Under Socialism the boards of directors or commissions which exercised supreme control in the various industries, would have to be chosen either by the general popular vote, by the government, or by the workers in each particular industry. The first method may be at once excludedfrom consideration. Even now the number of officials chosen directly by the people is far too large; hence the widespread agitation for the "short ballot." Public opinion is coming to realise that the voters should be required to select only a few important officials, whose qualifications should be general rather than technical, and therefore easily recognised by the masses. These supreme functionaries should have the power of filling all administrative offices, and all positions demanding expert or technical ability. If the task of choosing administrative experts cannot be safely left to the mass of the voters at present, it certainly ought not to be assigned to them under Socialism, when the number and qualifications of these functionaries would be indefinitely increased.
If the boards of industrial directors were selected by the government, that is, by the national and municipal authorities, the result would be industrial inefficiency and an intolerable bureaucracy. No body of officials, whether legislative or executive, would possess the varied, extensive, and specific knowledge required to pick out efficient administrative commissions for all the industries of the country or the city. And no group of political persons could safely be entrusted with such tremendous power. It would enable them to dominate the industrial as well as the political life of the nation or the municipality, to establish a bureaucracy that would be impregnable for a long period of years, and to revive all the conceivable evils of governmental absolutism.
The third method is apparently the one now favoured by most Socialists. "The workers in each industry may periodically select the managing authority," says Morris Hillquit.[130]Even if the workers were as able as the stockholders of a corporation to select an efficient governing board, they would be much less likely to choose men who would insist on hard and efficient work from all subordinates.The members of a private corporation have a strong pecuniary interest in selecting directors who will secure the maximum of product at the minimum of cost, while the employés in a Socialist industry would want managing authorities who were willing to make working conditions as easy as possible.
The dependence of the boards of directors upon the mass of the workers, and the lack of adequate pecuniary motives, would render their management much less efficient and progressive than that of private enterprises. In the rules that they would make for the administration of the industry and the government of the labour force, in their selection of subordinate officers, such as superintendents, general managers, and foremen, and in all the other details of management, they would have always before them the abiding fact that their authority was derived from and dependent upon the votes of the majority of the employés. Their supreme consideration would be to conduct the industry in such a way as to satisfy the men who elected them. Hence they would strive to maintain an administration which would permit the mass of the labour force to work leisurely, to be provided with the most expensive conditions of employment, and to be immune from discharge except in rare and flagrant cases. Even if the members of the directing boards were sufficiently courageous or sufficiently conscientious to exact reasonable and efficient service from all their subordinates and all the workers, they would not have the necessary pecuniary motives. Their salaries would be fixed by the government, and in the nature of things could not be promptly adjusted to reward efficient and to punish inefficient management. So long as their administration of industry maintained a certain routine level of mediocrity, they would have no fear of being removed; since they would be supervised and paid by public officials who would have neither the extraordinary capacity nor the necessary incentiveto recognise and reward promptly efficient management, they would lack the powerful stimulus which is provided by the hope of gain. In the large private corporations, the tenure of the boards of directors depends not upon the workers but upon the stockholders, whose main interest is to obtain a maximum of product at a minimum of cost, and who will employ and discharge, reward and punish, according as this end is attained. Moreover, the members of the boards, and the executive officers generally, are themselves financially interested in the business and in the maintenance of the policy demanded by the other stockholders.
All the subordinate officers, such as department managers, superintendents, foremen, etc., would exemplify the same absence of efficiency. Knowing that they must carry out the prudent policy of the board of directors, they would be slow to punish shirking or to discharge incompetents. Realising that the board of directors lacked the incentive to make promotions promptly for efficient service, or to discharge promptly for inefficient service, they would devote their main energies to the task of holding their positions through a policy of indifferent and routine administration.
Invention and progress would likewise suffer. Men who were capable of devising new machines, new processes, new methods of combining capital and labour, would be slow to convert their potencies into action. They would be painfully aware that the spirit of inertia and routine prevailing throughout the industrial and political organisation would prevent their efforts from receiving quick recognition and adequate rewards. Inventors of mechanical devices particularly would be deprived of the stimulus which they now find in the hope of indefinitely large gains. Boards of directors, general managers, and other persons exercising industrial authority would be very slow to introduce new and more efficient financial or technicalmethods when they had no certainty that they would receive adequate reward in the form of either promotion or money compensation. They would see no sufficient reason for abandoning the established and pleasant policy of routine methods and unprogressive management.
The same spirit of inefficiency and mediocrity would permeate the rank and file of the workers. Indeed, it would operate even more strongly among them than among the officers and superiors; for their intellectual limitations and the nature of their tasks would make them less responsive to other than material and pecuniary motives. They would desire to follow the line of least resistance, to labour in the most pleasant conditions, to reduce irksome toil to a minimum. Since the great bulk of their tasks would necessarily be mechanical and monotonous, they would demand the shortest possible working day, and the most leisurely rate of working speed. And because of their numerical strength they would have the power to enforce this policy throughout the field of industry. They would have the necessary and sufficient votes. In a general way they might, indeed, realise that the practice of universal shirking and laziness must sooner or later result in such a diminution of the national product as to cause them great hardship, but the workers in each industry would hope that those in all the others would be more efficient; or doubt that a better example set by themselves would be imitated by the workers in other industries. They would not be keen to give up the certainty of easy working conditions for the remote possibility of a larger national product.
All the attempts made by Socialists to answer or explain away the foregoing difficulties may be reduced totwo: the achievements of government enterprises in our present system; and the assumed efficacy of altruism and public honour in a régime of Socialism.
