73. SUMMARY AND FORECAST.—Production in the economic sense consists in doing that which will satisfy human wants. Modern production is a vast and complicated process, involving the co÷peration of five factors: land, labor, capital, co÷rdination, and government. In a later chapter we shall find that there are wide differences of opinion as to the relative importance of some of these factors. We shall find, indeed, that the most vital economic problems which confront American democracy depend for their solution upon a clear understanding of the facts stated or implied in this chapter. The student ought not, therefore, to accept hastily the statement that land, labor, capital, co÷rdination, and government are necessary in production, but ought rather to reason out just how and why each is actually helpful in American industry.
1. What are the chief reasons why men work?
2. Describe the "old way of getting a living."
3. Just what is meant by the "new way of getting a living"?
4. What were the chief effects of the Industrial Revolution?
5. What is the economist's definition of production?
6. Just how does Nature help in production?
7. Explain the relation of Nature to land.
8. Show how man's labor is necessary in production.
9. What is the nature and function of capital?
10. Discuss co÷rdination as a factor in production.
11. Name a fifth factor in production.
1. Williamson,Readings in American Democracy, chapter vii.
Or all of the following:
2. Carver,Elementary Economics, chapters ix-xiii.
3. Adams,Description of Industry, chapter v.
4. Ely,Outlines of Economics, chapter viii.
5. Smith,Wealth of Nations, Book I, chapters i and ii.
1. What instinct in man gives rise to the division of labor? (Smith, chapter ii.)
2. Name and distinguish between the two kinds of division of labor. (Carver, pages 77-82.)
3. How does pin making illustrate the principle of the division of labor? (Smith, chapter i.)
4. How does the meat packing industry illustrate the principle of the division of labor? (Ely, page 125.)
5. To what extent does the cotton mill illustrate the principle of the division of labor? (Ely, pages 124-125.)
6. What are the three fundamental advantages which result from the division of labor? (Smith, chapter i; Carver, pages 75-76; Ely, page 126.)
7. What are the effects of the complex division of labor upon the worker? (Ely, pages 127-128.)
8. Describe the chief sources of power utilized by man. (Carver, chapter x.)
9. Discuss the origin of capital. (Carver, chapter xi.)
10. What are the two factors which give value to land? (Carver, page 111.)
11. Explain the statement that thousands of individuals co÷perate to furnish the humblest workman with food and clothing. (Smith, chapter i.)
12. What is the secret of modern industrial efficiency? (Adams, page 87.)
1. Visit a factory, mill or shop in your vicinity and study the organization of the plant with regard to the application of the principle of the division of labor. Secure the amount of output per man by dividing the total product by the number of workmen co÷perating in its production. Compare the output per man under these conditions with the probable output per man if each workman were working separately, without material assistance from other workmen.
2. Study, both by inquiry and by observation, the effects of the division of labor upon the health and spirits of the workmen in the factory, mill or shop visited.
3. Classify the industries in your locality on the basis of whether they rely chiefly or entirely upon human, animal, water, steam or electric power. Why does each industry not utilize some other form of power than that actually used?
4. Classify some of the familiar occupation groups in your community according as they derive their incomes chiefly or entirely from land, labor, capital, or the process of co÷rdinating land, labor, and capital. Test the productivity of each group by the standard advanced in section 67 of the text.
5. Attempt to show to what extent each of the five factors of production has contributed toward the erection and furnishing of your schoolhouse.
6. The Industrial Revolution in England. (Ely,Outlines of Economics, chapter iv. Cheyney,Introduction to the Industrial and Social History of England, chapter viii.)
7. Colonial industries. (Lessons in Community and National Life, Series A, pages 73-83; Series B, pages 17-25; Series C, pages 17-25. See also Bogart,Economic History of the United States, chapter iv.)
8. The Industrial Revolution in the United States. (Bogart,EconomicHistory of the United States, chapter xii. Ely,Outlines ofEconomics, chapter vi. Marshall and Lyon,Our EconomicOrganization, chapter viii.)
