SECTION IIITHE MORAL ASPECT OF PROFITS
We have seen that rent goes to the landlord as the price of land use, while interest is received by the capitalist as the return for the use of capital. The two shares of the product which remain to be considered include an element which is absent from both rent and interest. The use for which profits and wages are paid comprises not merely the utilisation of a productive factor, but the sustained exertion of the factor's owner. Like the landowner and the capitalist, the business man and the labourer put the productive factors which they control at the disposal of the industrial process; but they do so only when and so long as they exercise human activity. The shares that they receive are payments for the continuous output of human energy. No such significance attaches to rent or interest.
Who is the business man, and what is the nature of his share of the product of industry? Let us suppose that the salaried manager of a hat factory decides to set up a business of the same kind for himself. He wishes to become an entrepreneur, an undertaker, a director of industry, in more familiar language, a business man. Let us assume that he is without money, but that he commands extraordinary financial credit. He is able to borrow half a million dollars with which to organise, equip, and operate the new enterprise. Having selected a favourable site, he rents it on a long term lease, and erects thereon the necessary buildings. He installs all the necessary machinery andother equipment, hires capable labour, and determines the kinds and quantities of hats for which he thinks that he can find a market. At the end of a year, he realises that, after paying for labour of all sorts, returning interest to the capitalist and rent to the landowner, defraying the cost of repairs, and setting aside a fund to cover depreciation, he has left for himself the sum of ten thousand dollars. This is the return for his labour of organisation and direction, and for the risk that he underwent. It constitutes the share called profits, sometimes specified as net profits.
This case is artificial, since it assumes that the business man is neither capitalist nor landowner in addition to his function as director of industry. It has, however, the advantage of distinguishing quite sharply the action of the business man as such. For the latter merely organises, directs, and takes the risks of the industrial process, finds a market for the product, and receives in return neither rent nor interest but only profits. In point of fact, however, no one ever functions solely as business man. Always the business man owns some of the capital, and very often some of the land involved in his enterprise, and is the receiver not only of profits but of interest and rent. Thus, the farmer is a business man, but he is also a capitalist, and frequently a landowner. The grocer, the clothier, the manufacturer, and even the lawyer and the doctor own a part at least of the capital with which they operate, and sometimes they own the land. Nevertheless their rewards as business men can always be distinguished from their returns as capitalists and landowners by finding out what remains after making due allowance for rent and interest.
It is a fact that many business men, especially those directing the smaller establishments, use the term profits to include rent and interest on their own property. In other words, they describe their entire income from the business as profits. In the present discussion, andthroughout this book generally, profits are to be understood as comprising merely that part of the business man's returns which he takes as the reward of his labour, and as insurance against the risks affecting his enterprise. Deduct from the business man's total income a sum which will cover interest on his capital at the prevailing rate and rent on his land, and you have left his income as business man, his profits.
In a preceding chapter we have seen that where the conditions of capital are the same, there exists a fairly uniform rate of interest. No such uniformity obtains in the field of profits. Businesses subject to the same risks and requiring the same kind of management yield very different amounts of return to their directors. In a sense the business man may be regarded as the residual claimant of industry. This does not mean that he takes no profits until all the other agents of production have been fully remunerated, but that his share remains indeterminate until the end of the productive period, say, six months or a year, while the shares of the other agents are determined beforehand. At the end of the productive period, the business man may find that his profits are large, moderate, or small, while the landowner, the capitalist, and the labourer ordinarily obtain the precise amounts of rent, interest, and wages that they had expected to obtain. That there exists no definite upper limit to profits is proved by the history of modern millionaires. That there exists no rigid lower limit is proved by the large proportion of enterprises that meet with failure.
Nevertheless it would be wrong to infer that the volume of profits is governed by no law whatever, or that they show no tendency toward uniformity in any part of the industrial field. There is a calculated or preconceived minimum. No man will embark in business for himselfunless he has reason to expect that it will yield him, in addition to protection against risks, an income as large as he could obtain by hiring his services to some one else. In other words, contemplated profits must be at least equal to the income of the salaried business manager. No tendency toward uniformity of profits exists among very large enterprises nor among industries which are constantly adopting new methods and new inventions. In businesses of small and moderate size, and in those whose methods have become standardised, such as a retail grocery store, or a factory that turns out staple kinds of shoes, profits tend to be about the same in the great majority of establishments. In such industries the profits of the business man do not often exceed the salary that he could command as general manager for some one else in the same kind of business.
Professor King estimates the total volume of profits in the United States in 1910 as almost eight and one-half billion dollars. This was 27.5 per cent. of the national product, as against 24.6 per cent. in 1890 and 30 per cent. in 1900.[160]He interprets the fall in the wage earners' share which has taken place since 1890 (53.5 to 46.9 per cent.) as indicating a considerable increase in the share of those business men who control the very large industries. "The promoters and manipulators of these concerns have received, as their share of the spoils, permanent income claims, in the shape of securities, large enough to make Crœsus appear like a pauper."[161]Moreover, even outside this monopoly field, the more able and successful business men seem to have obtained in recent years what might be termed a relatively large share of the product of industry. The exceptionally efficient undertakers, those possessing the imagination, foresight, judgment, and courage to takefull advantage of the recent improvements in the industrial arts, and in the methods of production generally, seem to have advanced in wealth and income more rapidly than any other class that has been subject to the operation of competition.
Up to this point we have been considering the independent business man, the undertaker who manages his enterprise either alone or as a member of a partnership. In all such concerns it is easy to identify the business man. Who or where is the business man in a joint stock company? Where are the profits, and who gets them?