Under the first head appeal is made to such publicly owned and managed concerns as the post office, railroads, telegraphs, telephones, street railways, water works, and lighting plants. It is probably true that all these enterprises are on the whole carried on with better results to the public than if they were in private hands. It is likewise probable that these and all other public utility monopolies will sooner or later be taken over by the State in all advanced countries. Even if this should prove in all cases to be a better arrangement from the viewpoint of the general public welfare than private ownership and management, the fact would constitute no argument for a Socialist organisation of all industry. In the first place, the efficiency of labour, management, and technical organisation is generally lower in public than in private enterprises, and the cost of operation higher. Despite these defects, government ownership of public utilities, such as street railways and lighting concerns, may be socially preferable because these industries are monopolies. Inasmuch as their charges and services cannot be regulated by the automatic action of competition, the only alternative to public ownership is public supervision. Inasmuch as the latter is often incapable of securing satisfactory service at fair prices, public ownership and management becomes on the whole more conducive to social welfare. In other words, the losses through inefficient operation are more than offset by the gains from better service and lower charges. Three cent fares and adequate service on an inefficiently managed municipal street railway are preferable to five cent fares on a privately owned street railway whose management is superior. On the other hand, all those industries which are not natural monopolies can be prevented from practising extortion upon the public through regulatedcompetition. In them, therefore, the advantages of private operation, of which competition itself is not the least, should be retained.
In the second place, practically all the public service monopolies are simpler in structure, more routine in operation, and more mature in organisation and efficiency than the other industries. The degree of managerial ability required, the necessity of experimenting with new methods and processes, and the opportunity of introducing further improvements in organisation are relatively less. Now, it is precisely in these respects that private has shown itself superior to public operation. Initiative, inventiveness, and eagerness to effect economies and increase profits are the qualities in which private management excels. When the nature and maturity of the concern have rendered these qualities relatively unimportant, public management can exemplify a fair degree of efficiency.
In the third place, the ability of the State to operate a few enterprises, does not prove that it could repeat the performance with an equal degree of success in all industries. I can drive two horses, but I could not drive twenty-two. No matter how scientific the organisation and departmentalisation of industries under Socialism, the final control of and responsibility for all of them would rest with one organ, one authority, namely, the city in municipal industries, and the nation in industries having national scope. This would prove too great a task, too heavy a burden, for any body of officials, for any group of human beings.
Finally, it must be kept in mind that the publicly operated utilities are subject continuously to the indirect competition of private management. By far the greater part of industry is now under private control, which sets the pace for efficient operation in a hundred particulars. As a consequence, comparisons are steadily provoked between public and private management, and the former is subjectto constant criticism. The managers of the State concerns are stimulated and practically compelled to emulate the success of private management. This factor is probably more effective in securing efficiency in public industries than all other causes put together. In the words of Professor Skelton: "A limited degree of public ownership succeeds simply because it is a limited degree, succeeds because private industry, in individual forms or in the socialised joint stock form, dominates the field as a whole. It is private industry that provides the capital, private industry that trains the men and tries out the methods, private industry that sets the pace, and—not the least of its services—private industry that provides the ever-possible outlet of escape."[131]
The Socialist expectation that altruistic sentiments and public honour would induce all industrial leaders and all ordinary workers to exert themselves as effectively as they now do for the sake of money, is based upon the very shallow fallacy that what is true of a few men may very readily become true of all men. There are, indeed, persons in every walk of life who work faithfully under the influence of the higher motives, but they are and always have been the exceptions in their respective classes. The great majority have been affected only feebly, intermittently, and on the whole ineffectively by either love of their kind or the hope of public approval.
A Socialist order could generate no forces which would be as productive of unselfish conduct as the motives that are drawn from religion. History shows nothing comparable either in extent or intensity to the record of self surrender and service to the neighbour which are due to the latter influence. Yet religion has never been able, even in the periods and places most thoroughly dominated by Christianity, to induce more than a small minority of the population to adopt that life of altruismwhich would be required of the great majority under Socialism.
Moreover, the efficacy of the higher motives is much greater among men devoted to scientific, intellectual, and religious pursuits than in either the leaders or the rank and file engaged in industrial occupations. The cause of this difference is to be sought in the varying nature of the two classes of activity: the first necessarily develops an appreciation of the higher goods, the things of the mind and the soul; the second compels the attention of men to rest upon matter, upon the things that appeal to the senses, upon the things that are measurable in terms of money.
There is a special fallacy underlying the emphasis placed by Socialists on the power of public honour. It consists in the failure to perceive that this good declines in efficacy according as the number of its recipients increases. Even if all the industrial population were willing to work as hard for public approval as they now do for money, the results expected by Socialists would not be forthcoming. Public recognition of unselfish service is now available in relatively great measure because the persons qualifying for it are relatively few. They easily stand out conspicuous among their fellows. Let their numbers vastly increase, and unselfishness would become commonplace. It would no longer command popular recognition, save in those who displayed it in exceptional or heroic measure. The public would not have the time nor take the trouble to notice and honour adequately every floor walker, retail clerk, factory operative, street cleaner, agricultural labourer, ditch digger, etc., who might become a candidate for such recognition.
When the Socialists point to such examples of disinterested public service as that of Colonel Goethals in building the Panama Canal, they confound the exceptional with the average. They assume that, since an exceptional man performs an exceptional task from high motives, all mencan be got to act likewise in all kinds of operations. They forget that the Panama Canal presented opportunities of self satisfying achievement and fame which do not occur once in a thousand years; that the traditions and training of the army have during many centuries deliberately and consistently aimed and tended to produce an exceptionally high standard of honour and disinterestedness; that, even so, the majority of army officers have not in their civil assignments shown the same degree of faithfulness to the public welfare as Colonel Goethals; that the Canal was built under a régime of "benevolent despotism," which placed no reliance upon the "social mindedness" of the subordinate workers; and that the latter, far from showing any desire to qualify as altruists or public benefactors, demanded and received material recognition in the form of wages, perquisites, and gratuities which greatly surpassed the remuneration received by any other labour force in history.[132]In a word, wherever in the construction of the Canal notable disinterestedness or appreciation of public honour was shown, the circumstances were exceptional; where the situation was ordinary, the Canal builders were unable to rise above the ordinary motives of selfish advantage.
Beneath all the Socialist argument on this subject lies the assumption that the attitude of theaverage mantoward the higher motives can by some mysterious process be completelyrevolutionised. This is contrary to all experience, and to all reasonable probability. Only a small minority of men have ever, in any society or environment, been dominated mainly by altruism or the desire of public honour. What reason is there to expect that men will act differently in the future? Neither legislation nor education can make men love their neighbours more than themselves, or love the applause of their neighbours more than their own material welfare.
