposed to it condemn it in their definition of it, as, for example: "an excessive consumption of wealth," or "devoting a relatively large amount of wealth to the satisfaction of a relatively superfluous want." Those who take a more moderate and favorable view say: "It is the enjoyment of forms of wealth not obtainable by the mass of men." The difficulty in the definition as well as in the problem of luxury is that it involves a mixture of economic and of ethical questions.

[Sidenote: Extravagance "to give employment"]

2. Luxury is erroneously justified by some as giving employment to labor. Typical instances are extravagant dress and elaborate balls where fine and costly flowers, decorations, music, coaches, require the expenditure of a large amount of money. It is said of the Empress Eugenie, wife of Napoleon III, that, in order to help the glove industry of France, she wore no pair of gloves more than once; in order to help other French industries, she purchased many silks and laces. It is a very comfortable doctrine to some people that the oftener they change their dress, the greater benefactors to society they are. A few years ago the "Bradley-Martin ball" was given in New York city. It was possibly little more elaborate and expensive than many another ball, but it chanced to be a dull time for news and the papers all over the land gave columns to its discussion. In the many interviews with ministers and business men, the thought appeared over and over that the ball had at least the merit of giving employment to labor.

[Sidenote: The fallacy of luxury]

The fallacy of this is essentially the same as that in the argument for waste and destruction. From the fact that these particular tailors, musicians, and florists would have less employment if this ball were not given, it is falsely concluded that, but for this ball, this particular income, or capital, would not be used at all. The average of employment in those special industries which minister to luxury is the result of and is determined by the average level of demand. There are more caterers and florists in Ithaca than in Hayt's Corners. A more than ordinarily gay season gives unusual profits to these enterprises, and it is true that an abrupt and extreme falling off in demand would cause them large losses, and leave many workers lacking employment for that one season. But, if this limited demand became usual, capital and labor would shift to the other industries to which expenditure had shifted. Other modes of expenditure than twenty-five thousand-dollar balls are possible, as, for example, twenty-five thousand-dollar public libraries. Mr. Carnegie takes his dissipation in that form. That gives employment also; not less does investment in new houses, in new railroads, and in new factories. More employment of a particular kind of labor is caused in one case than in another, but not more employment of labor as a whole and on the average.

[Sidenote: Results of a sudden change in standards of living]

3. If all extreme luxury ceased, men of means would improve durable agents more or would give more or would take more leisure while producing less. The question of luxury is most difficult when put thus: What would happen if everybody began suddenly to live on the simplest food and to confine himself to the bare necessities of life? A sudden change of this sort is almost unthinkable, but if it took place, all the factories and agents used for non-essentials would lose their value at once. A great industrial crisis would follow, as industry would have to adjust itself abruptly to an unprecedented standard of desires. What would happen if that standard continued would vary as human nature varies. There might follow increase of population, or a heightening of the efficiency of such agents as were of use, or, more probable than all else, a progressive lightening of labor, a use of the surplus of energy in study, rest, and recreation. It is, of course, illogical to suppose that with limited desires for the objective goods of the world there would continue undiminished efforts to produce goods and to save for future superfluities. In actual life changes of standard occur gradually. Economizing in material things by simpler living makes possible not only the increased efficiency of productive agents but the increased enjoyment of immaterial goods.

[Sidenote: Luxury as an incentive to progress]

4. The defenders of luxury claim that it is the great incentive to progress. It is undoubtedly true that a dead level of conditions is unfavorable to the progress of society. There must be in society some motive for emulation and ambition after the bare necessities of life are provided. There is therefore much strength in the defense of luxury. Necessities, strictly understood, are things absolutely essential to life and health. No hard line can be drawn between necessities and comforts, between comforts and luxuries. The level rises; it is a trite and true saying that the luxuries of one age become the necessities of the next. The rise of the bath-tub in the nineteenth century is an epitome of the progress of civilization in that period. The free baths in our cities surpass the hopes of the wealthy of a century ago. Even the meaner motives of envy may have their social function. The lower social grades, emulous of the higher standard held before them, labor with greater energy. The successful and capable, not content with necessities, continue to give their efforts to production. The destruction of the motive of luxury before the development of a substitute in a higher social conscience, would be paralyzing to industry. Luxury in a moderate measure may be defended by the same arguments as those for private property. True as this view may be in many cases, in others it seems directly opposed to the facts. Let us look at the economico-moral questions involved from the side of the individual who is indulging in luxury, and from that of the society in which he lives.

[Sidenote: Happiness and the simple life]

5. As a question of consumption luxury involves for the individual both an economic and a moral problem. The economic question is, Does luxury enhance the man's real income? Does a greater expenditure on himself give him a larger sum of gratification in life than a moderate expenditure would give? Ostentation has its penalties. Undue striving after effect defeats its own purpose. This is the cold fact of experience, not a speculative proposition. To get back to the fundamental principle: gratification results from a harmonious relation between man's nature and the world. Life loaded with too much luggage staggers under the burden. The tired faculties of the Sybarite cease at length to respond to natural pleasures. When the senses are robbed of their fineness, youth grows blasé, mature manhood is ennuied, life is empty. The praise of "the simple life" has lately been heard in a quarter whence such counsel does not usually come. In gay Paris, a wise pastor has made one of the most beautiful and rational pleas for plain and sincere living that society has heard since the time of the stoic philosophers. The word is needed. With the growth of incomes grows the strain to reach the self-imposed standards of frivolity. Insanity and suicide are on the increase. The stress of modern life makes men yearn for the simpler joys. Happiness dwells not outside of men; they must seek it within.

[Sidenote: Luxury vs. social welfare]

An economic failure, luxury is likewise in most cases a moral failure. Morality has to do with others; the social aspect of luxury is its effect on other people. The mere spending of a large income in selfish indulgence absorbs all the energies and interests of some men and women. Not only happiness in the narrow sense, but self-realization, is to such lives impossible. Those absorbed in display can give no due measure of thought to social obligations. A society made up of self-absorbed and self-centered individuals is a selfish society, foredoomed to decay.

[Sidenote: Luxury generally condemned]

6. The larger moral problem involved in luxury is connected with distribution or the justice of the income, rather than with consumption or the spending of the income. The individual effects of luxury broaden thus into the larger social effects. Most of the enemies of luxury condemn all expenditure of wealth above a very moderate sum, declaring that it is "unjust" for one man to have much while others are in poverty. This communistic doctrine pervades the teaching of many moral teachers, pagan and Christian. In many ways a public opinion can be developed to disapprove and condemn ostentation. Frivolous display becomes bad taste. Flaunting riches meet the public frown. The spending of income for dress and display has never been successfully forbidden by law. The Middle Ages are full of futile sumptuary laws which sprang from the envy of the nobles for the wealthy merchants. The growth of good taste may do what formal law found impossible.

[Sidenote: Increasing social uses of wealth]

The use of wealth in these days is taking more social directions. It turns from dress toward education, art, music, and travel; then ceases to be applied merely to self and family, and benefits the community. Nowhere and never before has this movement gone so far as in America. Andrew Carnegie, with his gifts of millions annually to public libraries; Peter Cooper, founder of the People's Institute; Ezra Cornell, the patron and prophet of the modern type of higher education--are citizens of a kind better known in this country than in any other.

[Sidenote: Justice of the large income]

[Sidenote: Legal repression of luxury inadvisable]

The immorality of luxury rests in most minds on the conviction that it is unjust that any one should have so large an income to use. The question of luxury leads back to the question of distribution: Has the man honestly gained his wealth? If so, he may spend it with good judgment or poor, with good taste or bad, but, so long as he does not injure others in the spending of it, there is much vagueness and confusion in the talk of "justice" or "injustice." Each must in large measure be his own judge of the wisdom of expenditure. Luxury is not always a question of wealth. Every person of moderate income has relatively superfluous and expensive tastes. One spends more for music than many a millionaire does; another more for books. How many college students' budgets could pass the censorship of Hetty Green, reputed to be the richest woman in America? If expenditures were regulated by the public, few persons would be within the law. But whatever the goods that are bought, if income is unjustly acquired, if its distribution is by rules that do not give the best possible approach to social service, there may well be talk of injustice. There is need of better standards of taste and judgment in expenditure, but not of sumptuary laws. If there is any legal change, it should be rather in the law of property.