Strictly speaking, there is no undertaker or business man in a corporation. His functions of ownership, responsibility, and direction are exercised by the whole body of stockholders through the board of directors and other officers. It is true that in very many, probably in most corporations, one or a very few of the largest stockholders dominate the policies of the concern, and exercise almost as much power and authority as though they were the sole owners. Neither these, however, nor any other officer in a corporation receives profits in the same sense as the independent owner of a business. For their active services the officers of the corporation are given salaries; for the risks that they undergo as owners of the stock they are compensated in the same way as all the other stockholders, that is, through a sufficiently high rate of dividend. For example, in railroads the bonds usually pay from four to five per cent., the stock from five to six per cent. The bonds represent borrowed money, and are secured by a mortgage on the physical property. The stock represents the money invested by the owners, and is subject to all the risks of ownership; hence its holders require the protection which is afforded by the extra one per cent. which they obtain over that paid to the bondholders.
While a corporation has no profits in the sense of a reward for directive activity or a protection against risk, it frequently possesses profits in the sense of a surplus which remains after costs and expenses of every kind have been defrayed. These profits are ordinarily distributed pro rata among the stockholders, either outright in the form of an extra dividend, or indirectly through enlargement of the property and business of the company. They are surplus gains or profits having the same intermittent and speculative character as the extra gains which the individual business man sometimes obtains in addition to those profits which are necessary to remunerate him for his labour, and protect him against risks. They are not profits in the ordinary economic sense of the term.
Before taking up the question of the morality of profits, it will be helpful, if not necessary, to consider the chief rules of justice that have been or might be adopted in distributing the product of industry among those who participate actively in the productive process. While the discussion is undertaken with particular reference to the rewards of the business man, it will also have an important bearing on the compensation of the wage earner. The morality of rent and interest depends upon other principles than those governing the remuneration of human activity; and it has been sufficiently treated in chapters xii and xiii. The canons of distribution applicable to our present study are mainly six in number: arithmetical equality; proportional needs; efforts and sacrifices; comparative productivity; relative scarcity; and human welfare.
According to the rule of arithmetical equality, all persons who contribute to the product should receive the same amount of remuneration. With the exception of Bernard Shaw, no important writer defends this rule to-day. It is unjust because it would treat unequals equally. Although men are equal as moral entities, as human persons, they are unequal in desires, capacities, and powers. An income that would fully satisfy the needs of one man would meet only 75 per cent., or 50 per cent., of the capacities of another. To allot them equal amounts of income would be to treat them unequally with regard to the requisitesof life and self development. To treat them unequally in these matters would be to treat them unequally as regards the real and only purpose of property rights. That purpose is welfare. Hence the equal moral claims of men which admittedly arise out of their moral equality must be construed as claims to equal degrees of welfare, not to equal amounts of external goods. To put the matter in another way, external goods are not welfare; they are only means to welfare; consequently their importance must be determined by their bearing upon the welfare of the individual. From every point of view, therefore, it is evident that justice in industrial distribution must be measured with reference to welfare rather than with reference to incomes, and that any scheme of distribution which provided equal incomes for all persons would be radically unjust.
Moreover, the rule of equal incomes is socially impracticable. It would deter the great majority of the more efficient from putting forth their best efforts and turning out their maximum product. As a consequence, the total volume of product would be so diminished as to render the share of the great majority of persons smaller than it would have been under a rational plan of unequal distribution.
The second conceivable rule is that of proportional needs. It would require each person to be rewarded in accordance with his capacity to use goods reasonably. If the task of distribution were entirely independent of the process of production, this rule would be ideal; for it would treat men as equal in those respects in which they are equal; namely, as beings endowed with the dignity and the potencies of personality; and it would treat them as unequal in those respects in which they are unequal; that is, in their desires and capacities. But the relationbetween distribution and production cannot be left out of account. The product is distributed primarily among the agents of production only, and it must be so distributed as to give due consideration to the moral claims of the producer as such. The latter has to be considered not merely as a person possessing needs, but as a person who has contributed something to the making of the product. Whence arise the questions of relative efforts and sacrifices, and relative productivity.
Since only those who have contributed to the product participate in the distribution thereof, it would seem that they should be rewarded in proportion to the efforts and sacrifices that they exert and undergo. As an example of varying effort, let us take two men of equal needs who perform the same labour in such a way that the first expends 90 per cent. of his energy, while the second expends 60 per cent. As an example of varying sacrifice, let us take the ditch digger, and the driver who sits all day on the dump wagon. In both these examples the first man expends more painful exertion than the second. This would seem to make a difference in their moral desert. Justice would seem to require that in each case compensation should be proportionate to exertion rather than to needs. At any rate, the claims of needs should be modified to some extent in favour of the claims of exertion. It is upon the principle of efforts and sacrifices that we expect our eternal rewards to be based by the infinitely just Rewarder. The principle of needs is likewise in conflict with the principle of comparative productivity. Men generally demand rewards in proportion to their products. The validity of this demand we shall examine in a subsequent paragraph.
Like the rule of arithmetical equality, the rule of proportional needs is not only incomplete ethically but impossible socially. Men's needs vary so widely and so imperceptibly that no human authority could use them as thebasis of even an approximately accurate distribution. Moreover, any attempt to distribute rewards on this basis alone would be injurious to social welfare. It would lead to a great diminution in the productivity of the more honest, the more energetic, and the more efficient among the agents of production.
The third canon of distribution, that of efforts and sacrifices, would be ideally just if we could ignore the questions of needs and productivity. But we cannot think it just to reward equally two men who have expended the same quantity of painful exertion, but who differ in their needs and in their capacities of self development. To do so would be to treat them unequally in the matter of welfare, which is the end and reason of all distribution. Consequently the principle of efforts and sacrifices must be modified by the principle of needs. Apparently it must also give way in some degree to the principle of comparative productivity. When two men of unequal powers make equal efforts, they turn out unequal amounts of product. Almost invariably the more productive man believes that he should receive a greater share of the product than the other. He believes that the rewards should be determined by productivity.