Even though human nature should undergo the degree of miraculous transformation necessary to maintain an efficient industrial system on Socialist lines, such a social organisation must soon collapse because of its injurious effect upon individual liberty. Freedom of choice would be abolished in the most vital economic transactions; for there would be but one buyer of labour, and one seller of commodities. And these two would be identical, namely, the State. With the exception of the small minority that might be engaged in purely individual avocations, and in co-operative enterprises, men would be compelled to sell their labour to either the municipality or the national government. As competition between these two political agencies in the matter of wages and other conditions of labour could not be permitted, there would be virtually only one employer. Practically all material goods would have to be purchased from either the municipal or the national shops and stores. Since the city and the nation would produce different kinds of goods, the purchaser of any given article would be compelled to deal with one seller. His freedom of choice would be further restricted by the fact that he would have to be content with those kinds and grades of commodities which the seller saw fit to produce. He could not create an effective demand for new forms and varieties of goods, as he now does, by stimulating the ingenuity and acquisitiveness of competing producers and dealers.
Prices and wages would, of course, be fixed beforehand by the government. The supposition that this function might be left to the workers in each industry is utterly impracticable. Such an arrangement would involve a grand scramble among the different industries to see which could pay its own members the highest wages, and charge its neighbours' members the highest prices. The final resultwould be a level of prices so high that only an alert and vigorous section of the workers in each industry could find employment. Not only wages and prices but hours, safety requirements, and all the other general conditions of employment, would be regulated by the government. The individuals in each industry could not be permitted to determine these matters any more than they could be permitted to determine wages. Moreover, all these regulations would from the nature of the case continue unchanged for a considerable period of time.
The restriction of choice enforced upon the sellers of labour and the buyers of goods, the utter dependence of the population upon one agency in all the affairs of their economic as well as their political life, the tremendous social power concentrated in the State, would produce a diminution of individual liberty and a perfection of political despotism surpassing anything that the world has ever seen. It would not long be tolerated by any self respecting people.
To reply that the Socialist order would be a democracy, and that the people could vote out of existence any distasteful regulation, is to play with words. No matter how responsive the governing and managing authorities might be to the popular will, the dependence of the individual would prove intolerable. Not the manner in which this tremendous social power is constituted, nor the personnel of those exercising it, but the fact that so much power is lodged in one agency, and so little immediate control of his affairs left to the individual,—is the heart of the evil situation. In a word, it is a question of the liberty of the individual versus the all pervading control of his actions by an agency other than himself. Moreover, the people in a democracy means a majority, or a compact minority. Under Socialism the controlling section of the voting population would possess so much power, political and economic, that it could impose whatever conditions itpleased upon the non-controlling section for an almost indefinite period of time. The members of the latter part of the population would not only be deprived of that immediate liberty which consists in the power to determine the details of their economic life, but of that remote liberty which consists in the power to affect general conditions by their votes.
In the last chapter we saw that the claim to the full product of industry, made on behalf of labour by the Socialists, cannot be established on intrinsic grounds. Like all other claims to material goods, it is valid only if it can be realised consistently with human welfare. Its validity depends upon its feasibility, upon the possibility of constructing some social system that will enable it to work. The present chapter has shown that the requirements of such a system are not met by Socialism. A Socialist organisation of industry would make all sections of the population, including the wage earning class, worse off than they are in the existing industrial order. Consequently, neither the private ownership of capital nor the individual receipt of interest can be proved to be immoral by the Socialist argument.
Since private ownership and management of capital are superior to Socialism, the State is obliged to maintain, protect, and improve the existing industrial system. This is precisely the conclusion that we reached in chapter iv with reference to private ownership of land. In chapter v we found, moreover, that individual ownership of land is a natural right. The fundamental considerations there examined lead to the parallel conclusion that the individual has a natural right to own capital. But we could not immediately deduce from the right to own land the right to take rent. Neither can we immediately deduce from the right to own capital the right to take interest. The positive establishment of the latter right will occupy us in the two following chapters.
In his address as President of the American Sociological Society at the annual meeting, Dec. 27, 1913, Professor Albion W. Small denounced "the fallacy of treating capital as though it were an active agent in human processes, and crediting income to the personal representatives of capital, irrespective of their actual share in human service." According to his explicit declaration, his criticism of the modern interest-system was based primarily upon grounds of social utility rather than upon formally ethical considerations.
A German priest has attacked interest from the purely moral viewpoint.[133]In his view the owner of any sort of capital who exacts the return of anything beyond the principal, violates strict justice.[134]The Church, he maintains, has never formally authorised or permitted interest, either on loans or on producing capital. She has merely tolerated it as an irremovable evil.
Is there a satisfactory justification of interest? If there is, does it rest on individual or on social grounds? That is to say: is interest justified immediately and intrinsically by the relations existing between the owner and the user of capital? Or, is rendered morally good owing to its effects upon social welfare? Let us see what light is thrown on these questions by the anti-usury legislation of the Catholic Church.
During the Middle Ages all interest onloanswas forbidden under severe penalties by repeated ordinances of Popes and Councils.[135]Since the end of the seventeenth century the Church has quite generally permitted interest on one or more extrinsic grounds, or "titles." The first of these titles was known as "lucrum cessans," or relinquished gain. It came into existence whenever a person who could have invested his money in a productive object, for example, a house, a farm, or a mercantile enterprise, decided instead to lend the money. In such cases the interest on the loan was regarded as proper compensation for the gain which the owner might have obtained from an investment on his own account. The title created by this situation was called "extrinsic" because it arose out of circumstances external to the essential relations of borrower and lender. Not because of the loan itself, but because the loan prevented the lender from investing his money in a productive enterprise, was interest on the former held to be justified. In other words, interest on the loan was looked upon as merely the fair equivalent of the interest that might have been obtained on the investment.
During the seventeenth, eighteenth, and nineteenth centuries, another title or justification of loan-interest found some favour among Catholic moralists. This was the "praemium legale," or legal rate of interest allowed by civil governments. Wherever the State authorised a definite rate of interest, the lender might, according to these writers, take advantage of it with a clear conscience.