41. REACTION OF CONSUMPTION ON PRODUCTION

§ I. REACTION UPON MATERIAL PRODUCTIVE AGENTS

[Sidenote: Essential mark of the consumption of goods]

1. Economic consumption is the enjoyment of the utilities which wealth is capable of affording. All wealth looks toward consumption. To take away the prospect of the enjoyment of goods is to take away all their value. Consumption involves generally the using up of a thing. Food is consumed quickly, clothing more slowly, and houses wear out after many years. The using up is, in some cases, due to the forces of nature, and is not hastened by enjoyment. A house goes to ruin more rapidly if uninhabited than with a careful tenant; clothing is destroyed more quickly by moths than by wear. The use of many goods that give esthetic pleasures, as art, painting, sculpture, and the enjoyment of fine scenery or of beautiful building sites, does not destroy the things that afford the pleasure. The idea that all value originates in labor has led to false views on this question. The essential mark of consumption is the using of the income as it arises, not necessarily the using up of the material agents that afford it, though this frequently occurs as well.

[Sidenote: Consumers' choice as influencing value]

2. The kind of consumption affects the value of material agents. Each buyer helps to determine the use of productive agents. The control of purchasing power means the potential control of industry to that degree. It was necessary in discussing the enterpriser to recognize that the buyer eventually dictates the direction of industry; the enterpriser seeks to produce that for which there is most demand. A change of taste affects the value of natural agents. An increase in the demand for meat affects the value of wheat and potatoes, and also the land used for producing them. A change in the national diet may be equivalent to the discovery or to the destruction of half a continent. If one chooses to drink wine instead of buying statuary, he increases the value of vineyards and decreases that of marble quarries: If one drinks beer, he bids for barley; if he eats candy, he may be offering a bounty for beets. Therefore, choosing vines or violets, pictures or pretzels, each with his nickel helps to determine what shall be produced.

[Sidenote: Inventions influencing value]

The distribution of wealth thus affects the value of agents. The wealthy spend relatively more for luxuries, the poor for food and other essentials. Where wealth and incomes are very nearly equally distributed, the demand of different families will be for much the same kinds of goods. If there were no rich men, the demand for vineyards producing fine wines would be less. The very best qualities of goods take on the highest prices when there is a small, but very wealthy, class of purchasers.

Inventions often shift demand, and value follows. The invention of the bicycle with pneumatic tires, coincident with the adoption of electric traction for street cars, reduced the price of horses between 1890 and 1895. This doubtless was a factor in agricultural land values at that time. This change was sudden, extreme, and temporary, and there has since been a gradual adjustment and a return to the former values.

[Sidenote: Consumers' choice as affecting productive forces]

3. The production of the next period may be radically affected by the use now made of agents. Some consumption takes the form of using up and reducing the stock of wealth. The demand for lumber causes the disappearance of the forests, whereas the demand for oranges stimulates the planting of orange trees. The reckless exploitation of natural resources leaves society poorer. Great herds of buffalo were slaughtered to get the hides, which were of comparatively slight value. Rich land has been exhausted to get a few harvests.

War is a use of wealth for ends believed at the time to be necessary and believed to forward social welfare better in the long run than would dishonorable submission; but it causes misery and leaves industry prostrate. The forms taken by saving are affected by the choice of expenditure. In war the savings of individuals are given to the government and used for destructive purposes. The lender parts with his wealth and society uses it up. While the lender has a claim on the industry and on the remaining property of the community, society as a whole is the poorer. If the savings had taken the form of public buildings, libraries, railroads, and factories, the wealth and income of society as a whole would have been enhanced.

[Sidenote: Consumers' choice as affecting wages]

4. The kind of consumption affects the wages of the various classes of labor. That an increase in the supply of a given grade of labor reduces its wages and encourages its use, and vice versa, is a truth that became familiar in the study of wages. An influence also is exerted from the side of goods upon the price of labor. A shift of demand from one kind of goods to another depresses the wage of the one kind of labor and raises that of the other. A low grade of labor that performs only simple tasks, and those but badly, is injured if demand shifts to better products. Back of the sweat-shop shirt is the problem of the inefficient worker. Progress takes place by the effort of labor to increase its efficiency and to move into higher paid callings, and at the same time by the desire of the purchaser to buy as good a quality as he can.

[Sidenote: The consumer's responsibility]

Every buyer then determines in some degree the direction of industry. The market is a democracy where every penny gives a right of vote. It is the thought of the society called "The Consumers' League" that through purchases, pressure may be brought to bear upon the employer to provide better conditions of work. The members of The Consumers' League refuse to buy goods not made under sanitary conditions. Undoubtedly there is here a great economic force which an enlightened public opinion, even without a formal association, can make in large measure effective. Every individual may organize a consumer's league, leaguing himself with the powers of righteousness. Will he read a yellow journal or a pink or a white one? A nickel or two will buy either. He has a dollar; will he go to the theater or buy ten dishes of ice-cream? He decides to buy a book, and more type and paper are made, and more printers are employed; he subscribes to foreign missions and Christian workers penetrate farther into Africa. Every purchase has far-reaching consequences. You may spend your monthly allowance as an agent of iniquity or of truth. You cannot escape a choice even by burying the money, for that is either a demand for gold or a gift to the issuer of paper currency.

§ II. REACTION UPON THE EFFICIENCY OF THE WORKERS

[Sidenote: Instinctive choice as related to welfare]

1. All consumption works some temporary change in the consumer, making him a more or less efficient producer. Most consumption goods are used to gratify a wish of the moment. Many actions are governed by impulse rather than by reason; but in general this impulse is in harmony with the interests of efficiency. In primitive society instinct and appetite must generally have been safe guides. Food not merely appeased hunger and gratified the palate, but it gave strength. Sensations of cold, hunger, and thirst were developed by nature to stimulate men to do the things that helped them to survive. In primitive societies there are few chances to seek pleasures that are not favorable to efficiency. In the struggle for existence the more efficient tribes survive, and those that develop many abnormal tastes must perish. But the conditions of modern life are more complex, and temptations beset men on every side. Tastes are pampered and appetite is gratified at the expense of later welfare.

[Sidenote: Choice of foods]

2. The physical efficiency of the worker is conditioned on wise consumption. Chemists and physiologists are telling now in accurate terms how the nutritive values of foods differ. Food values are not measured by the pleasure afforded the palate. The wide variety and greater choice now possible, even to the modest purse, make the chance of error much greater than in simpler conditions. This subject, already touched upon in the sections on the efficiency of labor, deserves further notice. From youth to age, the foolish choice of goods yields its harvest of ultimate misery. When babies are fed on crackers dipped in coffee, or, as among the Italian immigrants, on stale bread dipped in sour wine, there is a poor foundation laid for a vigorous manhood. Rich and poor cook too much for taste and too little for nutrition or digestion. Much cooking is still done in ways fit only for our grandfathers who had cast-iron stomachs and worked in the open air. Culinary methods have not been adapted as yet to a sedentary life.

[Sidenote: Of drinks]

Drinking tempts some men not only by taste, but by the appeal to sociability; to other coarser natures the joys of Bacchus offer the one hope of exhilaration. The pleasure from alcoholic liquor may at the moment outweigh the cost in money, but a diseased appetite forbids any reckoning of the vast psychic cost that follows. The coin paid for the drink is the beginning of the expense; misery, disgrace, degeneracy, and bestialty too often are the unreckoned items.

[Sidenote: Of clothing]

Clothing is primarily for ornament, secondly for physical comfort. That was the historical order, and it is the logical order in most minds to-day. How badly the two needs are harmonized! No wonder that the savage suffers in adopting civilized dress. Travelers describe the African potentate, attired in a high hat and a bracelet, striving to outshine his rival resplendent in full-dress coat and a palm-leaf fan. Civilization is making headway there; but the student of primitive peoples finds one of the important causes of their decay to be their bad judgment in adopting civilized dress, unsuited to their customs and climate. A mistake is made likewise by workers in physical tasks in imitating the dress of the wealthy and professional classes. The dress of the higher classes often is chosen because of its unsuitableness for an active worker. It serves thus to mark its wearer as one engaged in delicate tasks or as a person of leisure. Possibly, therefore, because of their strong social ambitions, the manual workers in America more than elsewhere adopt a costume that is not sensible or sanitary.