It is evident that the rule of efforts and sacrifices, like those of equality and needs, could not be universally enforced in practice. With the exception of cases in which the worker is called upon regularly to make greater sacrifices owing to the disagreeable nature of the task, attempts to measure the amounts of effort and painful exertion put forth by the different agents of production would on the whole be little more than rough guesses. These would probably prove unsatisfactory to the majority. Moreover, the possessors of superior productive power would in most instances reject the principle of efforts and sacrificesas unfair, and refuse to do their best work under its operation.
The three rules already considered are formally ethical, inasmuch as they are directly based upon the dignity and claims of personality. The two following are primarily physical and social; for they measure economic value rather than ethical worth. Nevertheless, they must have a large place in any system which includes the factor of competition.
According to this rule, men should be rewarded in proportion to their contributions to the product. It is open to the obvious objection that it ignores the moral claims of needs and efforts. The needs and use-capacities of men do, indeed, bear some relation to their productive capacities, and the man who can produce more usually needs more; but the differences between the two elements are so great that distribution based solely upon productivity would fall far short of satisfying the demands of needs. Yet we have seen that needs constitute one of the fundamentally valid principles of distribution. Between productivity on the one hand and efforts and sacrifices on the other, there are likewise important differences. When men of equal productive power are performing the same kind of labour, superior amounts of product do represent superior amounts of effort; when the tasks differ in irksomeness or disagreeableness, the larger product may be brought into being with a smaller expenditure of painful exertion. If men are unequal in productive power their products are obviously not in proportion to their efforts. Consider two men whose natural physical abilities are so unequal that they can handle with equal effort shovels differing in capacity by fifty per cent. Instances of this kind are innumerable in industry. If these two men are rewarded according to productivity, one will get fifty percent. more compensation than the other. Yet the surplus received by the more fortunate man does not represent any action or quality for which he is personally responsible. It corresponds to no larger output of personal effort, no superior exercise of will, no greater personal desert. It is based solely upon a richer physical endowment by the Creator.
It is clear, then, that the canon of productivity cannot be accepted to the exclusion of the principles of needs and efforts. It is not the only ethical rule of distribution. Is it a valid partial rule? Superior productivity is frequently due to larger effort and expense put forth in study and in other forms of industrial preparation. In such cases it demands superior rewards by the title of efforts and sacrifices. Where, however, the greater productivity is due merely to higher native qualities, physical or mental, the greater reward is not easily justified on purely ethical grounds. For it represents no personal responsibility, will-effort, or creativeness. Nevertheless, the great majority of the more fortunately endowed think that they are unfairly treated unless they are recompensed in proportion to their products. Sometimes this conviction is due to the fact that such men wrongly attribute their larger product to greater efforts. In very many cases, however, the possessors of superior productive power believe that they should be rewarded in proportion to their products, regardless of any other principle or factor. Probably the true explanation of this belief is to be found in man's innate laziness. While the prevalence of the conviction that superior productivity constitutes a just title to superior compensation, does create some kind of a presumption in favour of its correctness, it must be remembered that presumption is not proof. Weighing this presumption against the objective considerations on the opposite side of the argument, we take refuge in the conclusion that the ethical validity of the canon of comparative productivitycan neither be certainly proved nor certainly disproved.
Like the rules of equality, needs, and efforts, that of productivity cannot be universally enforced in practice. It is susceptible of accurate application among producers who perform the same kind of work with the same kind of instruments and equipment; for example, between two shovellers, two machine operators, two bookkeepers, two lawyers, two physicians. As a rule, it cannot be adequately applied to a product which is brought into existence through a combination of different processes. The engine driver and the track repairer contribute to the common product, railway transportation; the bookkeeper and the machine tender co-operate in the production of hats; but we cannot tell in either case whether the first contributes more or less than the second, for the simple reason that we have no common measure of their contributions. Sometimes, however, we can compare the productivity ofindividualsengaged in different processes; that is, when both can be removed from the industry without causing it to come to a stop. Thus, it can be shown that a single engine driver produces more railway transportation than a single track repairer, because the labour of the latter is not indispensable to the hauling of a given load of cars. But no such comparison can be made as between the whole body of engine drivers and the whole body of track repairers, since both groups are indispensable to the production of railway transportation. Again, a man can be shown to exert superior productivity because he affects the productive process at more points and in a more intimate way than another who contributes to the product in a wholly different manner. While the surgeon and the attendant nurse are both necessary to a surgical operation, the former is clearly more productive than the latter. When due allowance is made for all such cases, the fact remains that in a large part of the industrial field it issimply impossible to determine remuneration by the rule of comparative productivity.
It frequently happens that men attribute their larger rewards to larger productivity, when the true determining element is scarcity. The immediate reason why the engine driver receives more than the track repairer, the general manager more than the section foreman, the floorwalker more than the salesgirl, lies in the fact that the former kinds of labour are not so plentiful as the latter. Were general managers relatively as abundant as section foremen their remuneration would be quite as low; and the same principle holds good of every pair of men whose occupations and products are different in kind. Yet the productivity of the general managers would remain as great as before. On the other hand, no matter how plentiful the more productive men may become, they can always command higher rewards than the less productive men in the same occupation, for the simple reason that their products are superior either in quantity or in quality. Men engaged upon the more skilled tasks are likewise mistaken when they attribute their greater compensation to the intrinsic excellence of their occupation. The fact is that the community cares nothing about the relative nobility, or ingenuity, or other inherent quality of industrial tasks or functions. It is concerned solely with products and results. As between two men performing the same task, superior efficiency receives a superior reward because it issues in a larger or better product. As between two men performing different tasks, superior skill receives superior compensation simply because it can command the greater compensation; and it is able to do this because it is scarce.