9. The significance of the cotton gin. (Consult an encyclopedia.)
10. Cyrus McCormick and the reaper. (Consult an encyclopedia.)
11. The story of a loaf of bread. (Wood,The Story of a Loaf of Bread. Additional material on this subject may be secured by writing to the International Harvester Company, Chicago.)
12. The story of iron and steel. (Smith,The Story of Iron and Steel, pages 23-126.)
13. Development of business organization. (Lessons in Community and National Life, Series A, pages 169-178.)
14. Economic work of the United States government. (Dryer,Economic Geography, chapter xxxiii.)
74. RELATION OF THE DIVISION OF LABOR TO EXCHANGE.—In the self- sufficing stage that existed in industry a few hundred years ago, there was generally little necessity for the exchange of products. Each family produced most of the commodities which it needed, and depended relatively little upon the products of persons outside the family circle.
But the complex division of labor which developed out of the Industrial Revolution has made the exchange of products increasingly important. To-day the typical workman concentrates upon one particular kind of work, and is content to exchange a share of his earnings for the numerous goods and services which he cannot supply for himself. Exchange thus increases the total output of the community or nation by permitting individuals to specialize in those commodities which they can produce most effectively.
75. RELATION OF TRANSPORTATION AND COMMUNICATION TO EXCHANGE.— Exchange is largely dependent upon transportation and communication. In the United States, for example, not only do the individuals of a particular community specialize in various types of work, but the different sections of the country are devoted to the production of those commodities for which they are best suited. Thus it is largely true that New England is best suited to manufacturing, the South to the growing of cotton, and certain parts of the West to the production of lumber and foodstuffs. The suitability of a region to a particular class of products is due, partly to location, partly to the nature of the soil and the climate, and partly to the inclination and training of the people. But whatever its causes, this territorial division of labor could not be carried out without an efficient system of transportation and communication. Communication by mail, telephone, and telegraph is necessary to allow producers and consumers in different parts of the country to keep in touch with one another. Transportation by land and water is necessary if the surplus products of one section are to be exchanged for the surplus products of other sections.
76. TYPES OF COÍRDINATORS.—Those who perform the work of co÷rdination in industry are commonly referred to indiscriminately as business men, middlemen, or entrepreneurs. [Footnote: the term "entrepreneur" is awkward and little known, but no more satisfactory term is available.] The meaning of these three terms is distinguished with difficulty, but to avoid confusion later on the essential character of each should be pointed out here. The term business man is very wide, and is commonly inclusive of all who actively engage in any sort of business. The primary function of the middleman is to act as a connecting link between various industrial enterprises. The entrepreneur, on the other hand, is primarily an individual who co÷rdinates land, labor, and capital with the intention of initiating and conducting a business enterprise. In so far as he acts as a connecting link between other industrial agents, the entrepreneur is a middleman, but the middleman is usually thought of as an individual who connects up existing businesses, rather than initiating a new enterprise. To the functions of the entrepreneur we shall return in the next chapter; here it is the middleman proper who is our chief concern.
77. IMPORTANCE OF THE MIDDLEMAN.—The chief stages of shoe manufacture may serve to illustrate the great importance of the middleman in exchange. The middleman, anticipating a demand for beef and hides, connects the cattle grower with the live-stock market. Still later it is a middleman who offers raw hides to the tanner, and who sees that the wholesale leather merchant comes into business contact with the tanner. The banker or broker who connects the entrepreneur with the money with which to set up a shoe factory may be called a middleman, as may the individual who aids the entrepreneur in getting the required amounts of land and labor with which to start manufacturing. When, under the direction of the entrepreneur, the shoe has been manufactured, it is often a middleman who connects the shoe wholesaler with the finished product. The jobber who buys large quantities of shoes from the wholesaler and sells them to the retailer in small lots is a middleman. The advertising man whose description and pictorial representation of the shoe causes the consumer to buy it of the retailer is also a middleman.