[Sidenote: Reactions of enjoyment upon the intelligence]

3. The intelligence of the worker is affected by the form of his enjoyments. This does not refer to the use made of spare time for regular study in night schools, correspondence schools, vacation work, but to the use of time when seeking recreation. The choice of recreation reacts upon the nature of the man. Will he read a book or play billiards? In proper proportions both may be good, in excess both are evil. Liking realism, does he read Howells or the blood-curdling serial entitled "Piping the Mystery"? Does he devote his spare hours to the "Scientific American" or to the "Police Gazette"? At the moment there may be as much pleasure in one as in the other (and one might add, in Hibernian phrase, "Yes, and more too."). Does he enjoy music, the theater, or the cheaper attractions of Coney Island and the Bowery? Is his recreation permeated with a certain intellectual ambition? There may be just as much momentary joy in one choice as in another, and life is shaped by the direction of one's enjoyments. Much depends on the natural bent; some natures incline to the healthy as the plant grows toward the sun. With most characters much depends on the influences of neighborhood life; thus the boy's clubs and college settlements of the cities, the schools and playgrounds of the villages, are tending to surround child life with healthier conditions, that will mould it into better social habits.

[Sidenote: Reaction upon the character]

4. The form of the worker's expenditures affects his industrial virtues. This is not a moral lecture; it is a look at the economic side of the subject. There are some moral qualities, however, that are closely connected with efficiency, while others are not. Some individuals are corrupt in private personal relations, but "square" in business dealings. But usually there is some connection between the two, and under modern conditions this is becoming closer. Fitness for daily tasks is affected by the daily thoughts of the worker. Sordid and foul thoughts, like an internal malady, sap the economic efficiency of the worker; clean, bright thoughts act as a tonic. Drink, gambling, fast living, unfit men for positions of trust, while many pastimes leave the moral nature cleaner and stronger. Few can live a double life--honorable, conscientious, and exact in one part of the day, and corrupt in another. Dr. Jekylls and Mr. Hydes are not often found in real life. The habitual train of thought in leisure hours possesses and controls the man throughout his work. It is said that "A man is what his work makes him," but it is equally true that a man's work tends to become what he is. A man fit for a higher kind of work rises to it in the usual order of things; but no matter how humble the task, it partakes of the worth and wholesomeness of its doer.

§ III. EFFECTS ON THE ABIDING WELFARE OF THE CONSUMER

[Sidenote: Production vs. welfare]

1. Man and his welfare are the end and aim of the economic process. The starting point of industry is wants; the goal is welfare. Momentary gratification is only a way-station, not the journey's end. Too often, in economic reasoning, things are looked at from the employer's point of view. The older writers, such as Ricardo and Mill, were inclined to take what John B. Clark has called the "feed and work" view,--the view that the workman is merely an agent of production, a means to an end; that his food, the same as coal for an engine, is to be thought of rather as employer's cost than as consumer's gratification. But, in the broader view, the welfare of men as men is the subject most worthy of economic study. The workman's food is to gratify his hunger, primarily; not merely to make him a better working machine. This reverses the order of the older reasoning. The use made of the income is itself a kind of production--its last stage. Is the process, on the whole, worth while? This can only be judged by finding whether, on the whole, the welfare of man has been furthered.

[Sidenote: The marginal application of income]

2. An income yields the maximum gratification when it is apportioned among goods so that their marginal utilities, as nearly as possible, are equal. Even a small income is income capable of many applications. The choice lies among many thousands of articles. Utility varies not only according to the kinds of good, but according to the varying quantities of each. Every moment, therefore, the conditions of a choice are changing. The best use of income forbids the purchase of an additional unit of any good unless it affords the highest gratification obtainable, at the moment, at an equal price. Various circumstances prevent the exact application of this rule. Expenditure is a matter of habit, in large measure, rather than a matter of judgment. The knowledge needed for a rational choice very often is lacking. Appetites change, making unwise the old purchases, yet men go on buying the same things in the same proportions simply because a readjustment that would give greater gratification requires thought. Finally, the best economic adjustment must conform to the abiding physical and moral welfare of the user, not to a temporary impulse; and such a choice is far more difficult than that of the temporary good.

[Sidenote: Progress and the refinement of desires]

3. Progress takes place where new wealth gratifies marginal wants as intense as those of the preceding period. If the utility of every kind of goods decreased uniformly as wealth increased, desire would steadily decline in intensity. But old wants vary and new wants develop with prosperity. Desire grows by what it feeds on. Ambition passes on to other and higher peaks. The direction of the individual man's life thus is determined by the expenditure of his increasing income. Wealth makes possible a new adjustment of life, a new character, both in the individual and in the society.

[Sidenote: Wealth a means to living]

The thought that needs emphasis in this connection is that, while production and consumption are separable in thought and distinguishable in practice, they are not opposed in their ultimate purpose. The highest fruits of production are in the lessons of sacrifice and discipline, and in its opportunities for experience and self-expression. The best result of the consumption of wealth is not the gratification of appetite, but the strengthening of the spiritual forces within men. The world is to rise to a higher social stage not by banishing labor and by multiplying sensual enjoyments of the commoner sort. Wealth, even in an economic view, is not the end of life, but merely the means to its realization.

[Sidenote: Variety and harmony in the choice of goods]

4. Enjoyment is increased by a proper variety and harmony of goods. As the old kinds of goods increase in amount and fall in value, there must be a substitution of new goods. An element added to the dress or to the diet heightens greatly the total gratification. The result is a unit. Think of a dinner without butter, or a cranberry-pie without sugar, or a dress-suit without a linen collar. Certain combinations are essential to the requirements of developed taste and present a problem of complementary goods. Combinations of complementary goods enhance the enjoyment; inharmonious combinations decrease it. That certain things "go together" is a fact that rests often in the nature of things. Complementary colors please the eye; well-seasoned dishes please the palate.

Again, the harmony of goods is affected by the special nature of the occupation. A farmer with his out-of-door life can use tobacco with far less danger than the sedentary worker. A piano player cannot be a base-ball player: the one requires soft and supple hands, the other hard and callous ones. The young man must give up the piano or the game, or play both badly. The harmony may rest on a still more complex social adjustment. The loss to the man whose life is in the main on a higher plane is greater if he descends occasionally to a lower. A ditch-digger, looking at the question short-sightedly, may deem "a good drunk" a very desirable form of enjoyment. But a brain-worker, whose joy as well as efficiency depends on the clearness of his intellectual processes, must see that in his case the perils and the costs are much greater.

[Sidenote: Unity of choice in happiness and in character]

Wise consumption depends not alone on physical pleasures, but on the spiritual unity of the uses made of goods. Happiness and character are akin in the qualities of simplicity and unity. Happiness, so far as it depends on wealth, is a harmony of gratifications. Character is a harmony of actions, a group of complementary deeds. There can be no harmony, without a central, simple, guiding principle. The wise and moral use of goods and the economic use of them are therefore for the individual essentially the same. Life is a unity. The results of the choice of goods are reflected in the health, intelligence, happiness, morality, and progress of society. It is vain for the economist to ignore the ultimate relations between economic choice and morality; it is folly for the moralist to ignore the economic bases of right and wrong in human conduct.

42. DISTRIBUTION OF THE SOCIAL INCOME

§ I. THE NATURE OF PERSONAL DISTRIBUTION

[Sidenote: Definition of personal distribution reviewed]

1. Personal distribution, in economics, is the reasoned explanation of the ways in which income is divided among the members of the community. Before noting more exactly the ways in which distribution can and does take place, it may be well to review briefly some definitions that have been given in other connections. Distribution is bound up in practice with production, but it can be thought of as a more or less distinct problem. Functional distribution is the attribution of value to agents or classes of producers, to land, machinery, and labor considered impersonally as groups of productive agents. Personal distribution is the actual apportioning of income to living persons. This theme now to be dealt with is the more important practically, for the abstract discussion of rent and interest is of use only as it helps to an understanding of this vital human problem. It is well to recall also the distinction between wealth income, money income, and psychic income. The first is the objective aspect, the last is the subjective aspect, of income; the second, money income, may be an expression, in money form, of either of the others, but commonly of the former. The money expression of psychic income can be only approximately attained.