In most cases where scarcity is the immediate determinant of rewards, the ultimate determinant is, partly atleast, some kind of sacrifice. One reason why chemists and civil engineers are rarer than common labourers is to be found in the greater cost of preparation. The scarcity of workers in occupations that require no special degree of skill is due to unusual hazards and unpleasantness. In so far as scarcity is caused by the uncommon sacrifices preceding or involved in an occupation, the resulting higher rewards obviously rest upon most solid ethical grounds. However, some part of the differences in scarcity is the result of unequal opportunities. If all young persons had equal facilities of obtaining college and technical training, the supply of the higher kinds of labour would be considerably larger than it now is, and the compensation would be considerably smaller. Scarcity would then be determined by only three factors; namely, varying costs of training, varying degrees of danger and unattractiveness among occupations, and inequalities in the distribution of native ability. As a consequence, competition would tend to apportion rewards according to efforts, sacrifices, and efficiency.
How can we justify the superior rewards of that scarcity which is not due to unusual costs of any sort, but merely to restricted opportunity? So far as society is concerned, the answer is simple: the practice pays. As to the possessors of the rarer kinds of ability, they are in about the same ethical position as those persons whose superior productivity is derived entirely from superior native endowment. In both cases the unusual rewards are due to factors outside the control of the recipients; to advantages which they themselves have not brought into existence. In the former case the decisive factor and advantage is opportunity; in the latter it is a gift of the Creator. Now we have seen that this sort of productivity cannot be proved to be immoral as a canon of distribution; consequently the same statement will hold good of this sort of scarcity.
We say "human" welfare rather than "social" welfare, in order to make clear the fact that this canon considers the well being of men not only as a social group, but also as individuals. It includes and summarises all that is ethically and socially feasible in the five canons already reviewed. It takes account of equality, inasmuch as it regards all men as persons, as subjects of rights; and of needs, inasmuch as it awards to all the necessary participants in the industrial system at least that amount of remuneration which will meet the elementary demands of decent living and self development. It is governed by efforts and sacrifices, at least in so far as they are reflected in productivity and scarcity; and by productivity and scarcity to whatever extent is necessary in order to produce the maximum net results. It would give to every producer sufficient remuneration to evoke his greatest net contribution to the productive process. Greatest "net" contribution; for a man'sabsolutemaximum product may not always be worth the required price. For example: a man who for a salary of 2500 dollars turns out a product valued at 3000 dollars, should not be given 3000 dollars in order to induce him to bring forth a product worth 3300 dollars. In this case a salary of 2500 dollars evokes the maximum net product, and represents the reward which would be assigned by the canon of human welfare. Once the vital needs of the individual have been safeguarded, the supreme guide of the canon of human welfare is the principle of maximum net results, or the greatest product at the lowest cost.
It is not contended here that this canon ought never to undergo modification or exception. Owing to the exceptional hazards and sacrifices of their occupation, a combination of producers might be justified in exacting larger compensation than would be accorded them by the canonof human welfare on the basis of net results in the present conditions of supply and scarcity. Unusual needs and capacities might also justify a strong group in pursuing the same course. All that is asserted at present is that in conditions of average competition the canon of human welfare is not unjust. And this is all that is necessary as a preliminary to the discussion of just profits.[162]
We have seen that profits are that share of the product of industry which goes to the business man. They comprise that residual portion which he finds in his hands after he has made all expenditures and allowances for wages, salaries, interest at the prevailing rate on both his own and the borrowed capital, and all other proper charges. They constitute his compensation for his labour of direction, and for the risks of his enterprise and capital.
In the opinion of most Socialists, profits are immoral because they are an essential element of an unjust industrial system, and because they are not entirely based upon labour. Under Socialism the organising and directing functions that are now performed by the business man, would be allotted to salaried superintendents and managers. Their compensation would include no payment for the risks of capital, and it would be fixed instead of indeterminate. Hence it would differ considerably from present-day profits.
To the assertion that profits are immoral a sufficient reply at this time is that Socialism has already been shown to be impracticable and inequitable. Consequently the system of private industry is essentially just, and profits, being a necessary element of the system, are essentially legitimate. The question of their morality is one of degree not of kind. It will be considered under two principal heads: the right of the business man to obtain indefinitely large profits; and his right to a certain minimum of profits.
As a general rule, business men who face conditions of active competition have a right to all the profits that they can get, so long as they use fair business methods. This means not merely fair and honest conduct toward competitors, and buyers and sellers, but also just and humane treatment of labour in all the conditions of employment, especially in the matter of wages. When these conditions are fulfilled, the freedom to take indefinitely large profits is justified by the canon of human welfare. The great majority of business men in competitive industries do not receive incomes in excess of their reasonable needs. Their profits do not notably exceed the salaries that they could command as hired managers, and generally are not more than sufficient to reimburse them for the cost of education and business training, and to enable them to live in reasonable conformity with the standard of living to which they have become accustomed.
Efforts and sacrifices are reflected to some extent in the different amounts of profits received by different business men. When all due allowance is made for chance, productivity, and scarcity, a considerable proportion of profits is attributable to harder labour, greater risk and worry, and larger sacrifices. Like the principle of needs, that of efforts and sacrifices is a partial justification of the business man's remuneration.
Those profits which cannot be justified by either of the titles just mentioned, are ethically warranted by the principles of productivity and scarcity. This is particularly true of those exceptionally large profits which can be traced specifically to that unusual ability which is exemplified in the invention and adoption of new methods and processes in progressive industries. The receivers of these large rewards have produced them in competition with less efficient business men. While the title of productivitydoes not entirely satisfy the seeker for decisive ethical sanctions, it is stronger morally than any opposing considerations that can be invoked. It is probably as strong as some other principles that we have to accept as the best attainable in the very difficult field of industrial ethics.