78. NOT ALL MIDDLEMEN ARE SOCIALLY NECESSARY.—By co÷rdinating the work of these various individuals, many of whom are themselves middlemen, the middlemen whom we have been describing allow the community to secure the full benefit of the division of labor and of exchange. Where there exist just enough middlemen to co÷rdinate with maximum efficiency the various industrial agents of a community, the community gains. When, on the other hand, there are more middlemen at work than are really needed to perform the work of industrial co÷rdination, the community loses. This loss is a double one: first, the working energy of the superfluous middlemen is wasted, or at least is applied uneconomically; second, middlemen are paid, directly or indirectly, out of the product which they handle, so that the handling of a commodity by an unnecessarily large number of middlemen means higher prices for the ultimate consumers of that commodity. [Footnote: The existence of superfluous middlemen constitutes a grave problem, to which more and more attention is being given. Various aspects of this problem are discussed in Chapters XII and XXV.]
79. BARTER.—We have seenwhatthe middleman does; it remains to point outhow,or by means of what mechanism, he performs his functions. When savages, and civilized peoples living under primitive conditions, wish to exchange their surplus goods, they generally resort to barter,i.e.,they exchange one commodity directly for another. Where the division of labor has been so little developed that the goods to be exchanged are relatively few, this may work very well, but in modern industry barter would be inexpedient, if not impossible. The farmer who had a surplus of cattle and desired a piano might have great difficulty in finding a man who had a surplus piano and who also desired cattle. Even though the farmer liked the piano in question, and even though the owner of the piano were pleased with the farmer's cattle, it might be impossible to measure the value of the piano in units of cattle.
80. NATURE AND FUNCTION OF MONEY.—To facilitate exchange civilized peoples make an extensive use of money. Money may be defined as anything that passes freely from hand to hand as a medium of exchange. [Footnote: The terms "money" and "capital" are often used interchangeably. Strictly speaking, however, money is a form of capital. Moreover, it is onlyoneform of capital] In modern times gold, silver, nickel, and copper coins have been the most familiar forms, though paper currency is also an important form of money. There is nothing mysterious about money: it is simply a means of facilitating exchange by saving time and by guaranteeing accuracy in measuring the relative values of commodities.
Let us see how money actually aids in the exchange, say, of cattle and pianos. The farmer disposes of his cattle to a middleman, receiving in return money, the authenticity of which is guaranteed by the government's stamp upon its face. There is no difficulty in making change, for money can be so minutely divided as to measure the value of an article rather exactly. The farmer does not fear that he could not use the money received for the cattle, for money is generally accepted in exchange for any commodity. The farmer now offers the money to the piano-owner, who is probably a middleman. Again the fact that money is finely divisible allows an accurate money measure of the value of the piano. The owner of the piano, if he is satisfied with the amount of money offered, does not hesitate to accept the farmer's money, since he, too, realizes that he can use the money to purchase the things that he in turn desires.
81. VALUE AND PRICE.—We have used the term "value" several times; as part of our preparation for the study of the great problem of industrial reform, we must understand precisely what is meant by the term.
Suppose, for the sake of clearness, that we speak of a market as a definite place where goods are bought and sold. Individuals take or send their surplus products to the market for sale; individuals desiring to buy commodities likewise resort to the market. In the market commodities are said to have value, that is to say, they have power in exchange. The power of a commodity in exchange is measured in money, and the amount of money for which a commodity will exchange is called its price. Price is thus a measure, in terms of money, of the value of a commodity.
The value of a commodity in the market is dependent, partly upon its utility, or want-satisfying power; and partly upon its scarcity. In other words, the value of a commodity depends partly upon the intensity with which it is desired by persons able and willing to purchase it, and partly upon its available supply. Price is set as the result of the interaction of the forces of supply and demand, this interaction commonly taking the form of a bargaining process between prospective sellers and prospective buyers.