[Sidenote: Personal affection and distribution]

2. The individual's income is determined by a number of forces, only part of which are primarily economic. Many persons derive income directly neither from property nor from labor. They neither toil nor clip coupons, but they flourish in the favor of others--parent, husband, wife, friends, patrons. So long as the good-will continues these persons may be as well off as if they drew a salary or owned a bank. If a person in control of goods shares them with another, it is a matter that economists must recognize, but cannot well reduce to rules of value. It is not the task of economists to explain why the impulses of generosity arise, but only how they affect distribution. The economic problem of distribution really ends where owner or worker secures his income. Giving a part of it to some one else is essentially a form of consumption, and only secondarily a mode of distribution; it is the way chosen to spend the wealth income.

[Sidenote: Complex source of psychic incomes]

The psychic income of individuals, therefore, is often made up of many elements. Some parts are due to services performed by the person himself. When one combs his own hair he is adding to his income. Benjamin Franklin said it was better to teach a boy to shave himself than to give him a thousand dollars. Other goods are the uses and fruits of legally controlled wealth: chance finds, as gifts of value or lost and abandoned goods; goods assigned to one by authority; wealth inherited; illegal gains by robbery; goods secured on credit; gifts either of things or of services. The uses of this university are a gift forming a part, first, of the student's income, and, finally, of the social income. Such gifts can be traced back to large-hearted, public-spirited men like Ezra Cornell, but they must be looked upon as coming from some one. This list, incomplete as it is, suggests that the real income of most individuals has manifold sources. Let us undertake to examine and analyze the various methods in actual use in the distribution of income to the persons making up society.

§ II. METHODS OF PERSONAL DISTRIBUTION

[Sidenote: Compulsory distribution; violence]

1. Distribution is sometimes compulsory, by force or fraud. This crude and primitive mode of distribution, the negation of personal liberty, never has been quite eliminated. In every country an unhappily large number of men from time to time break over into crime, from violence and highway robbery down to sneak-thieving, pocket-picking, and bunco games. Not more than ten per cent. of this criminal element is at any one time in prison. This method of personal distribution, not hinted at in most theories of distribution, determines a large part of the income of tens of thousands of men in this country and concerns the distribution of millions of dollars. These enemies of society appropriate whatever they can, and the law stops them if it is able.

[Sidenote: Chattel slavery]

Slavery is distribution by legalized force, but the force is not legalized by the consent of the victims. The evolution of the harsher slavery may be traced through various forms of milder serfdom. There is found an element of this in the freest existing societies; men unwilling are forced to do things. A patent example is the convict on a chain-gang, a slave to society as a penalty for his violation of its commands. But some radical reformers to-day claim that present society is wholly based on legalized force, and that the workingman is essentially a slave. Their ideal cannot be realized without dissolving social bonds and destroying civilization; yet the presence, even in our society, of this forced, unwilling submission on the part of some of its members cannot be ignored.

[Sidenote: War indemnities]

A similar example of forcible taking is seen in case of war. Savage tribes plunder and take captive their weaker neighbors. Conquering modern nations usually exact tribute from defeated enemies. Germany got a billion dollars from France, Japan a quarter of a billion from China. The terms of peace at the close of our great Civil War were the most liberal ever granted by conqueror to vanquished; and yet the federal pensions granted to Northern soldiers are a form of tribute, being paid by taxes falling alike upon the North and the South. In all these cases the distribution by force is unwillingly suffered. In none of them is it reducible to economic rules or capable of a strict economic explanation.

[Sidenote: Charitable distribution within the family]

2. Distribution may be charitable, that is, determined by considerations of benevolence and affection. Charitable is here used in its original sense, as synonymous with love or affection. First to be mentioned is the love of parents, the root and type of all the forms of charity. The lack of economic equivalence in the relation of parent and child is complete in early years. The helpless infant gives nothing economic to the parent, the parent gives all to the child. Gradually, however, the balance is regained; as the years go on, not only does the child repay in affection but in many cases he repays in material ways. In the factory districts and on the farm the child in early years begins to reëstablish the balance, becomes a worker, and contributes as much as the cost of his support, and finally more. A student of modern English town life has traced the curve of poverty traversed by the average child of the poor, as the family moves, now below, again above, the level of minimum income required for physical efficiency. In the middle or propertied classes the children do not for many years take the burden from the parents, and it is doubtful whether in most cases the economic balance is ever reëstablished. It is not to the parents, but to the succeeding generation, that the debt is vicariously paid.

[Sidenote: And in larger circles]

Friendship widens the range of generosity and multiplies the mass of gifts. Broad sentiments of humanity lead to gifts outside the range of personal affection and personal interest, to the beggar on the street, to institutions devoted to charity. In New York state about twenty million dollars a year is given to charity, and in the country at large many times as much. In the year 1901 over one hundred million dollars was given to education in the United States by private donors; and that high mark will no doubt soon be passed. Gifts in cases of great disasters, as the Irish and Indian famines, the Chicago fire, the Galveston flood, the eruption of Mount Pelée, bespeak a widening generosity. Religion impels to the building of churches, to the support of priests, missions, and manifold religious undertakings. Charity in this connection is the expression of a sentiment that varies from the broadest and most general humanitarian sentiment to the most intense and ardent personal affection.

[Sidenote: Authoritative distribution in the despotic state]

3. Distribution may be by an authority willingly acknowledged. The two preceding forms of distribution, force and love, shade off into this form. In them the ones from whom goods are taken or to whom they are given have no power to change the conditions; here is to be considered the case where the person bows willingly to the superior power and takes what that power accords him. There are few despotisms in which the government is not based on the wishes and average capacities of the governed. If the citizens as a body really desired and were deserving of better government, in most cases they could get it. Much is heard, for example, of despotism in Russia, and of the abject condition of the people; but travelers testify that while many in the educated student classes are filled with the greatest discontent, and the intelligent subject peoples, such as the Finns, detest their rulers, such sentiments are far from general throughout the empire. The power of the Czar could not exist for a single moment if the mass of the people did not look to him as the great father whom they venerate and love. If this is true, the despotism in Russia, though abhorrent to our ideals of freedom, is fitted to the aspirations of the mass of the people. So far as government determines income, the authority distributing income there, as elsewhere, is one willingly acknowledged.

[Sidenote: In communities and families]

In patriarchal tribes, in communal societies, in monastic and other religious orders distribution is by an accepted authority. Each person works at what he is commanded to do, and some one in authority (the patriarch, head of the community, the father of the monastic order) portions out the work and the reward. In the family this rule largely prevails, and even after the children have come to years of discretion they not infrequently accept, from habit or affection, the will of the parents, and give up their entire wages to receive back a portion. The method of charitable distribution while the child is young gradually changes to authoritative distribution after the child becomes a worker. The untrained and indocile youth, however, is made the subject of compulsory distribution.

[Sidenote: In much governmental action]

The collection and distribution of taxes is by public authority. No attempt is made to give back an exact equivalent to the tax-payer. The money is taken and spent by authority for the public good. This method is exemplified in the work of certain commissions appointed by law to fix rates or settle disputes, as boards of conciliation and arbitration and railway commissions. The courts sometimes find themselves obliged to enter this field, although they do so most unwillingly. They try to confine their efforts to interpreting the contracts men have voluntarily entered into, and they avoid, so far as possible, the making of contracts or the fixing of rates.

[Sidenote: In various contests]

In many cases, little thought of as economic distribution, the authoritative method is followed. Literary and oratorical contests are passed upon by a set of judges whose opinion of merit determines the award. It is a poor method, often resulting in injustice (as every defeated candidate will admit); but it is the only way practicable for deciding such contests. Yet there are literary and oratorical contests decided very differently. If a man advertises himself as an orator and charges fifty cents admission to his lecture, everyone who goes to hear the man votes that he is an orator; everyone having money but staying away votes that he is not of such value. The one is judgment by the authoritative, the other by the competitive, method. The essence of the method of distributing by authority is that one individual (or group of individuals) judges of the deserts or duties of others, decides what others must get or must pay, not what he himself is willing to pay. Authoritative distribution is necessary in many cases, but it is fraught with dangers. It is the essence of socialism that it would make this plan universal.