To-day the majority of Catholic authorities on the subject prefer the title of virtual productivity as a justification. Money, they contend, has become virtually productive.It can readily be exchanged for income-bearing or productive property, such as, land, houses, railroads, machinery, and distributive establishments. Hence it has become the economic equivalent of productive capital, and the interest which is received on it through a loan is quite as reasonable as the annual return to the owner of productive capital. Between this theory and the theory connected with "lucrum cessans" the only difference is that the former shifts the justification of interest from the circumstances and rights of the lender to the present nature of the money itself. Not merely the fact that the individual will suffer if, instead of investing his money he loans it without interest, but the fact that money is generally and virtually productive, is the important element in the newer theory. In practice, however, the two explanations or justifications come to substantially the same thing.
Nevertheless, the Church has given no positive approval to any of the foregoing theories. In the last formal pronouncement by a Pope on the subject, Benedict XIV[136]condemned anew all interest that had no other support than the intrinsic conditions of the loan itself. At the same time, he declared that he had no intention of denying the lawfulness of interest which was received in virtue of the title of "lucrum cessans," nor the lawfulness of interest or profits arising out of investments in productive property. In other words, the authorisation that he gave to both kinds of interest was merely negative. He refrained from condemning them.
In the Responses given by the Roman Congregations from 1822 onward to questions relating to the lawfulness of loan-interest, we may profitably consider four principal features. First, they declare more or less specifically that interest may be taken in the absence of the title of "lucrum cessans"; second, some of them definitely admit the title of "praemium legale," or civil authorisation, as sufficientto give the practice moral sanction; third, they express a genuine permission, not a mere toleration, of interest taking; fourth, none of them explicitly declares that any of the titles or reasons for receiving loan-interest will necessarily or always give the lender astrict rightthereto. None of them contains a positive and reasoned approval of the practice. Most of them merely decide that persons who engage in it are not to be disturbed in conscience, so long as they stand ready to submit to a formal decision on the subject by the Holy See. The insertion of the latter condition clearly intimates that some day interest taking might be formally and officially condemned.
Should such a condemnation ever appear, it would not contradict any moral principle contained in the "Roman Responses," nor in the present attitude of the Church and of Catholic moralists. Undoubtedly it could come only as the result of a change in the organisation of industry, just as the existing ecclesiastical attitude has followed the changed economic conditions since the Middle Ages.
All the theological discussion on the subject, and all the authoritative ecclesiastical declarations indicate, therefore, that interest on loans is to-day regarded as lawful because a loan is the economic equivalent of an investment. Evidently this is good logic and common sense. If it is right for the stockholder of a railway to receive dividends, it is equally right for the bondholder to receive interest. If it is right for a merchant to take from the gross returns of his business a sum sufficient to cover interest on his capital, it is equally right for the man from whom he has borrowed money for the enterprise to exact interest. The money in a loan is economically equivalent to, convertible into, concrete capital. It deserves, therefore, the same treatment and the same rewards. The fact that the investor undergoes a greater risk than the lender, and the fact that the former often performs labour in connection with the operation of his capital, have no bearing on themoral problem; for the investor is repaid for his extra risk and labour by the profits which he receives, and which the lender does not receive. As a mere recipient of interest, the investor undergoes no more risk nor exertion than does the lender. His claim to interest is no better than that of the latter.
On what ground does the Church or Catholic theological opinion justify interest on invested capital? on the shares of the stockholders in corporations? on the capital of the merchant and the manufacturer?
In the early Middle Ages the only recognised titles to gain from the ownership of property were labour and risk.[137]Down to the beginning of the fifteenth century substantially all the incomes of all classes could be explained and justified by one or other of these two titles; for the amount of capital in existence was inconsiderable, and the number of large personal incomes insignificant.
When, however, the traffic in rent charges and the operation of partnerships, especially the "contractus trinus," or triple contract, had become fairly common, it was obvious that the profits from these practices could not be correctly attributed to either labour or risk. The person who bought, not the land itself, but the right to receive a portion of the rent thereof, and the person who became the silent member of a partnership, evidently performed no labour beyond that involved in making the contract. And their profits clearly exceeded a fair compensation for their risks, inasmuch as the profits produced a steady income. How then were they to be justified?
A few authorities maintained that such incomes had no justification. In the thirteenth century Henry of Ghent condemned the traffic in rent charges; in the sixteenth Dominicus Soto maintained that the returns to the silentpartner in an enterprise ought not to exceed a fair equivalent for his risks; about the same time Pope Sixtus V denounced the triple contract as a form of usury. Nevertheless, the great majority of writers admitted that all these transactions were morally lawful, and the gains therefrom just. For a time these writers employed merely negative anda pariarguments. Gains from rent charges, they pointed out, were essentially as licit as the net rent received by the owner of the land; and the interest received by a silent partner, even in a triple contract, had quite as sound a moral basis as rent charges. By the beginning of the seventeenth century the leading authorities were basing their defence of industrial interest on positive grounds. Lugo, Lessius, and Molina adduced the productivity of capital goods as a reason for allowing gains to the investor. Whether they regarded productivity as in itself a sufficient justification of interest, or merely as a necessary prerequisite to justification, cannot be determined with certainty.
At present the majority of Catholic writers seem to think that a formal defence of interest on capital is unnecessary. Apparently they assume that interest is justified by the mere productivity of capital. However, this view has never been explicitly approved by the Church. While she permits and authorises interest, she does not define its precise moral basis.
So much for the teaching of ecclesiastical and ethical authorities. What are the objective reasons in favour of the capitalist's claim to interest? In this chapter we consider only the intrinsic reasons, those arising wholly out of the relations between the interest-receiver and the interest-payer. Before taking up the subject it may be well to point out the source from which interest comes, the class in the community that pays the interest to the capitalist. From the language sometimes used by Socialists it might be inferred that interest is taken from the labourer,and that if it were abolished he would be the chief if not the only beneficiary. This is incorrect. At any given time interest on producing capital is paid by the consumer. Those who purchase the products of industry must give prices sufficiently high to provide interest in addition to the other expenses of production. Were interest abolished and the present system of private capital continued, the gain would be mainly reaped by the consumer in the form of lower prices; for the various capitalist directors of industry would bring about this result through their competitive efforts to increase sales. Only those labourers who were sufficiently organised and sufficiently alert to make effective demands for higher wages before the movement toward lower prices had got well under way, would obtain any direct benefit from the change. The great majority of labourers would gain far more as consumers than as wage earners. Speaking generally, then, we may say that the capitalist's gain is the consumer's loss, and the question of the justice of interest is a question between the capitalist and the consumer.