1. Explain clearly the relation between the division of labor and exchange.
2. To what extent is exchange dependent upon transportation and communication?
3. Name three types of co÷rdinators, and distinguish between them.
4. Illustrate the functions of the middleman with reference to the shoe industry.
5. Where there exist in a community more middlemen than are really needed, what double loss results?
6. What is barter?
7. Why is barter not extensively used in modern industry?
8. Define money.
9. What is the primary function of money?
10. Give an illustration of the service performed by money.
11. Define value. Distinguish between value and price.
12. Upon what two factors is value dependent?
13. How is price set or determined?
1. Williamson,Readings in American Democracy, chapter viii.
Or all of the following:
2. Adams,Description of Industry, chapter viii.
3. Carver,Elementary Economics, chapters xix, xx, xxi, xxii, and xxiv.
4. Hayward,Money, What It Is and How to Use It, chapter viii.
5. Smith,Wealth of Nations, Book 1, chapters iii and iv.
1. Name some commodities which at one time or another have been used as money. (Carver, pages 215-216.)
2. Why were precious metals first coined? (Smith, chapter iv.)
3. What is meant by the phrase "Time is money"? (Carver, page 183.)
4. What is the function of the bank check? (Hayward, pages 58-60.)
5. Explain the meaning of scarcity. (Carver, page 203.)
6. What are the characteristics of a modern market? (Adams, pages 139- 148.)
7. What is meant by the "higgling of the market"? (Adams, page 139.)
8. What is the "first law of the market"? (Carver, page 201.)
9. What are the four industrial agencies on which the organization and practice of the modern market depend? (Adams, pages 148-152.)
10. What is meant by the "widening of the market"? (Carver, page 171.)
11. Explain the statement that "the division of labor is limited by the extent of the market." (Smith, chapter iii.)
1. In the production of what commodities do the people of your section tend to specialize? To what extent is this specialization due to the nature of the soil and climate? To geographical location? To the training of the people?
2. What becomes of the surplus products of your section? Trace these products as nearly as possible to the ultimate consumer.
3. List the articles of food which appear on your dinner table and attempt to discover the source of each.
4. To what extent does the exchange of products in your section take place by means of canals, inland waterways, ocean-going vessels, motor truck, horse teams, railroads?
5. To what extent are the telephone and telegraph used to facilitate exchange in your section?
6. Visit a near-by market and study the operations there, with reference to the facts discussed in this chapter.
7. List and classify the middlemen of your community.
8. Internal trade and transportation in the United States a century ago. (Bogart and Thompson,Readings in the Economic History of the United States, pages 240-251.)
9. Transportation and communication in the United States since 1860. (Bogart,Economic History of the United States, chapters xxiv and xxv.)
10. Early forms of money. (Bullock,Selected Readings in Economics, pages 387-399.)
11. Forms of money at the present time. (Adams,Description of Industry, chapter x.)
12. Why coinage is necessary. (Bullock,Selected Readings in Economics, pages 399-400.)
13. The minting of coins. (Lessons in Community and National Life, Series C, pages 177-185.)
14. Paper money. (Lessons in Community and National Life, Series C, pages 185-192.)
15. Functions of money. (Adams,Description of Industry, chapter x.)
16. The commercial bank. (Lessons in Community and National Life, Series A, pages 187-192.)
17. An English fair in the eighteenth century. (Bullock,Selected Readings in Economics, pages 325-333.)
18. The development of business organization. (Marshall and Lyon,Our Economic Organization, chapters ix and x.)
82. THE PROBLEM PRIOR TO THE INDUSTRIAL REVOLUTION.—The distribution of industrial income has to do with dividing the products of industry, or the money which represents those products, among the various individuals who have aided in their creation.
The problem of distribution has existed ever since men first combined for purposes of production, but until the period of the Industrial Revolution the question was relatively unimportant. When, three hundred years ago, most necessities were produced within the family circle, there was little or no question as to whether or not individuals outside the family ought to be rewarded for having helped in the production of those commodities. If one member of the family made an entire pair of shoes, for example, he was clearly entitled to those shoes, at least so far as economic principles are concerned. Even where different members of the family combined to produce a pair of shoes or an article of clothing, the small number of persons involved, as well as the close identity of interests among the family members, kept the problem of distribution from becoming a serious one.