Nevertheless, it would seem that those business men who obtain exceptionally large profits could be reasonably required to transfer part of their gains to their employés in the form of higher wages, or to the consumers in the form of lower prices. Both of these methods have been followed by Henry Ford, the automobile manufacturer. Neither of them is certainly demanded by the principles of strict justice; they rest upon the feebler and less decisive principle of general equity or fairness.[163]This concept is less definite than those of charity and justice, and stands midway between them. It comes into operation when an action is obligatory on stricter grounds than those of charity, and yet cannot with certainty be required on grounds of justice. Notwithstanding its vagueness, it is sufficiently strong to make the average conscientious man feel uncomfortable if he neglects its prescriptions entirely. It has, therefore, sufficient practical value to deserve a place in the ethics of distribution. And it seems to have sufficient application to the problem before us to justify the statement that the receivers of exceptionally large profits are bound in equity to share them with those persons who have co-operated in producing and providing them, namely, wage earners and consumers.
In the field of profits the canon of human welfare is not only sound ethically but expedient socially. It permits the great majority of business men to obtain, if they can, sufficient remuneration to meet their reasonable needs. Whether it requires society toguaranteeat least this amount of profit-income is a question that we shall examinepresently. It encourages efforts, and makes for the maximum social product by permitting business men to retain all the profits that they can get in conditions of fair competition. Does it forbid any attempt by society to limit exceptionally large profit-incomes? If the limit were placed very high, say, at 50,000 dollars per year, it would not apparently check the productive efforts of the great majority of business men, since they never hope to pass that figure. Whether it would have a seriously discouraging effect upon the activity and ambition of those who do hope to reach, and of those who have already reached that level, is uncertain. Among business men who are approaching or who have passed the 50,000 dollars annual profit-income mark, the desire to possess more money is frequently weaker as a motive to business activity than the longing for power and the driving force of habit. At any rate, the question is not very practical. Any sustained attempt to limit profits by law would require such extensive and minute supervision of business that the policy would prove to be socially intolerable and unprofitable. The espionage involved in the policy would provoke general resentment, and the amount of profits that could be diverted either to the State or to private persons would be relatively insignificant.
Thus far we have been considering the independent business man and business firm, not the joint stock company or corporation. In the latter form of organisation, the labour of direction is remunerated by fixed salaries to the executive officers, while the risks of enterprise and capital are covered by the regular dividends received by the whole body of stockholders. Consequently the only revenues comparable to profits are the surplus gains that remain after wages, salaries, interest, dividends, rent, and all other expenses and charges have been met. These are apportioned through one process or another among the stockholders. On what ethical principle can they be thus distributed?The general principle of productivity, or superior productivity, is the only one available. If a corporation which uses fair methods of competition can obtain surplus gains, while the majority of its competitors fail to do so, the cause must be sought in its superior business management. This superiority must be credited to the whole body of stockholders, even though the great majority of them are responsible for it only in a very remote way, through their selection of the executive officers. The stockholders surely have a better claim to these surplus gains than any other group in the community. At the same time, they are, like the independent business man, bound by the principle of equity to share the surplus with the labourers and consumers.
Has the business man a strict right to a minimum living profit? In other words, have all business men a right to a sufficient volume of sales at sufficiently high prices to provide them with living profits or a decent livelihood? Such a right would imply a corresponding obligation upon the consumers, or upon society, to furnish the requisite amount of demand at the required prices. Is there such a right, and such an obligation?
No industrial right is absolute. They are all conditioned by the possibilities of the industrial system, and by the desires, capacities, and actions of the persons who enter into industrial relations with one another. As we shall see later, this statement is true even of the right to a living wage. When the industrial resources are adequate, all persons of average ability who contribute a reasonable amount of labour to the productive process have a right to a decent livelihood on two conditions: first, that such labour is their only means of sustenance; and, second, that their labour is economically indispensable to those who utilise it or its product. "Economically indispensable"means that the beneficiary of the labour would rather give the equivalent of a decent livelihood for it than go without it. While both these conditions are apparently fulfilled in the case of the great majority of wage earners, they are only rarely realised with regard to business men. In most instances the business man who is unable to make living profits could become an employé, and thus convert his right to a decent livelihood into a right to a living wage. Even when no such alternative is open to him, he cannot claim a strict right to living profits, for the second condition stated above remains unfulfilled. The consuming public does not regard the business function of such men as economically indispensable. Rather than pay the higher prices necessary to provide living profits for the inefficient business men, consumers will transfer their patronage to the efficient competitors. Should the retail grocer, for example, raise his prices in the effort to get living profits, his sales would fall off to such an extent as to reduce his profits still lower. While the consumers may be willing to fulfil their obligation of furnishing living profits for all necessary grocers, they are not willing, nor are they morally bound, to do so in the case of grocers whose inability to command sufficient patronage at remunerative prices shows that they are not necessary to the community. The consuming public does not want to employ such business men at such a cost.
Nor is the State under obligation to ensure living profits for all business men. To carry out such a policy, either by enforcing a sufficiently high level of prices, or by subsidising those who fail to obtain living profits, would be to compel the public to support inefficiency.
In the foregoing paragraphs we have assumed that the inability of the business men under consideration to get living profits is due to their own lack of capacity as compared with their more efficient competitors. When, however, their competitors are not more efficient, but areenabled to undersell through the use of unfair methods, such as adulteration of goods and oppression of labour, a different moral situation is presented. Honest and humane business men undoubtedly have a claim upon society to protection against such unfair competition. And the consumers are under obligation to make reasonable efforts to withhold their patronage from those business men who practise dishonesty and extortion.
Although we have rejected as impractical the proposal to set a legal limit to profit-incomes, we have to admit that many of the abler business men would continue to do their best work even if the profits that they could hope to obtain were considerably smaller in volume. These men hold a strategic position in industry, inasmuch as they are not subject to the same degree of constant competition as the other agents of production.[164]Were the supply of superior business capacity more plentiful, their rewards would be automatically reduced, and the burden of profits resting upon society would be to that extent diminished. On the other hand, the number of mediocre business men, especially in the distributive industries, is much larger than is necessary to supply the wants of the community. This constitutes a second unnecessary volume of payments under the head of profits. Is there no way by which these wastes can be reduced?