The intrinsic or individual grounds upon which the capitalist's claim to interest has been defended are mainly three: productivity, service, and abstinence. They will be considered in this order.
It is sometimes asserted that the capitalist has as good a right to interest as the farmer has to the offspring of his animals. Both are the products of the owner's property. In two respects, however, the comparison is inadequate and misleading. Since the owner of a female animal contributes labour or money or both toward her care during the period of gestation, his claim to the offspring is based in part upon these grounds, and only in part upon the title of interest. In the second place, the offspring is the definite and easily distinguishable product of its parent.But the sixty dollars derived as interest from the ownership of ten shares of railway stock, cannot be identified as the exact product of one thousand dollars of railway property. No man can tell whether this amount of capital has contributed more or less than sixty dollars of value to the joint product, i.e., railway services. The same is true of any other share or piece of concrete capital. All that we know is that the interest, be it five, six, seven, or some other per cent., describes the share of the product which goes to the owner of capital in the present conditions of industry. It is the conventional not the actual and physical product of capital.
Another faulty analogy is that drawn between the productivity of capital and the productivity of labour. Following the terminology of the economists, most persons think of land, labour, and capital as productive in the same sense. Hence the productivity of capital is easily assumed to have the same moral value as the productive action of human beings; and the right of the capitalist to a part of the product is put on the same moral basis as the right of the labourer. Yet the differences between the two kinds of productivity, and between the two moral claims to the product are more important than their resemblances.
In the first place, there is an essential physical difference. As an instrument of production, labour is active, capital is passive. As regards its worth or dignity, labour is the expenditure of human energy, the output of aperson, while capital is a material thing, standing apart from a personality, and possessing no human quality or human worth. These significant intrinsic or physical differences forbid any immediate inference that the moral claims of the owners of capital and labour are equally valid. We should logically expect to find that their moral claims are unequal.
This expectation is realised when we examine the bearing of the two kinds of productivity upon human welfare.In the exercise of productive effort the average labourer undergoes a sacrifice. He is engaged in a process that is ordinarily irksome. To require from him this toilsome expenditure of energy without compensation, would make him a mere instrument of his fellows. It would subordinate him and his comfort to the aggrandisement of beings who are not his superiors but his moral equals. For he is a person; they are no more than persons. On the other hand, the capitalist as such, as the recipient of interest, performs no labour, painful or otherwise. Not the capitalist, but capital participates in the productive process. Even though the capitalist should receive no interest, the productive functioning of capital would not subordinate him to his fellows in the way that wageless labour would subordinate the labourer.
The precise and fundamental reason for according to the labourer his product is that this is the only rational rule of distribution. When a man makes a useful thing out of materials that are his, he has a strict right to the product simply because there is no other reasonable method of distributing the goods and opportunities of the earth. If another individual, or society, were permitted to take this product, industry would be discouraged, idleness fostered, and reasonable life and self development rendered impossible. Direful consequences of this magnitude would not follow the abolition of interest.
Perhaps the most important difference between the moral claims of capitalist and labourer is the fact that for the latter labour is the sole means of livelihood. Unless he is compensated for his product he will perish. But the capitalist has in addition to the interest that he receives the ability to work. Were interest abolished he would still be in as good a position as the labourer. The product of the labourer means to him the necessaries of life; the product of the capitalist means to him goods in excess of a mere livelihood. Consequently their claims to theproduct are greatly unequal in vital importance and moral value.
The foregoing considerations show that even the claim of the labourer to his product is not based upon merely intrinsic grounds. It does not spring entirely from the mere fact that he has produced the product, from the mere relation between producer and thing produced. If this is true of labour-productivity we should expect to find it even more evident with regard to the productivity of capital; for the latter is passive instead of active, non rational instead of human.
The expectation is well founded. Not a single conclusive argument can be brought forward to show that the productivity of capital directly and necessarily confers upon the capitalist a right to the interest-product. All the attempted arguments are reducible to two formulas: "res fructificat domino" ("a thing fructifies to its owner") and "the effect follows its cause." The first of these was originally a legal rather than an ethical maxim; a rule by which the title was determined in the civil law, not a principle by which the right was determined in morals. The second is an irrelevant platitude. As a juristic principle, neither is self evident. Why should the owner of a piece of capital, be it a house, a machine, or a share of railway stock, have a right to its product, when he has expended neither time, labour, money, nor inconvenience of any kind? To answer, "because the thing which produced the product belongs to him," is merely to beg the question. To answer, "because the effect follows the cause," is to make a statement which has nothing to do with the question. What we want to know is why the ownership of a productive thing gives a right to the product; why this particular effect should follow its cause in this particular way. To answer by repeating under the guise of sententious formulas the thesis to be proved, is scarcely satisfactory or convincing.To answer that if the capitalist were not given interest industry and thrift would decrease and human welfare suffer, is to abandon the intrinsic argument entirely. It brings in the extrinsic consideration of social consequences.
The second intrinsic ground upon which interest is defended, is theserviceperformed by the capitalist when he permits his capital to be used in production. Without capital, labourers and consumers would be unable to command more than a fraction of their present means of livelihood. From this point of view we see that the service in question is worth all that is paid in the form of interest. Nevertheless it does not follow that the capitalist has a claim in strict justice to any payment for this service. According to St. Thomas, a seller may not charge a buyer an extra amount merely because of the extra value attached to the commodity by the latter.[138]In other words, a man cannot justly be required to pay an unusual price for a benefit or advantage or service, when the seller undergoes no unusual deprivation. Father Lehmkuhl carries the principle further, and declares that the seller has a right to compensation only when and to the extent that he undergoes a privation or undertakes a responsibility.[139]According to this rule, the capitalist would have no right to interest; for as mere interest-receiver he undergoes no privation. His risk and labour are remunerated in profits, while the responsibility of not withdrawing from production something that can continue in existence only by continuing in production, is scarcely deserving of a reward according to the canons of strict justice.