83. EFFECT OF THE INDUSTRIAL REVOLUTION UPON THE PROBLEM.—The Industrial Revolution greatly increased the importance of the problem of distribution. Indeed, the growth of the factory system, and the greater and greater complexity of the division of labor, have made the distribution of industrial income the basic problem in our economic and social life. Many commodities are still produced by individuals working independently, or by the joint efforts of the members of a family, but the vast majority of commodities are now produced by the joint efforts of numerous individuals who are not bound together by family ties. The production of a factory-made shoe, for example, involves large numbers of people, including the cattle grower, the transportation agent, the tanner, numerous laborers, the individuals who supply land and capital to the entrepreneur, and the entrepreneur who conducts the enterprise. The welfare of millions of people is involved in the distribution of industrial income among individuals who co÷perate in such enterprises as this.
84. DIFFICULTY OF THE PROBLEM.—Under modern industrial conditions most commodities are produced by the combined efforts of large numbers of people. All these people help along the productive process, though in different ways and to a varying degree. Since all help, all are entitled to payment. But this is less simple than it sounds. How shall we determine how much each one helps, and how shall we decide how much each one is to receive?
At the outset of the discussion, we can be sure of at least one fact,i.e.that since all the individuals involved in a given enterprise must be paid out of the value of the finished product, the combined sums received by them cannot long exceed the total value of that product. Unfortunately, this fact is often overlooked. Many of the individuals who aid in production often become so intent upon securing their share, that they are over-ready to explain their contribution to the product, but loath to give due credit to those who have co÷perated with them. It is the belief that some individuals receive too little of the joint income of industry, while other individuals receive too large a share, which has given rise to the charge of injustice in the distribution of wealth.
85. SIGNIFICANCE OF THE ENTREPRENEUR IN DISTRIBUTION.—For the sake of clearness, let us continue to illustrate the nature of distribution by reference to the shoe industry, carried on under conditions which are not unduly complicated.
The individual having control of the actual manufacture of the shoes is the entrepreneur. It is he who, in anticipation of a demand for shoes, has initiated the enterprise. Suppose, for the sake of simplicity, that the entrepreneur has secured land from the land- owner, capital from the capitalist, and labor from the workmen. Protected in a legitimate enterprise by the government, he has set himself up as a manufacturer of shoes. Since he is in control of the enterprise, it is he who pays the land-owner, the capitalist, and the laborers, for their respective contributions toward the finished shoes.
The amounts received by the individuals co÷perating with the entrepreneur are not, however, arbitrarily determined. The entrepreneur must bow to economic law, and give these individuals what free competition in industry sets as a proper reward for their respective services. Let us examine into this conformity to economic law.
86. THE LAND-OWNER RECEIVES RENT.—The land-owner is rewarded because he extends the use of land to the entrepreneur. A land-owner could not be expected to, and will not, allow the entrepreneur free use of this land. The land-owner must therefore be paid for the use of the land. The entrepreneur, on the other hand, is able and willing to pay for the use of the land because upon it he expects to build a factory in which to manufacture shoes. He therefore pays the land-owner an amount of money called rent. The amount of rent paid for a piece of land depends partly upon how much the entrepreneur wants the land, and partly upon the available supply of land of the type wanted. This is equivalent to saying that rent is determined by the interaction of the two forces of supply and demand.
87. THE CAPITALIST RECEIVES INTEREST.—Besides land, the entrepreneur needs machinery, office equipment, raw materials, the services of laborers, and numerous other aids in production. Let us assume that the entrepreneur borrows of a capitalist the money required to procure these necessities. The entrepreneur can afford to pay interest for the use of this money, since with the aid of the goods and services which it will buy, he can produce more shoes than would otherwise be possible. Not only can he afford to pay interest, but he is obliged to pay it, since otherwise he could not secure the required loan. Though some people tend carelessly to overlook this fact, saving and abstinence are necessary to the accumulation of money. The individual who has money, therefore, cannot be expected to allow the entrepreneur to use it without payment, especially not when, as we have just seen, the entrepreneur can acquire wealth by the use of the goods and services which that money will buy.