4. Distribution of psychic income may be in part by the collective use of social wealth. By collective use in the full sense is meant the continuing enjoyment at the same time by all caring to partake and without limit as to amount.

[Sidenote: Distribution by collective enjoyment]

Now it is evident that, because of difficulties that arise, not all things are capable of this kind of enjoyment. Free water for private use from public waterworks is wasted; free meals and clothing to school-children are open to still greater abuses. Men cannot thus collectively enjoy rare wines or good confectionery; they cannot partake without limit of a limited supply. But libraries and schools may practically be managed in this way. They require both certain qualifications and certain sacrifices on the part of the user. Collective enjoyment is most completely possible where the use of a permanent form of wealth, such as a park, can be made free to the public. All individuals may enjoy equal privileges, though general rules may limit the kind of use; for example: no one may be permitted to pull flowers or to walk on the grass, but all who make use of the park enjoy equal privileges. Henry van Dyke in one of his essays puts into the mouth of his boy the question, "Father, who owns the mountains?" and the answer is, He who can enjoy them. Every man without covetousness, as he stands on this hilltop, owns the mountains, the lake, and this beautiful valley.

In some ways the amount of public enjoyment is decreasing, as by the growing density of population, by the loss of open spaces and commons for playgrounds, by the destruction or fencing in of natural scenery; but in other ways it is growing and must grow rapidly. The spirit of civic improvement spreads. The streets are better paved than formerly; there are more public buildings, art galleries, and noble monuments. Every cross-road in the land will some day have its fountain and its statue. The coöperation of the whole community gives to collective use many of the advantages of large production, and the maximum of enjoyment.

[Sidenote: Distribution by custom and status]

5. Distribution may be by status or set rules and customs. Distribution by status fixes the shares of men independently of their effort and without their control. It is guided neither by their personal merit nor by the economic value of their services, but by the merits and acts of men not living. This method has prevailed and still prevails to a great extent, though in our society this is hardly realized. Feudal society was built on status. Men were born to certain privileges and positions; they inherited property which could neither be bought nor sold; they followed trades which could rarely be entered by any outside of favored families. Caste in India and in other Oriental countries regulates by status a large part of the life. In western countries to-day inheritance of property is the main legal form of status and it shades off into other forms of distribution. While in some cases inheritance may be looked upon as a gift to the heir, in other cases, elsewhere noted, it is partly earned by the heir who has helped to produce it. By public opinion and by prejudices, status is still maintained even where the law has formally abolished it, as is seen in modern race problems.

[Sidenote: Competitive distribution the dominant form]

6. Distribution is usually competitive in accordance with the value of the product. This is the dominant form of distribution in modern society. It is the essentially economic form, as contrasted with the legal and personal forms just described, because it is impersonal and reducible to a rule of value. Distribution under competition is made not with reference to abstract ethical principles or to personal affection, but to the value of the product so far as it is honestly controlled. Monopoly, it may be noted, never has ceased to rest under the ban of Anglo-Saxon law, hence to exemplify compulsory, as opposed to competitive, distribution. A striking feature of the competitive method is its decentralization. Each helps to value the economic services of each. If one pays more for the services of the singer than for those of the cook, it is not because he would rather listen to the singing than to eat, but because by apportioning his income he can get the singing and the eating too. In the existing circumstances, the singer's services seem to him worth paying for, and he backs his opinion with his money. So each is measuring the services of all others, and all are valuing each. It is the democracy of valuation, while the method of authority is an oligarchy or monarchy.

[Sidenote: Various ideals of distribution]

7. The best distribution in practice must be sought in union and harmony of these various methods. Various social reforms propose simply the extreme application of one kind to the exclusion of the others. There are two opposing views of competition: one, that it is the ideal to be sought; the other, that it is inherently bad, and therefore should be abolished. Extreme individualists, believing that everything would be settled for the best by free competition, wish to make it universal. They ignore the many cases where it does not, should not, and cannot exist.

Socialists, ill content with the share secured by the less skilled laborer, say that the competitive plan is unsound at the core. They say that distribution should be not in proportion to value, but in proportion either to needs or to deserts (they are not agreed which), judged by a vague ethical standard. But this involves the principle of authority in its extremest form. It intrusts to some men the function of passing upon the economic merits or desires of all others. Yet that alone is not a conclusive argument against all use of authoritative distribution. In many practical cases the intrusting of power and authority to men to judge of the value of others cannot be avoided. Whatever is indispensable, whatever is the best possible, is, humanly speaking, just. Assessors, judges, jurors, must be employed. Interstate commerce commissioners determine whether rates are reasonable, boards of arbitration settle disputes, the strike commission adjudicates difficulties in the coal regions. Doubtless these methods will be increasingly used.

[Sidenote: Need of a wise blending of methods]

There is no other kind of distribution than those enumerated. The strongest contrast is between the competitive and the authoritative principles; the others are minor and modifying. None of them alone is sufficient; each has its merits and each has its defects; they must supplement each other. Actually they are employed in modern society side by side; each seems essential and best in some special application. But it does not follow that exactly the proper use is now made of each. No two generations have followed the same rule, and the proportions in which use has been made of them has constantly shifted. It must be recognized that the principle of diminishing utility applies to each method of distribution as it does to the productive processes. Each may be best under certain conditions and circumstances, but, extended in application, each reveals its weaknesses. In any productive process the best method depends upon the proper proportion and combination of elements. Progress toward the best possible distribution is to be sought in the wise adjustment of the various methods to human nature and to human needs.

43. SURVEY OF THE THEORY OF VALUE

§ I. REVIEW OF THE PLAN FOLLOWED

[Sidenote: The cycle and order of economic study]

1. The beginning and end of economic study is man. Before leaving the more theoretical and abstracter part of the theory of value, it may be well, at the cost of some repetition, to restate and review the relations of the various parts of the argument. Intent on details of the theory of value the student is in danger of losing its broader perspective.

The proposition with which this section opens was accepted as our axiomatic starting-point. It was not so in the older political economy; men too often were looked upon rather as a means to an end, namely, the creation of wealth. This proposition refers to all classes, not to a small group of men. The aim of economic study is democratic, being the welfare of all men. Economics does not purpose, however, to explain man's action with reference to all things. It asks and attempts to answer the question: "Why does man attach value to certain things and actions; why does he measure them in certain ratios as expressed in terms of each other; and why do these ratios change with changing conditions?" This purpose has determined the order of our study. Beginning with an analysis of the nature of wants, and of the mental process of valuing consumption goods, the circle of inquiry widened to the problem of valuing things whose relation to wants is more remote and indirect (though not less important).

The problem of future uses, the major part of the theory of value, leads back to the question of the use man makes of things--a field claimed by the moralist, but one that cannot be neglected by the economist. Economics is not the whole science of social relations. It is a restricted part of the field. But it comes into relation with great practical questions that touch all sides of life. Thus economics broadens and unites with the general stream of sociology. In the pursuit of our study one comes back to the starting-point and cause of value--human wants and the use made of wealth to gratify them. The circle is completed. We have surveyed, rapidly and imperfectly it is true, the whole range of economic inquiry.

[Sidenote: The unit in value problems]

2. The central point in economic study is the simplest problem of exchange value. The first look at the economic world reveals so many things that have relation to wants, and relations so complex, that the mind is confused. The object of science is to simplify; it seeks unity in the midst of chaos. Relations exist between wants and things that certainly never can gratify them directly. Where is the simplest aspect of the problem to be found? Evidently in the exchange of consumption goods, for these are in closest touch with wants. Out of the complex of direct and indirect goods, those few which are at the moment gratifying wants must be somewhat abstractly, but logically, set apart and studied. In the simplest problem, the exchange of the most typical consumption goods, is the key to the larger problem of value. If one could follow it step by step into its complexer relations, he might hope to understand everything in economics.