Whatever we may think of this argument from authority, we find it impossible to prove objectively that a manwho renders a service to another has an intrinsic right to anything beyond compensation for the expenditure of money or labour involved in performing the service. The man who throws a life preserver to a drowning person may justly demand a payment for his trouble. On any recognised basis of compensation, this payment will not exceed a few dollars. Yet the man whose life is in danger would pay a million dollars for this service if he were extremely rich. He would regard the service as worth this much to him. Has the man with the life preserver a right to exact such a payment? Has he a right to demand the full value of the service? No reasonable person would answer this question otherwise than in the negative. If the performer of the service may not charge the full value thereof, as measured by the estimate put upon it by the recipient, it would seem that he ought not to demand anything in excess of a fair price for his trouble. In other words, he may not justly exact anything for the service as such.
It would seem, then, that the capitalist has no moral claim to pure interest on the mere ground that the use of his capital in production constitutes a service to labourers and consumers. It would seem that he has no right to demand a payment for a costless service.
The third and last of the intrinsic justifications of interest that we shall consider isabstinence. This argument is based upon the contention that the person who saves his money, and invests it in the instruments of production undergoes a sacrifice in deferring to the future satisfactions that he might enjoy to-day. One hundred dollars now is worth as much as one hundred and five dollars a year hence. That is, when both are estimated from the viewpoint of the present. This sacrifice of present to future enjoyment which contributes a service to the communityin the form of capital, creates a just claim upon the community to compensation in the form of interest. If the capitalist is not rewarded for this inconvenience he is, like the unpaid labourer, subordinated to the aggrandisement of his fellows.
Against this argument we may place the extreme refutation attempted by the Socialist leader, Ferdinand Lassalle:
"But the profit of capital isthe reward of abstinence. Truly a happy phrase! European millionaires are ascetics, Indian penitents, modern St. Simons Stylites, who perched on their columns, with withered features and arms and bodies thrust forward, hold out a plate to the passers-by that they may receive the wages of their privations! In the midst of this sacro-saint group, high above his fellow-mortifiers of the flesh, stands the Holy House of Rothschild. That is the real truth about our present society! How could I have hitherto blundered on this point as I have?"[140]
Obviously this is a malevolently one-sided implication concerning the sources of capital. But it is scarcely less adequate than the explanation in opposition to which it has been quoted. Both fail to distinguish between the different kinds of savers, the different kinds of capital-owners. For the purposes of our inquiry savings may be divided into three classes.
First, those which are accumulated and invested automatically. Very rich persons save a great deal of money that they have no desire to spend, since they have already satisfied or safeguarded all the wants of which they are conscious. Evidently this kind of saving involves no real sacrifice. To it the words of Lassalle are substantially applicable, and the claim to interest for abstinence decidedly inapplicable.
Second, savings to provide for old age and other futurecontingencies which are estimated as more important than any of the purposes for which the money might now be expended. Were interest abolished this kind of saving would be even greater than it is at present; for a larger total would be required to equal the fund that is now provided through the addition of interest to the principal. In a no-interest régime one thousand dollars would have to be set aside every year in order to total twenty thousand dollars in twenty years; when interest is accumulated on the savings, a smaller annual amount will suffice to produce the same fund. Inasmuch as this class of persons would save in an even greater degree without interest, it is clear that they regard the sacrifice involved as fully compensated in the resulting provision for the future. In their case sacrifice is amply rewarded by accumulation. Their claim to additional compensation in the form of interest does not seem to have any valid basis. In the words of the late Professor Devas, "there is ample reward given without any need of any interest or dividend. For the workers with heads or hands keep the property intact, ready for the owner to consume whenever convenient, when he gets infirm or sick, or when his children have grown up, and can enjoy the property with him."[141]
The third kind of saving is that which is made by persons who could spend, and have some desire to spend, more on present satisfactions, and who have already provided for all future wants in accordance with the standards of necessaries and comforts that they have adopted. Their fund for the future is already sufficient to meet all those needs which seem weightier than their present unsatisfied wants. If the surplus in question is saved it will go to supply future desires which are no more important than those for which it might be expended now. In other words, the alternatives before the prospective saverare to procure a given amount of satisfaction to-day, or to defer the same degree of satisfaction to a distant day.
In this case the inducement of interest will undoubtedly be necessary to bring about saving. As between equal amounts of satisfaction at different times, the average person will certainly prefer those of the present to those of the future. He will not decide in favour of the future unless the satisfactions then obtainable are to be greater in quantity. To this situation the rule that deferred enjoyments are worth less than present enjoyments, is strictly applicable. The increased quantity of future satisfaction which is necessary to turn the choice from the present to the future, and to determine that the surplus shall be saved rather than spent, can be provided only through interest. In this way the accumulations of interest and savings will make the future fund equivalent to a larger amount of enjoyment or utility than could be obtained if the surplus were exchanged for the goods of the present. "Interest magnifies the distant object." Whenever this magnifying power seems sufficiently great to outweigh the advantage of present over future satisfactions, the surplus will be saved instead of spent.
Among the well-to-do there is probably a considerable number of persons who take this attitude toward a considerable part of their savings. Since they would not make these savings without the inducement of interest, they regard the latter as a necessary compensation for the sacrifice of postponed enjoyment. In a general way we may say that they have a strict right to this interest on the intrinsic ground of sacrifice. Inasmuch as the community benefits by the savings, it may quite as fairly be required to pay for the antecedent sacrifices of the savers as for the inconvenience undergone by the performer of any useful labour or service.
Summing up the matter regarding the intrinsic justification of interest, we find that the titles of productivityand service do not conclusively establish the strict right of the capitalist to interest, and that the title of abstinence is morally valid for only a portion, probably a rather small portion, of the total amount of interest now received by the owners of capital. Consequently interest as a whole is not conclusively vindicated on individual grounds. If it is to be proved morally lawful its justification must be sought in extrinsic and social considerations. This inquiry will form the subject of the next chapter.