The amount of interest which the capitalist receives for the use of his money will depend, as will rent, upon the law of supply and demand. If there is a large amount of funds available for investment, and at the same time few borrowers, then a given capitalist must be content to accept a relatively low rate of interest, lest his refusal cause the entrepreneur to close a bargain with a competing capitalist. If, on the other hand, available funds are scarce and entrepreneurs are greatly in need of money, then capitalists are at an advantage and entrepreneurs must offer relatively high rates of interest.
88. THE LABORERS RECEIVE WAGES.—The payment which the laborers receive for their part in the production of the shoes is called wages. Since the laborers help in shoe manufacture, the employer can afford to pay them. Not only can he afford to pay them, but he must pay them. Otherwise the laborers would not work for this particular entrepreneur, but, in a freely competitive market, would offer their services to a competing employer.
Wages, like rent and interest, depend upon the conditions of supply and demand. If, in comparison with other aids in production, the services of laborers are wanted badly, and if, at the same time, there is a scarcity of the desired type of labor, then wages will be high. If, on the other hand, there is an over supply of laborers, and also a small demand for that type of labor, then wages will tend to be low.
89. THE GOVERNMENT RECEIVES TAXES.—In addition to paying the land- owner, the capitalist, and the laborers for their share in producing the shoes, the entrepreneur must pay taxes to the government. These taxes may be considered as payment for that maintenance of law and order without which the economical manufacture of shoes would be impossible. The share which goes to the government is determined by a unique method: the government does not try to secure as large a share of the product as possible, but strives, on the contrary, to exact as little as possible, and still meet its expenses. The subject of taxation requires special treatment [Footnote: See Chapter XXXII.] and does not, therefore, call for further mention in this chapter.
90. THE ENTREPRENEUR RECEIVES PROFITS.—That share of the income derived from the sale of the shoes which goes to the entrepreneur is called profits. It is only fair that the entrepreneur receive some reward, for it is he who conceived the idea of shoe manufacture and then carried out the project. Without his efforts the land-owner, the capitalist, and the laborers would not have combined in this enterprise, with the result that there would have been fewer shoes in the community. Fewer shoes would probably mean more expensive shoes. And not only does the entrepreneur deserve some reward for thus adding to the well-being of the community, but if he did not receive that reward, he would not go to the trouble of initiating and maintaining a shoe manufacturing establishment.
The share going to the entrepreneur is determined less exactly than is the share of the land-owner, the capitalist, and the laborers. In dividing up the income of the business, the shoe manufacturer must, in an important sense, put himself last. Before there are finished shoes to sell, he must pay the land-owner rent, the capitalist interest, and the laborers wages. Before he is allowed to count out his own share he must also pay taxes to the government, pay insurance on his plant, and set aside an amount sufficient to keep his buildings and machinery in repair. He cannot evade the payment of rent, interest, or wages on the plea that these payments will diminish his profits. He has contracted to pay the landlord, the capitalist, and the laborers, and he must fulfill that contract. If, after paying all of his expenses, there is anything left, the entrepreneur retains it as profits. Sometimes this share is very large, sometimes it is so small as to force the entrepreneur out of business. In any case, the chief risks and responsibilities of the whole enterprise are concentrated upon the entrepreneur, rather than upon the land-owner, the capitalist, or the laborers.
91. THE DETERMINANTS OF EACH SHARE.—To sum up, the share of the joint industrial income going respectively to the land-owner, the capitalist, and the laborers is determined by the interaction of the forces of supply and demand, operating under conditions of free competition. The entrepreneur's demand for land, labor, or capital will depend upon whether or not he sees an opportunity, under a particular set of circumstances, to add to his product by the employment of each or all of these factors. Where the supply of laborers is large, relatively to demand, the promised product of any one laborer is likely to be relatively small, and in this case the entrepreneur or employer will be unwilling or even unable to offer a particular laborer high wages. Under these circumstances the competition of the many laborers for the few jobs will accordingly bring about lower wages. Where, on the other hand, the supply of laborers is small, relatively to demand, the chances that a particular laborer will be able to add to the product are relatively great, and the competition of employers for laborers will result in higher wages. The same reasoning is applicable to rent and interest. The automatic operation of the law of supply and demand, functioning in a freely competitive market, determines the shares which go to land, labor, and capital. The share going to the individual entrepreneur is, as has already been pointed out, a residual share,i.e.what is left over.