[Sidenote: Former or conventional conceptions of rent and interest]

3. The problems of rent and of time-value are successive steps in the explanation of the exchange value of indirect agents. The term rent has been so variously defined that no caution to the student as to its use can be deemed superfluous. Until recently economists sought to confine the term to the income from natural resources (or land). Rent, in their conception, was the income from one group of goods, physically distinguishable from another group of goods, called capital, which were supposed to yield interest. That is, rent and interest was each supposed to bear much the same relation to a particular set of durable agents; the difference between them was primarily in the agent that yielded them (though there were other complicating thoughts) rather than in the aspect of value they represented.

[Sidenote: Rent and time-value as here used]

Rent as defined in this volume has the much broader meaning of the usufruct of any material agent as contrasted with the use-bearer. Usufruct is a conception most intimately related to that of consumption goods, but is logically one step further removed from want. Time-value, as here considered, is a broader conception than that of contract interest, for it has to do with the all-pervading element of time in its influence on value. Some rents are logically, and in practical business as well, not measured over periods of time, but at the moment of their accrual. The measurement of time differences is mainly required in setting a valuation upon a more or less permanent use-bearer. This process, which is capitalization, has only recently been recognized to be the discounting of all the future uses to their present worth. While in its essence this is merely a problem in exchange value, it is the highest, subtlest, and most difficult of such problems. Its understanding presupposes rent, just as rent presupposes the analysis of wants and marginal utility. It is the outer zone of the value problem, carrying the thought of value years away (all but an eternity away) from present enjoyment.

[Sidenote: Different stages in value]

While both rent and time value are widened so that each applies in some manner to all durable agents, it is a grave error to conclude hastily that the intention is to make synonymous the old terms rent and interest. Rent and time-discount remain essentially different stages in the value problem. Actual concrete net economic incomes as they arise are always rents. Interest never accrues in a concrete form except under the interest contract for a money loan (a contract income, not an economic income), and this evidently is a species of contract rent. Time-value is a phase of value connected logically with investment, or the calculation of future earning power; rents are both actual and expectative, or future, but as realized incomes they always express present earning power. Together, rent and capitalization embrace the whole problem of valuing durable material agents.

[Sidenote: Wages and profits related]

4. Wages and profits are of the same genus, the value of human services of different grades. The attempt has been made in the foregoing treatment to show the unity between the problems of wages and profits, and to point out the difference between the conditions that surround them. Through the common characteristic, social utility, the employer's service can be compared with the most ordinary or the most artistic labor. Profits and wages, therefore, are simply different aspects of the same question. A common power, or principle, is found in all objects of value, a power to gratify human wants. In the variety of human services and in material goods must be sought this unity.

The different kinds of services range from direct to most indirect goods. The commonest labor may serve welfare at the moment or may be embodied in a form to be used years later. In that light, wages seems a more complex problem than either rent or capitalization. But the moment the service embodies itself in a material good with future uses the general theory of capitalization applies to it.

§ II. RELATION OF VALUE THEORIES TO SOCIAL REFORMS

[Sidenote: "Orthodox" political economy]

1. The earlier theories of political economy implied a dismal view of the future of the masses. The theory of value one holds is sure to affect his view of economic progress and of social reform. The theories from the middle of the eighteenth to the middle of the nineteenth centuries, however varied they were in other respects, nearly all gave a gloomy view of the condition of the laboring-men. The physiocratic school in France, the so-called "orthodox" economists in England (that is, the writers from about 1800 to 1850 that were in sympathy with the landholding or commercial classes), and the socialistic or laboring-class theorists, all inclined to this view. It was while this view prevailed that Carlyle characterized political economy by the term still sometimes heard--"the dismal science." The thinkers of that time started their study of value at wages, and assumed that population would always increase so fast as to force labor to a bare subsistence. The other shares (or the other classes of society) were supposed then to absorb all the surplus income. Economics to-day is not especially lugubrious, and its more cheerful note is due as well to its changed theory of value as to the evidence of advancing welfare among the masses.

[Sidenote: The gloomy socialistic theory]

2. The socialistic theory of value, akin to the other, holds that capitalists absorb all the benefits of progress. The socialists (of the radical school) claim that their theory is merely the logical conclusion to be drawn from the old "orthodox" theory, stated in its extremest form. Usually, however, the orthodox theorists softened and modified greatly the statement of their harsher views. The socialists have not been willing to recognize any ameliorating conditions. They say: economic theory shows that under a competitive condition of society the laboring-man must be forever ground down in helpless misery; therefore the only hope of the laboring masses is to do away with competitive society and to substitute for it central, governmental control of all industry. They did not and do not attempt to distinguish carefully the part of production, due to brains and effort, from the part due to ownership of capital. The socialist theory is a plan for political agitation rather than a scientific theory of value. It was originated or elaborated by men such as Karl Marx, Frederick Engels, and Ferdinand Lasalle, as labor leaders and political agitators, who found a ready weapon in the bungling economic analysis of the time. The claim of a scientific basis for socialism has continued to be proudly made by their followers, but it has a tottering support in their defective theory of value.

[Sidenote: George's single-tax theory]

3. The single-tax theory of value is that ground-rent automatically absorbs all benefits of progress. This is the most notable example of a plan of social reform growing out of an abstract theory of value. While the socialists first had their plan of social reform (or revolution), in whose support Marx's fanciful theory of value was invented, Henry George appears first to have got hold of a theory of value that suggested his plan of social reform. Studying the political economy of Ricardo and Mill, he accepted their ideas regarding the hopeless outlook of the laboring classes, and their conception of the theory of ground-rent with its false implication that landowners get all the surplus in society. George thus came to believe that, with private ownership in land, competition steadily robbed all but landlords, even the non-landholding capitalist, of any share in the benefits of progress. This theory of value is thought to explain all the poverty in the world. It calls, in the single-taxer's opinion, for a radical measure of reform, namely, the taking of all rent of land for public purposes as a common instead of an individual income. If the theory of value on which it is based were sound, the doctrine would have irresistible reasons in its favor; if it is false, most of the argument falls to the ground, though there may still be substantial reasons of a different nature for the exceptional treatment of ground-rents for purposes of taxation.

[Sidenote: Recent hopeful theories of wages; Walker's]

4. Recent theories of value assign to labor a more hopeful position. A most optimistic theory of wages is "the residual claimant theory," presented by Francis A. Walker. His view was that the various shares of production, such as land-rent, the income from machinery, etc., and the enterpriser's profits, were fixed by forces independent of wages, and any increase in the product must therefore fall to the laborer as the residual claimant. This conclusion has the one merit of explaining somehow the rise in wages in the past century, but the fallacy of its method is too evident to call for exposure. Not to enter into the details of the method, it is enough to note that it involves the circular reasoning that land-rent is a surplus over cost of production, and is fixed regardless of wages, whereas the cost of production itself is made up of money wages.

[Sidenote: Clark's wage theory]

Another American economist, John B. Clark, is led by his theory of profits to a most hopeful conclusion as to the future of wages. Profits he considers to be essentially the reward for improvements in productive processes, which gradually accrue to the general benefit. As profits thus disappear, the average wage-earner is correspondingly uplifted, a conclusion quite as hopeful as that of Walker. In discussing profits above, dissent from the narrow conception of their source has been expressed.

Some facts lend support to every one of these theories of social progress, but other facts refuse to be harmonized. The temptation to get a simple, dogmatic explanation of value should be resisted. When the interrelation of the factors is recognized there is little likelihood of concluding that some one of them will absorb all the benefits of progress. One is not driven to the extreme either of optimism or of pessimism. While the theory of value is not in itself a theory of society, it greatly influences social conclusions. Clear economic analysis is a condition to sound thinking on practical questions.

§ III. INTERRELATION OF ECONOMIC AGENTS

[Sidenote: Organic nature of the productive process]

1. The industrial process is a unity and the different agents bear an organic relation to each other. The problem of value is not one of physical division; it is one of logical analysis, and this is not possible in isolation or without the competition of men. Production as now carried on is a social process; the determination of market price is a social process. The different agents are complementary goods, each necessary to the best use of the various other agents. The value of seed is not to be found apart from the use of the ground; or the value of the leather apart from the shoemaker or the thread he uses. When these things are brought together in society their value is found by the comparison and measurement of marginal utilities. Economic forces, like other classes of forces, act and react upon each other. Two bodies attract each other in space; two chemicals uniting are both transformed into a substance differing from either. The economic result of materials and men coöperating is something differing from either factor, yet dependent on both.