As we saw in the last chapter, interest cannot be conclusively justified on the ground of either productivity or service. It is impossible to demonstrate that the capitalist has a strict right to interest because his capital produces interest, or because it renders a service to the labourer or the consumer. A part, probably a small part, of the interest now received can be fairly justified by the title of sacrifice. Some present owners of capital would not have saved had they not expected to receive interest. In their case interest may be regarded as a just compensation for the sacrifice that they underwent when they decided to save instead of consuming.
Nevertheless these men would suffer no injustice if interest were now to be abolished. Up to the moment of the change, they would have been in receipt of adequate compensation; thereafter, they would be in exactly the same position as when they originally chose to save rather than consume. They would still be able to sell their capital, and convert the proceeds to their immediate uses and pleasures. In this case they would obviously have no further claim upon the community for interest. On the other hand, they could retain the ownership of their capital, and postpone its consumption to some future time. In making this choice they would regard future as more important than present consumption, and the superiority of future enjoyment as sufficiently great to compensatethem for the sacrifice of postponement. Hence they would have no moral claim to interest on the ground of abstinence. In general, then, the sacrifice-justification of interest continues only so long as the interest continues. It extends only to the interest received by certain capitalists in certain circumstances, not to all interest in all circumstances. Therefore, it presents no moral obstacle to the complete abolition of interest.
Since probably the greater part of the interest now received cannot be justified on intrinsic grounds, and since that part of it which is thus justified could be abolished consistently with the rights of the recipients, let us see whether it is capable of justification for reasons of social welfare. Would its suppression be socially beneficial or socially detrimental?
The interest that we have in mind is pure interest, not undertaker's profit, nor insurance against risk, nor gross interest. Even if all pure interest were abolished the capitalist who loaned his money would still receive something from the borrower in addition to the repayment of the principal, while the active capitalist would get from the consumer more than the expenses of production. The former would require a premium of, say, one or two per cent. to protect him against the loss of his loan. The latter would demand the same kind of insurance, and an additional sum to repay him for his labour and enterprise. None of these payments could be avoided in any system of privately directed production. The return whose suppression is considered here is that which the capitalist receives over and above these payments, and which in this country seems to be about three or four per cent.
Would capital still have value in a no-interest régime, and if so how would its value be determined? At present the lower limit of the value of productive capital, as ofall other artificial goods, is fixed in the long run by the cost of production. Capital instruments that do not bring this price will not continue to be made. In other words, cost of production is the governing factor of the value of capital from the side of supply. It would likewise fix the lower limit of value in a no-interest régime; only, the cost of producing capital instruments would then be somewhat lower than to-day, owing to the absence of an interest charge for the working capital during the productive process.
But the cost of production is not a constant and accurate measure of the value of artificial capital. The true measure is found in the revenue or interest that a given piece of capital yields to its owners. If the current rate of interest is five per cent., a factory that brings in ten thousand dollars net return will have a value of about two hundred thousand dollars. This is the governing factor of value from the side of demand. In a no-interest economy the demand factor would be quite different. Capital instruments would be in demand, not as revenue producers, but as the concrete embodiments, the indispensable requisites of saving and accumulation. For it is impossible that saving should in any considerable amount take the form of cash hoards. In the words of Sir Robert Giffen: "The accumulations of a single year, even taking it at one hundred and fifty millions only, ... would absorb more than the entire metallic currency of the country [Great Britain]. They cannot, therefore, be made in cash."[142]The instruments of production would be sought and valued by savers for the same reason that safes and safety deposit boxes are in demand now. They would be the only means of carrying savings into the future, and they would necessarily bring a price sufficiently high to cover the cost of producing them. One man might deposit his savings in a bank, whence they wouldbe borrowed without interest by some director of industry. When the owner of the savings desired to recover them he could obtain from the bank the fund of some other depositor, or get the proceeds of the sale of the concrete capital in which his own savings had been embodied. Another man might prefer to invest his savings directly in a building, a machine, or a mercantile business, whence he could recover them later from the sale of the property. Hence the absence of interest would not change essentially the processes of saving or investment. Capital would still have value, but its valuation from the demand side would rest on a different basis. It would be valued not in proportion to its power to yield interest, but because of its capacity to become a receptacle for savings, and to carry into the future the consuming power of the present.
The question whether the abolition of interest by the State would be socially helpful or socially harmful is mainly, though not entirely, a question of the supply of capital. If the community would not have sufficient capital to provide for all its needs, actual and progressive, the suppression of interest would obviously be a bad policy. Most economists seem inclined to think that this condition would be realised; that, without the inducement of interest, men would neither make new savings nor conserve existing capital in sufficient quantity to supply the wants of society. Very few of them, however, pretend to be able to prove this proposition. So many complex factors with regard to the possibilities of saving and the motives of savers, enter into the situation that no opinion on the subject can have any stronger basis than probability. As a preliminary to our consideration of the question of abolition, let us inquire whether there exists any definite relation between the present supply of capital and the current rate of interest.
It is sometimes contended that the interest rate must be kept up to the present level if the existing supply of capital is to be maintained. The underlying assumption is that some of the present savers would discontinue that function at any lower rate, with the consequence that the supply of capital would fall below the demand. Owing to this excess of demand over supply, the rate of interest would rise, or tend to rise, to the former level. Therefore, the rate existing at any given time is the socially necessary rate. The rate of interest is said to be analogous to the rate of wages. For example; of ten thousand men receiving five dollars a day, nine thousand may be willing to work for four dollars rather than quit their present jobs. But the other thousand set their minimum price at five dollars. If the wage is reduced to four dollars these men will get employment elsewhere, thus causing such an excess of demand over supply as to force the wage rate back to five dollars. The same thing, it is contended, will happen when the high-priced section of the savers, "the marginal savers," discontinue saving on account of the artificial lowering of the rate of interest.