1. What is meant by the distribution of industrial income?
2. Why was this distribution of relatively small importance prior to the Industrial Revolution?
3. In what way did the Industrial Revolution accentuate the importance of the problem of distribution?
4. What are the chief difficulties which confront the student of this problem?
5. What belief has given rise to the charge of injustice in the distribution of wealth?
6. Explain the significance of the entrepreneur in distribution.
7. What is the nature of rent?
8. Why does the capitalist receive interest?
9. Why does the laborer receive wages?
10. What is the government's share in distribution?
11. What is the nature of profits, and how are they determined?
1. Williamson,Readings in American Democracy, chapter ix.
Or all of the following:
2. Carver,Elementary Economics, chapters xxx and xxxi.
3. King,Wealth and Income of the People of the United States, chapter vii.
4. Thompson,Elementary Economics, chapters xx to xxiv inclusive.
1. What is meant by non-competing groups? (Thompson, page 296.)
2. What are the chief causes of the difference in wages in different occupations? (Carver, page 268.)
3. Upon what factors does the efficiency of the laborer depend? (Thompson, page 303.)
4. What is the functional theory of wages? (Carver, pages 261—262.)
5. Have wages increased or decreased since 1850? (King, page 173.)
6. What is the relation of risk to interest? (Thompson, pages 351— 353.)
7. What is meant by the term "unearned increment"? (Thompson, pages 335—337.)
8. Define profits. (King, pages 155—156.)
9. Have profits increased since 1880? (King, page 177.)
10. Name some of the characteristics of the business man. (Thompson, pages 357—358.)
1. Select for study some common commodity which passes through all or most of the stages of manufacture in your community, as, for example, a hammer, a shoe, flour or canned goods. Make a list of the various individuals who are connected with the production of this commodity. By whom are these various individuals paid? Does it appear to you that their services bear a close relation to the sums which they receive? Explain fully.
2. Select for study a plot of land which the owner has leased to a tenant in your community. Why is the tenant willing to pay rent for this plot? Why is he able to pay rent? Do you believe that under the existing circumstances he would be able to pay an increase of 10% in the rent? An increase of 50%? Explain.
3. Select for study an enterprise in your community in which the employer utilizes various groups of workmen. Classify the workmen on the basis of the amount of wages received. Why does the employer pay some high wages and others low wages?
4. Select for study a successful entrepreneur in your community. Outline, either as the result of hearsay, or personal interviews with him, the qualities to which he apparently owes his success.
5. Make a study of an enterprise in your community which has either recently failed, or which is not now in a thriving condition. Attempt to discover the reasons for the failure to progress.