The volume of exceptionally large profits could be diminished by an extension of the facilities of technical and industrial education. Thus the number of persons qualifying as superior business men could be gradually increased, competition among this class of men would be intensified, and their rewards correspondingly diminished.
The profits that go to superfluous business men, especially in the class known as middlemen, can be largelyeliminated through combination and co-operation. The tendency to unite into a single concern a large number of small and inefficient enterprises should be encouraged up to the point at which the combination threatens to become a monopoly. That this process is capable of effecting a considerable saving in business profits as well as in capital, has been amply demonstrated in several different lines of enterprise. As we have seen in a preceding chapter, the co-operative movement, whether in banking, agriculture, or stores, has been distinctly successful in reducing profits. Millions of dollars are thus diverted every year from unnecessary profit-receivers to labourers, consumers, and to the man of small resources generally. Yet the co-operative movement is only in its infancy. It contains the possibility of eliminating entirely the superfluous business man, and even of diminishing considerably the excessive profits of the exceptionally able business man.
The conclusion was drawn in the last chapter that the surplus gains of corporations operating in conditions of competition, can justly be retained by the stockholders as the remuneration of exceptional productive efficiency. It is, of course, to be understood that the proper allowance for interest on the capital is not necessarily the amount authorised by the stipulated rate of dividend on the stock, but the prevailing or competitive rate of interest plus an adequate rate of insurance against the risks of the enterprise. If the prevailing rate of interest is five per cent., and the risk is sufficiently protected by an allowance of one per cent., the fair rate of return on the investment is six per cent. The fact that a concern may actually award its stockholders ten per cent. dividends, has no bearing on the determination of the genuine surplus. If the actual surplus that remains after paying all other charges and allowing ten per cent. on the stock, is only 50,000 dollars, whereas it would be 100,000 dollars with an allowance of only six per cent., then the true surplus gains, or profits, are the latter amount not the former. No part of the 100,000 dollars can be justified as interest on capital. It must all find its justification as profits proceeding from superior productivity.
Bearing in mind this distinction between the actual rate of dividend and the proper allowance for interest on capital, we take up the question of the morality of profits or surplus gains in conditions of monopoly.
Several of the great industrial combinations of the United States have obtained profits which are commonly stigmatised as "excessive." For example, the Standard Oil Company paid, from 1882 to 1906, an average annual dividend of 24.15 per cent. on the capital stock, and had profits in addition at the rate of about 8 per cent. annually;[165]from 1904 to 1908 the American Tobacco Company averaged 19 per cent. on its actual investment;[166]and the United States Steel Corporation obtained an average annual return of 12 per cent. on its investment from 1901 to 1910.[167]A complete list of the American monopolies that have reaped more than the competitive rate of return on their capital would undoubtedly be a very long one.
Is it possible to justify such returns? Has a monopoly a right to take surplus gains? Let us suppose a concern which is getting 15 per cent. on its investment. Inasmuch as the risks are smaller than in competitive enterprises, six per cent. is an ample allowance for interest. Of the remaining 9 per cent., 4 per cent., we shall assume, is derived from economies of production as compared with the great majority of competitive concerns. This portion of the surplus, being the reward of superior efficiency, may be retained by the owners of the monopoly quite as justly as similar gains are taken by the exceptionally efficient corporation in conditions of competition. The objection that the monopoly ought to share these gains with the public, since it limits individual opportunity in asocially undesirable way, has some merit, but it can scarcely be urged on grounds of strict justice. At most it points only to an obligation in equity.
By what canon of distribution can the retention of the other 5 per cent. of surplus gain be justified? Not by the titles of needs and efforts, for these have already been satisfied through the salaries paid to those stockholders who perform labour in the management of the concern. These titles afford no basis for any other claim than that which proceeds from labour. They cannot be made to justify claims made on behalf of capital. Not by the title of productivity, for this has already been remunerated in the 4 per cent. just considered. Not as interest on capital, for ample allowance has already been made under this head in the original 6 per cent. As we have seen in an earlier chapter, the only reasons that give ethical support to interest on capital are the sacrifice that is involved in some kinds of saving, the possibility that interest is necessary in order to induce the provision of sufficient capital, the certainty that the State would be unable to enforce the abolition of interest, and some presumptive considerations. Since all of these reasons and ends are satisfied by the competitive rate of interest, none of them will justify the exaction of more than the competitive rate. It is not possible to justify a higher rate on either social or individual grounds. Therefore, the only basis that is left upon which to defend the retention of the five per cent. surplus that we are discussing, is the power of appropriation. The monopoly possesses the economic strength to take this five per cent. because it is able to impose higher than competitive prices upon the consumer. Obviously such power has no greater ethical sanction or validity than the pistol of the highwayman. In both cases the gains are the product of extortion.
The conclusion that men have no right to more than the competitive rate of interest, as interest, on their capital, andthat a monopoly has consequently no right to those surplus gains that are not produced by superior efficiency, is confirmed by public opinion and by the decisions of the courts. The monopolistic practice of taking more than the usual rate of returns on capital merely because there exists the power to take it, is universally condemned as inequitable. In fixing the charges of public service corporations, the courts with practical unanimity allow only the rate of return that is obtainable in competitive conditions of investment.
The statement that the monopoly may retain those surplus gains which are derived from superior efficiency assumes, of course, that fair wages have been paid to employés, and fair prices to the sellers of materials, and that fair methods have been used toward competitors. In so far as any of these conditions is not met, the monopolistic concern has no right to surplus gains of any sort. All three of the claims just mentioned are morally stronger than the claim to superior rewards because of superior efficiency.