[Sidenote: The conventional divisions of economics]

2. The divisions of the older political economy are aspects of the general problem of value. The divisions conventional in the text-books on political economy, namely, "production, exchange, distribution, and consumption," have not been observed in the plan of this work. It has not seemed possible to accept the view that each of these phases of the vital economic process could be discussed completely apart from the others. Consumption must be studied at the beginning, as the basis of exchange value, and again at the end, when the circle of thought has returned to the use man makes of wealth; and it pervades the whole subject of value, for back of every price is the potential utility of the good. Exchange is coextensive with the whole process of associated industry; for wherever there is a price, there is exchange. Subjective value outside a market forms a small, though not negligible, part of the problem for the student of to-day. Production is implied in every exchange, as exchange is in all social production. They are, indeed, but different phases of the larger phenomenon, the economic process. Nor is distribution, considered in its impersonal or economic form, any other than the logical valuing of the shares of the factors in economic production. Impersonal distribution is coextensive with economic production. Whatever a good, logically considered, contributes to value in production, that is its share of the product. Personal distribution, it is true, brings in other great influences which have been partly considered, but which will be treated more fully in the division to follow, on the influence of the state in the distribution of income.

[Sidenote: The broadest principle of value]

3. The law of diminishing returns is the broadest principle of value. The one character common to all goods is that their importance varies with their quantity in any given connection. This is true of direct goods whose power to gratify wants falls as the supply grows; it is true of indirect goods, whose technical importance diminishes as the quantity increases, and which when taken at any given cost can be applied, after a point, only with diminishing advantage. The gradual extension of the marginal principle from land used in agriculture to every conceivable economic agent is the most important development of the last century of economic theory.

[Sidenote: Generality of the law of value]

It being true that things are measured by the utility of the unit used last, logically considered, the least change in the combination alters the value of all the factors. Practical economic problems, therefore, are dynamic, not static. The view that the shares of the different factors are fixed by quite separate laws has not been accepted here. The law of rent is the same as the law of wages in its essential point and principle. It is a general law of value applied to a particular kind of want-gratifier. The law of substitution likewise is a general law, for within limits some substitution of factors is always possible along the margin. That being true, every movement of price creates its own resistance; substitutes will be found for materials, demand will decline, and a new equilibrium of price will be attained.

[Sidenote: Mutual employment of the factors]

[Sidenote: An ever changing problem]

4. The factors and agents of production mutually furnish the field of employment for each other. Each factor is dependent for its technical efficiency on the presence of the other factors. If labor is plentiful and machines are scarce, machines bear a high rent. In accordance with the law of diminishing returns, the last unit of labor in that case contributes little to the product, and labor gets low wages, while more is attributed to the machine. Each machine thus may be considered to offer a field for the employment of labor. If population increases and land remains fixed, the need for food raises the rental value of land. But if population increases slowly, and capital and science progress, the field for the employment of labor is enlarged; and if new lands are opened up or new resources are discovered beneath the surface of the land, the field for labor is still more enlarged and a greater share is attributed to labor. This changing character of the problem must be recognized; no share is foreordained in size.

The pursuit of the analysis of value along the lines of marginal utility thus leads to conclusions far less mechanical, and, to the superficial student, less simple than were the doctrines prevailing in the older economics. But the conclusions are, let us hope, more exact and more applicable to the real world, enabling the student to arrive at juster views of the present interests and of the future welfare of society.

DIVISION B--RELATION OF THE STATE TO INDUSTRY

44. FREE COMPETITION AND STATE ACTION

§ I. COMPETITION AND CUSTOM

[Sidenote: Definition of economic freedom]

1. Economic freedom exists when men's goods or their own services may be exchanged as they choose, without hindrance. Competition is but another expression for economic freedom. Where men are free to exchange their goods and to get the best price they can, and actually do so, they are said to compete. The action of men in the mass follows pretty regular lines, corresponding to certain abiding motives. If one man dictated all industry, a very fragmentary science of economics would be possible; but the mass of men act according to some rule and are free so to act. When men are free to bring their goods to a market and get the best price possible, a single market price results.

When cost of production was believed to be the regulator of value, it was said that the law of value laid down was true "within the limit of free competition." Market price varied ceaselessly from cost of production, and whenever it did "the law of value" as then formulated was admittedly invalid or inapplicable. The law of monopoly price was supposed to be in marked contrast to the law of competitive prices. The law of prices, as followed in our study, stated in terms of marginal utility, is equally valid in competitive and in monopolistic conditions if there is merely one-sided, or buyers', competition. Two-sided competition is not the sole, though it is the usual condition, which the economist takes account of in reasoning on the problem of price. Anything that keeps men from exchanging what they have for the best price, interferes with competition. Some of these hindrances have been noted, others are now to be.

[Sidenote: Economic freedom vs. equality of efficiency]

2. Economic freedom does not mean equality of power or of efficiency. It was said in discussing monopoly that it was not to be understood to be merely either scarcity or superiority. To speak of the class of laborers of ability above that of the average day laborer as having a monopoly is certainly a confusion of monopoly with the scarcity of efficiency. The term competition is not easy to define in practice; for it is not easy to see just what part of a man's inability to exchange is due to his own lack of efficiency, and what to things outside of himself which prevent him from exchanging his labor. But the thought is clear that free competition--economic freedom--is limited whenever men are hindered by any power outside themselves from using their economic power as they prefer. The limitations of competition, thus understood, are essentially social limitations, imposed by other men either unconsciously by custom, convention, tradition, or consciously by force or by laws. When, among Polynesian tribes, the custom of taboo prevailed, by which certain things were reserved to the rulers and were forbidden to the common man, there was a limitation on his economic freedom. Contrast such limits with those set by the penury of nature. The savage may like best to hunt, but if there is no game, he must fish; he may like best to make arrowheads, but in need of food he must dig roots. Economic action is limited by lack of knowledge and skill; the resources of nature lie unused under the feet of savages who are suffering from their lack. These are limitations not of economic freedom but of economic efficiency.

[Sidenote: Limitation by custom in early society]

3. In early society custom limits economic freedom in many ways. The savage is not a man without law; he is bound in many ways to prescribed lines of conduct. Primitive custom usually takes on a religious sanction, and every member of the tribe is compelled to do as his fathers have done and as his neighbors are doing. He is not free to choose. Custom in some ways is favorable to the welfare of society, for it limits the power of masters and rulers, preserves the rights of individuals to common property, and is in the interest of the weak as well as of the strong. In an age of force if it were not for custom, he who had might on his side could take all. So in early society even economic relations were complex and yet almost fixed--changing only slowly from generation to generation. Every such social custom that limits the choice of men limits economic freedom.

[Sidenote: Limitation by custom in the Middle Ages]

4. Custom ruled a large share of the industrial life of the Middle Ages. Political and economic interests were not clearly divided in the Middle Ages. Land was the all-important kind of wealth. Military and other public services were performed by the vassal, who thus at the same time paid his taxes and the rent of the land. The landlord was at once the ruler, the receiver of rents, and the collector of taxes. The rent, however, was not a competitive price, but consisted of the dues and services the forefathers had been accustomed to pay. This limited slavery, like all other slavery, was wasteful, as it did not give to the individual the strongest motive to increase the quantity and to improve the quality of his service. Trade became limited in almost every direction. Crafts and gilds arrogated to themselves the right of employment in their industries. No matter what talent the son of a peasant might show, he usually found it impossible and always found it difficult to follow the occupation of his choice. Privilege pervaded all the life of that time. In such conditions economic friction is great. Men are kept in trades below their ability, while others gain command of monopolistic and unearned returns.

Yet through all the Middle Ages ran the forces of competition. The inefficiency of customary services was a constant invitation to competitors. Men were striving to break over the barriers of custom and prejudice. The strife for freedom was the vital economic force even of the Middle Ages. The industrial history of that time is largely the story of the struggle of the forces of competition against the bounds of custom.