The analogy, however, is misleading. The "marginal" one thousand wage earners refuse to work for four dollars a day because they can get better compensation in some other occupation. This phenomenon has been proved over and over again by observation and experience. On the other hand, there is no experience, no positive evidence, which shows or tends to show that anynecessarygroup of present savers would discontinue or materially reduce their accumulations if they were no longer able to secure the present rate of interest. If the rate were lowered simultaneously in all civilised countries the dissatisfied savers, unlike the dissatisfied labourers, would not be able to get a better price for their capital elsewhere.Their only alternative would be to spend their actual or potential savings for present enjoyment. Now we have no empirical data to justify the assumption that any considerable number of savers would choose this alternative in preference to, say, three or two per cent. interest. The fact that any group of savers at present gets and insists on getting a higher rate, merely proves that they can get it, and that they are selfish enough to take advantage of the possibility. We know that some men who now obtain six per cent. interest would accept two rather than cease to save; yet they do not hesitate to demand six per cent. So far as we know, all present savers might take the same attitude. At any rate, we can not conclude that they would not take less from the fact that they now get more. Why then does not the rate of interest fall? If all present savers are getting a higher rate than is necessary to induce them to save, why do they not increase their savings to such an extent that the supply of capital will exceed the present volume of demand, and thus lead to a decline in the rate of interest? This is what happens when the price of consumption-goods rises appreciably above the minimum level that satisfies the most high-priced or "marginal" producers. There is, however, an important difference between the two cases. The capacity to produce more goods is practically unlimited, and the corresponding desire is also unlimited, so long as the price of the product exceeds the cost of production. The capacity to save is not unlimited, and the desire to save is neutralised and sharply restricted by other and more powerful desires. Hence it is quite possible that the price of capital, i.e., interest, is determined to only a slight degree by the "cost" of saving, being mainly dominated and regulated from the side of demand.
Even though many of the present savers and owners of capital should diminish or discontinue their functions on account of a fall in the rate of interest, a reductionwould not necessarily take place in the supply of capital. The function of these "marginal savers" would in all probability be performed by other persons, who would be compelled to increase their accumulations in order to provide as well for the future as they had previously been able to provide with a smaller capital at a higher rate of interest.[143]
While admitting that the present rate is unnecessarily high, Professor Cassel maintains that a certain important class of savers would diminish very considerably their accumulations if the interest rate should fall much below two per cent. This class comprises those persons whose main object in saving is a fund which will some day support them from its interest. At six per cent. a person can accumulate in about twelve years a sum sufficient to provide him with an interest-income equal to the amount annually saved. For example; two thousand dollars put aside every year, and subjected to compound interest, will aggregate in twelve years a principal capable of yielding an annual income of two thousand dollars. At two per cent. the same amount of yearly saving will not lead to the same income in less than thirty-five years. If the rate be one and one-half per cent., forty-seven years will be required to produce the desired income. Hence, concludes Cassel, if the rate falls below two per cent. the average man will decide that life is too short to provide for the future by means of an interest-income, and will expect to draw upon his principal. This means that he will not need to save as much as when he sought to accumulate a capital large enough to support him out of its interest alone.
The argument is plausible but not conclusive. If therate of interest is so low that a man must save for forty-seven years in order to obtain a sufficient interest-income to support him in his declining years, he will rarely attain that end. In the great majority of instances men who are unable to save more annually than the amount that they will need each year in old age, will expect and be compelled to use up a part or all of their capital in the period following the cessation of their economic usefulness. Nevertheless, it does not follow that they will save less at one and one-half per cent. than at six per cent. The determining factor in the situation is the attitude of the saver toward thecapital sum accumulated. He either desires or does not desire to leave this behind him. In the latter case he will save only as much as is necessary to provide an annual income composed partly of interest and partly of the principal. If this contemplated income is two thousand dollars, and the rate of interest is six per cent., he will not need to save that much annually for as long a period as ten years. He can diminish either the yearly amount saved or the length of time devoted to saving. On the other hand, if the rate is only one and one-half per cent. he will be compelled to save a larger total in order to secure an equal accumulation and an equal provision for the future. In all cases, therefore, in which the saving is carried on merely for the saver's own lifetime it will be increased instead of decreased by a low rate of interest.
If the saver does desire to bequeath his capital he will not always be deterred from this purpose merely because he is compelled to use some of the capital for the satisfaction of his own wants. Take the man who can save two thousand dollars a year, and with the rate of interest at six per cent. assure himself an interest-income of the same amount, and who intends to leave the principal (some thirty-three thousand dollars) to his children. Should the rate fall to one and one-half per cent. he wouldbe unable to accumulate and bequeath nearly such a large sum. Surely this fact, discouraging as it is, will not determine him to save nothing. He will not, as Cassel's argument assumes, decide to leave nothing to his children, and content himself with that amount of saving which will suffice to provide for his own future. In all probability he will try to accumulate a sum which, even when diminished by future deductions for his own wants, will approximate as closely as possible the amount that he could have bequeathed had the rate remained at six per cent. This means that he will save more at the low than at the high rate of interest.
The relative insignificance of the sum which would be saved at a low rate might sometimes, indeed, deter a person from saving for testamentary purposes. With the rate at six per cent., a man might be willing to save six hundred dollars a year for a sufficiently long period to provide a legacy of twenty thousand dollars to an educational institution. With the rate at one and one-half per cent., the amount that he could hope to accumulate would be so much smaller that it might seem to him not worth while, and he would decline to save the six hundred dollars annually. Cases of this kind, however, always involve the secondary objects of saving, the luxuries rather than the necessaries of testamentary transmission. They do not include such primary objects as provision for one's family. When the average man finds that he cannot leave to his family as much as he would desire, as much as he would have bequeathed to them at a higher rate of interest, he will strive to increase rather than decrease his efforts to save for this purpose.
Speaking generally, then, we conclude that the assumption underlying Professor Cassel's theory is contradicted by our experience of human motives and practices. Men who save mainly for a future interest-income, at the same time wishing to keep the principal intact until death, andwho could have fully realised this desire under a high interest régime, will not become entirely indifferent to it when they find that they cannot attain it completely. They will ordinarily try to leave behind them as large a capital or principal as they can. Hence they will save more rather than less.