So much for the moral principle. What proportion of the surplus gains of monopoly are due to extortionate prices rather than to economies in production, cannot be known even approximately. According to Justice Brandeis, who is one of the most competent authorities in this field, only a very small part of these gains are derived from superior efficiency.[168]Professor E. S. Meade writes: "During a decade [1902-1912] of unparalleled industrial development, the trusts, starting with every advantage of large capital, well-equipped plants, financial connections, and skilled superintendence, have not succeeded."[169]Onthe other hand, President Van Hise thinks that, "the weight of argument is strongly in favour of the increased efficiency of large combinations of industry on the average."[170]The difference of opinion existing among students of this subject is due to lack of adequate data, particularly to the absence of such uniform and comprehensive systems of accounting as would be required to provide a basis for reliable general conclusions. Opposing particular statements may be equally true, because based upon different instances; but general statements are little better than guesses.
Let us approach the question from another side, that of prices. Whenever the charges imposed by monopolistic concerns upon their products are higher than those that would have prevailed under competition, the surplus gains are obviously to that extent not due to superior efficiency. They have their source in the arbitrarily made prices. The Final Report of the United States Industrial Commission, which was made at the beginning of the year 1902, declared that, "in most cases the combination has exerted an appreciable power over prices, and in practically all cases it has increased the margin between raw materials and finished products."[171]Since the cost of production had decreased during the preceding decade, this increase in the margin, and the ensuing increased profits, necessarily involved an increase in prices to the consumer. Taking the period of 1897-1910, and comparing the movement of prices between eighteen important trust-controlled products, and the same number of important commodities not produced by monopolistic concerns, Professor Meade concluded that the former were sold at a "much lower" relative level than the latter.[172]His computations were based upon figures compiled by the Bureau of Labour. Accordingto the Commissioner of Corporations, the Standard Oil Company "has taken advantage of its monopoly power to extort prices much higher than would have existed under free competition."[173]The same authority shows that the American Tobacco Company used its power to obtain considerably more than competitive prices on some of its products.[174]Excessive prices, as measured by the standards of competition, were also established by the United States Steel Corporation, the American Sugar Refining Company, and the combinations in meat packing and in lumber.[175]
A safe statement would probably be that the greater part of the surplus gains of the most conspicuous American monopolies have been due to excessive prices rather than to economies of production.
Let us turn from the subject of unjust monopoly gains to that of unfair methods used by the great combinations toward their competitors. These methods are mainly three: discriminative underselling, exclusive-selling contracts, and advantages in transportation.
The first of these practices is exemplified when a monopoly sells its goods at unprofitably low rates in competitive territory, while maintaining higher prices elsewhere; and when it offers at very low prices those kinds of goods which are handled by competitors, while holding at excessively high prices the kinds of commodities over which it has exclusive control. Both forms of the practice seem to have been extensively used by most of the monopolistic concerns of America.[176]The Standard Oil Company has been perhaps the most conspicuous offender in thisfield.[177]This practice is unjust because it violates the fundamental moral principle that a man has a right to pursue a lawful good without hindrance through illicit means. Among the illicit means enumerated by the moral theologians are force, fraud, deception, lying, slander, intimidation, and extortion.[178]
The illicit means employed in discriminative underselling are chiefly extortion and deception. If the very low prices at which the monopoly sells in the field which contains competitors were maintained outside of that field also, and if they were continued not merely until the independent concerns were driven out of business, but indefinitely afterward, no injustice would be done the latter. For no man has a natural right to any particular business. If a powerful concern can eliminate competitors through low prices made possible by superior efficiency, the competitors are not unjustly treated. They have no more just cause of complaint than the inefficient grocer whose custom is attracted from him by other and more efficient merchants. The offence is at the worst contrary to charity. But when the monopoly maintains the low and competition-eliminating prices only locally and temporarily, when it is enabled to establish and continue these prices only because it sells its goods at extortionate rates elsewhere, the latter prices are evidently the instrument or means by which the competitors are injured and eliminated. In that case the monopoly violates the right of the competitors to pursue a lawful good immune from unfair interference. The lawful good is a livelihood from this kind of business; and the illicit interference is the unjust prices maintained outside the competitive field.
In the preceding paragraph we have assumed that the extortionate prices are operative at the same time as the excessively low prices, but in a different place. Supposethat the former are imposed only after the independent concerns are eliminated. The injustice to the competitors remains the same as in the preceding case. Although the extortionate prices are later in time, they are the instrumental cause of the destructive low prices through which the competitors were driven out of business. If the owners of the monopoly were not certain of their ability to establish the subsequent extortionate prices, they would not have put into effect the unprofitably low prices. Hence there is a true causal connection between the former and the latter. Although the connection is mainly psychical, through the consciousness of the monopoly owners, it is none the less real and effective. Its practical effectiveness is seen in the fact that the subsequent possibility of imposing extortionate prices will induce men to lend the monopoly money to carry on the process of exterminating competition. The process is maintained by means of the extortionate prices quite as effectively as though the two things were simultaneous.
In so far as the patrons of the independent concerns are deceived into expecting that the very low prices will be permanent, and in so far as this impression causes them to withdraw their patronage from the independents, the latter are injured through another illicit means, namely, deception. The competitors have a right not to be deprived of their customers through imposture.
What is the measure of extortionate prices in this connection? How can we know that the high, competition-eliminating prices are really extortionate? There are only two possible tests of just price. The first is the proper cost of production,—fair wages to labour, fair prices for materials, and fair interest on capital. If the monopoly does not raise prices above this level, it obviously does not impose extortionate prices, nor inflict injustice upon the eliminated competitor. Moreover, if the monopoly has introduced economies of production it may, as we haveseen, justly charge prices somewhat above the cost-of-production level. But it may not raise them above the level that would have prevailed under competition. This is the second test of just price. No possible justification can be found, except one to be mentioned presently, for charging the consumers higher prices than they could have obtained under competitive conditions. At such prices the monopoly will be able to secure the prevailing rate of interest on its capital, and all the surplus gains that proceed from superior efficiency. A higher scale of prices will be, therefore, extortionate, and the competitors who are eliminated through its instrumentality will be the victims of injustice.[179]
The exception alluded to above occurs when the monopoly uses the excess which it obtains over the competitive price to pay fair wages to those labourers who were insufficiently compensated in competitive conditions. In such a case the eliminated competitors would have no just claim against the monopoly; for their elimination took place in the just interest of the producers. The case, however, is purely academic, since the discriminative underselling practised by our monopolistic concerns has not been impelled by any such motive, nor has it achieved any such result.