§ II. ECONOMIC HARMONY THROUGH COMPETITION

[Sidenote: Effect of modern forces on custom]

1. The industrial events following the discovery of America strengthened the forces making for economic freedom. Discoveries in the Western hemisphere opened up a wide field for the adventure and enterprise of Europe. Commerce is the strongest enemy of custom, and new opportunities gave a rude shock to the conservatism both of the manor and of the village. With the rapid growth of industry and manufactures, old methods broke down. In an open market custom declines; it flourishes best in sheltered places. Further, the movement of thought in the Reformation and the spirit of the time, expressing the principle of personal liberty, allowing the individual to follow his own opinions and take the consequences, were favorable to competition. Despite these facts the restraints of the national governments on trade continued great, in some respects increasing during the seventeenth and eighteenth centuries, in France, Holland, and England. The regulation before attempted by towns and villages was employed on a larger scale by national governments with their commercial systems. The colonies in America were used for the economic ends of the "mother countries" and for the selfish interests of the home merchants in Europe. The American Revolution was one of the bitter fruits of the English policy of trade restriction.

[Sidenote: Adam Smith's influence]

[Sidenote: The philosophy of natural law]

2. Adam Smith's work advocating greater economic freedom had a profound influence upon public thought. "The Wealth of Nations," the first great work on political economy, was published in the year 1776. That was the "psychological moment," as public thought was so prepared for it that it had its maximum possible influence. The year of the American Declaration of Independence gave the most striking object lesson on the evils of a selfish colonial policy that interfered on a grand scale with economic freedom. The old customs had become ill fitted to life, ill adapted to the rapid industrial changes that were going on. What was needed in many directions, both in politics and in industry, was negative action by the government, the repeal of the old laws, the overthrow of old abuses. The French Revolution, following a few years later, emphasized this thought in the political field. The philosophers of the time believed in a "natural law" in industry and politics. The reformers of the time wished to throw off the trammels of the past and to give men opportunity to exert themselves "naturally." In America the old abuses never had taken deep root, as the conditions of a new continent were not favorable to monopoly and privilege. Although the movement for the repeal of medieval laws has continued in Europe from 1776 till the present time, yet to-day custom is stronger in Europe than in America. Serfdom was not abolished until the nineteenth century in Austria and southeastern Europe, and not until a few years ago in Russia. Many economic and cultural forces furthered this movement, but the most powerful intellectual force in its favor was the work of Adam Smith. So strong an impression did Smith's book make, that in the minds of men "free trade" became almost identical in thought with political economy, whereas that was but the temporary economic problem of the eighteenth century.

[Sidenote: The doctrine of the economic harmonies]

3. The doctrine of the "economic harmonies" is the extremest form of belief in the virtues of competition. Every truth in political philosophy finds some exaggerated expression. The main task of the student is to determine what shade of gray things are, rather than whether they are white or black. The belief in the benefits of competition and the virtues of economic freedom found expression in the doctrine of "the economic harmonies." This is the faith that if men are left entirely free to do as their interest dictates, the highest and best efficiency for all will follow; it is the belief that the economic interests of all men are in harmony. The most striking evidence in support of this thought is the stimulating effect of self-interest freely working in the field of competition. Each strives to do what will bring him the largest return, and the price others pay measures their estimate of the service. Each seeking his own interest is led to make himself more useful to others. Thus are men stimulated to sacrifice, to invention, to preparation; thus is zeal animated and are efforts sustained.

[Sidenote: Good social effects of self-interest]

Through self-interest the working force is distributed over the field of industry wherever it is most needed. The remarkable adjustment of industry to the needs of each neighborhood is brought about by individual motives, not by centralized authority. It is not mere chance that produces this harmony. Wherever consumers settle, stores are started and factories are built. Wherever work is to be done, men come in about the right number to do it. Skill is adjusted to needs by the delicate measurement of the market rate of wages. Competition gives a definite rule of price--certainly the only definite impersonal rule; some say the only just rule. The competitive price must be appealed to even in arbitration. It is the standard to which things tend constantly to adjust themselves in an open market.

[Sidenote: Conflicting interests in the business world]

4. Experience shows that the economic interests of men are only partly, not wholly, in harmony. That there is a great measure of truth in the statements just made, all must admit; but their application is limited. They are partial truths, never to be ignored, but quite false if taken, without modification, as practical rules of conduct. There are three species of competition in every market: that between sellers, that between buyers, and that between sellers on the one hand and buyers on the other. It is to the interest of the buyers that the sellers shall be numerous, eager, and freely competing. It is to the interest of the seller that supply shall be small, that sellers shall be united, and that buyers shall compete sharply. If at any point free competition is hindered, even the disciple of economic harmony must expect a discordant result. But in reality competition is rarely quite complete on both sides, and when it is not, the weak suffer. Men do not start with fair and equal opportunities. All that they may be entitled to under competition may be so little that social sympathy seeks to better the result; hence poor relief, public and private. Society as a whole has an interest in the outcome of the individual's economic struggle. It cannot see men starving or driven into crime. But the argument need not be confined to such crude and extreme cases, for wherever economic interests are not in harmony and it is possible to further the social welfare, will not society be justified in acting?

§ III. SOCIAL LIMITING OF COMPETITION

[Sidenote: Imperfections of economic freedom]

1. Undoubted evils result from some forms of competition under the conditions actually existing. Complete freedom must remain a somewhat abstract ideal, and actual conditions must be recognized. Entire freedom of choice means freedom to make mistakes, a privilege whose enjoyment society cannot always permit. The child should be raised to good citizenship, and entire freedom of choice makes that impossible or improbable. The freedom of choice of the insane, the feeble-minded, and the criminal, cannot be recognized. Even where competition is the ideal of sound adult humanity, it is not to be too suddenly or extremely applied. The inequality of faculties, the prevailing dishonesty, the mass of inherited abuses, cannot be either ignored or at once ended. The immigrant from Europe, plunged into the trying conditions of city life, suffers in health and in morals, and often becomes a burden upon society. One of many competitors may drive competition to an evil extreme. The "problem of the twentieth man" is presented when nineteen men desire to limit competition in ways not socially harmful, as by closing shops on Sunday or in the evening, and the one man refuses. The appeal to economic harmony often is the cry of "peace, peace, where there is no peace." The highest social result may be attained now by limiting, again by directing, in other cases possibly by fostering, competition.

[Sidenote: Forces opposing competition]

2. The main rivals of competition are custom, religion, morality, combination, and state action. The first three of these were the strongest forces in the past and they are still operating; but combination and state action are more characteristic of the present. The influence of custom, of morality, and of religion on value, has been touched upon at several points in our study; that of combination has been recently and more fully discussed. But state action, one of the most important of all the limitations, has been reserved for the concluding portion of our work.

[Sidenote: The state's part in directing competition]

3. It is a function of the state to determine in part the ways in which men shall exert their powers. This is not the sole function of the state, nor is its influence toward this end exclusive. The state puts limits to the physical rivalry of men. In the distant past no doubt physical rivalry between men was an agent of progress. The strong drove out the weak; physical contest developed more vigorous limbs, keener senses, and higher sagacity. To-day it is one of the principal functions of the state to suppress the physical contest between men. The citizen is surrounded with a network of rules and regulations of which he is hardly conscious. Most men easily avoid coming into contact with the police and feel no irksomeness in the control of the civil courts. The state regulates economic interests in many other ways; it controls the building of streets; it inspects the material and construction of houses; it forbids acts injurious to the public welfare; it regulates the issue of money; it determines the manner in which credit may be extended, the forms of taxation, and the direction which trade may legally take. The state has a part in shaping great industries of a public or semi-public nature, such as waterworks, railroads, and the postal system.

[Sidenote: Aim and failings of state action]

The state is as wise as the men who constitute it. Men make mistakes, therefore men collectively will make them. The state regulates and limits--now wisely, now foolishly; but its aim is to preserve the benefits of competition without its evils, to lift the competition to a higher plane, and, by determining the direction in which men shall put forth their efforts, to give a higher and truer economic freedom.