The second unfair method employed by monopolies toward competitors is that of exclusive-selling contracts,sometimes called the "factor's agreement." It requires the dealer, merchant, or jobber to refrain from selling the goods produced by independent concerns, on penalty of being refused the goods produced by the monopoly. The merchant is compelled to choose between the less important line of wares to be had from the former, and the more important line obtainable from the latter. He will not be permitted to handle both. "Here is somebody who has been buying goods, let us say, by way of illustration, from the American Tobacco Company, and a rival producer comes in whom the merchant likes to patronise. He buys goods for a time from the rival, and an agent of the trust sends him a note to the effect that he must not buy any more from that rival corporation; that, if he does so, the trust will give all of its own goods, some of which the merchant is obliged to have, to another agent. That will probably bring him to terms."[180]By this method the independent manufacturer can be deprived of sufficient patronage to injure him seriously, and perhaps to drive him out of business.
This process is one of intimidation brought to bear upon the merchant. Through fear of loss he is compelled to discontinue selling the goods of the competing manufacturer. It is a kind of secondary boycott. As such, it is an unreasonable interference with the liberty of the merchant unless its object is to compel him to do something that he may be reasonably required to do. In the case that we are considering, the object of the pressure is not of that character; for to drive the rival manufacturer out of business, or to assist in his expulsion, is not a reasonable thing. The exclusive-selling contract which is forced upon the merchant is quite as unreasonable as though its purpose were to prevent him from, say, patronising manufacturers having red hair. Being thus unreasonable, thus injurious to individual liberty, it violates not only the lawof charity but that of justice. It transgresses the merchant's right to enter reasonable contracts with the rival manufacturer, and if it results in a pecuniary loss to the former it is an invasion of his rights of property. It likewise violates the rights of the competitive manufacturer, since it is among the unfair means which may not be used to prevent a man from pursuing a legitimate good. It is an unfair means because it involves unreasonable intimidation, uncharity, and injustice toward the merchant. When the independent manufacturer is injured through such an instrumentality, he suffers injustice quite as certainly at the hands of the monopoly as though his property were destroyed through the strong-arm methods of hired thugs.
Concerning the third unfair method, discriminative advantages in transportation, the United States Industrial Commission declared: "It is incontestable that many of the great industrial combinations had their origin in railroad discrimination. This has been emphasised many times in the history of the Standard Oil Company, and of the great monopolies dealing in live stock, dressed beef, and other products."[181]The American Sugar Refining Company has been several times convicted of receiving illegal favours from railroads, and has paid in fines thousands upon thousands of dollars. Sometimes the monopoly has openly been accorded lower freight rates than its competitors, and sometimes it has paid the regular charges, and then received back a part of them as a refund or rebate. At one time the Standard Oil Company obtained rebates not only on its own shipments, but on those of its rivals![182]
Special advantages of this sort necessarily involve injustice to the competitors of the monopoly. If the lowrates given to the monopolistic concern are a sufficiently high price for the service of carrying freight, the higher charges imposed upon the competing concerns are extortionate; if the former rates are unprofitably low, the difference between sufficient and insufficient freight charges is made up by the independent concerns. In the former case the independents pay the railroad too much; in the latter case they bear burdens that should properly rest upon the monopoly. The monopolistic concern is partly responsible for this injustice inasmuch as it urges and often intimidates the railroad to establish the discriminating rates.
All three of the practices that we have been considering are universally condemned by public sentiment. They are all likewise under the ban of statutory law. The first two have recently received detailed and explicit prohibition in the Clayton Anti-Trust Act.
Up to this point we have been dealing with private and artificial monopolies. We turn now to consider briefly those natural and quasi-public monopolies which are either tacitly or explicitly recognised as monopolies by public authority, and whose charges are to a greater or less extent regulated by some department of the State. Such are, for example; steam railroads and municipal utilities. When the charges made for the services of these corporations areadequatelyregulated by public authority, the owners of such concerns will have a right to all the surplus gains that they can obtain. In that case a contract is made between the corporation and the public which is presumably fair to both parties, and which represents the social estimate of what is just. If the public authorities have not sufficiently safeguarded the interests of the people, if they have permitted the charges to be so high as to provide excessive returns for the corporation, the latter is under no moral obligation to refrain from reaping the full benefit of theState's negligence or incompetence. If, however, the unduly high rates have been brought about through bribery, extortion, or deception practised by the corporation, the inequitable contract thus arranged will not justify the surplus gains thus produced. For example; if the corporation deliberately and effectively conceals the real value of its property through stockwatering, and thus misleads the public authority into permitting charges which return twelve instead of six per cent. on the actual investment, the corporation cannot forthwith justly claim the surplus gain represented by the extra six per cent.
When the public authorities either fail entirely to regulate charges, or do so only spasmodically and partially, the quasi-public monopoly will not necessarily have a right to all the obtainable surplus gains. For a long time the express companies of the United States were permitted to exact what charges they pleased, and even yet the rates on some of our railroads are not adequately regulated by the State. In such cases the charges imposed on the public are not an adequate expression of the social estimate of justice, nor an adequate basis of legitimate surplus gains. In the absence of sufficient public regulation, a quasi-public monopoly is morally bound to fix its charges at such a level as will enable it to obtain only the prevailing rate of interest on the investment, and such surplus gains as it can produce through exceptional efficiency. In all such cases the public service corporation is in the same moral position as the artificial monopoly: it has no possible basis except superior efficiency for claiming or getting any returns above the competitive rate of interest on its capital. Its only possible reason for obtaining more is the fact that it has the power to take more. This fact has obviously no moral validity.