6. The law of variable proportions. (Carver,Elementary Economics, chapter xxix.)
7. The nature of income. (King,Wealth and Income of the People of the United States, chapter v.)
8. Relation of public education to income. (Thompson,Elementary Economics, pages 299-303.)
9. Reasons for the scarcity of capital. (Carver,Elementary Economics, chapter xxxvi.)
10. The productivity of capital. (Taussig,Principles of Economics, vol. ii, chapter xxxviii.)
11. Historical changes in the rate of interest. (Bullock,Selected Readings in Economics, pages 563-568.)
12. The rent of land. (Carver,Elementary Economics, chapter xxxiii.)
13. Causes of the scarcity of labor. (Carver,Elementary Economics, pages 270-271.)
14. Historical changes in the rate of wages. (Bullock,Selected Readings in Economics, pages 533-543.)
15. The nature of profits. (Carver,Elementary Economics, chapter xxxvi.)
16. Relation of profits to risk. (Taussig,Principles of Economics, vol. ii, chapter xlix, section 1.)
17. Qualities of a successful entrepreneur. (Taussig,Principles of Economics, vol. ii, chapter xlix, sections 3 and 4.)
18. Motives of business activity. (Taussig,Principles of Economics, vol. ii, chapter xlix, section 6.)
19. The government's share in distribution. (Carver,Elementary Economics, chapter xxxvii.)
92. THE "CAPITALISTIC SYSTEM."—Modern industry is sometimes said to be headless, because the numerous individuals engaged in it are not systematically controlled or directed by a single agency. It is often said to be planless, since laborers, employers, and other industrial agents concentrate upon their individual desires and needs, rather than upon the needs of the community or nation as a whole.
And yet there is in modern industry a certain regularity of outline, and a general tendency to follow the economic laws discussed in the preceding three chapters. This circumstance prevents us from concluding that our industrial life is entirely a haphazard affair. It may, indeed, be said that we have an industrial system. Because of the great importance in it of capital, this system is commonly known as the "capitalistic system." The underlying principles of this system have already been mentioned or implied; nevertheless it will be to our interest in this chapter to develop and organize these principles so as to indicate just how they constitute the bases of capitalism.
93. ATTITUDE OF GOVERNMENT TOWARD INDUSTRY.—"It is the duty of the government," Gladstone once said, "to make it easy for the people to do right, and difficult for them to do wrong." According to the theory of the capitalistic system, that is "right" which renders the individual and the community stronger, happier, and more prosperous in useful pursuits, while that is "wrong" which weakens or demoralizes the citizen and the community. The chief economic function of government is thus to discourage men from harmful and destructive acts, and to encourage them in activities which are helpful and productive.
Professor Carver points out that the method by which animals get their living is either destructive, deceptive, persuasive, or productive. Any one of these four methods may at least temporarily increase the well-being of the individual, but only the productive method is certain to benefit the community as well. A good government will therefore seek to prevent people from advancing their individual interests by killing, robbing, or deceiving their fellows. This suppression of violence and fraud leaves open to individuals only the productive method of getting a living, so that they cannot benefit themselves without at the same time adding to the prosperity of the community. From the standpoint of capitalism, thus, a good government maintains an attitude toward industry which is primarily negative: such a government hampers the economic activities of individuals very little or not at all, so long as they do not practice harmful methods of getting a living.
94. PRIVATE PROPERTY.—Most men are self-centered. In even a highly developed society, men ordinarily will not work consistently except in their own behalf, or in the behalf of a very few people for whom they care intensely. This instinct of self-interest is the kernel of industrial progress, but it can result in material prosperity only when government suppresses violence and fraud. The lowest savages are undoubtedly self-centered, but so long as they must rely upon brute force to retain their possessions, there is little inducement to acquire wealth. It is only when law suppresses robbery and fraud, and otherwise protects the individual in his property rights, that the acquisitive instinct will cause him to exert himself in productive ways. Because it satisfies the individual's desire to secure the good things of life, the institution of private property is the greatest known spur to economic activity, It is only in those countries where individuals are protected in their property rights that we find an active, progressive, and prosperous people.
95. ENFORCEMENT OF CONTRACTS.—We have already seen that among the members of a modern industrial society there is a high degree of interdependence, corresponding, in an important sense, to the interdependence between the parts of a machine. As we have seen, the typical individual in industry is a specialist, concentrating upon one particular kind of work, and depending upon his fellows to supply him with goods and services which he cannot supply for himself. Now, such a condition of interdependence could never have arisen were it not for the fact that government fosters the spirit of confidence among individuals. Many persons can be trusted to fulfill the agreements or contracts which they make with their fellows, but many cannot. A prime function of government, therefore, is to enforce contracts entered into voluntarily and in legal form. This is clearly essential to our material prosperity, for if men are to rely upon the word of those who sell them goods or services, or to whom they sell goods or services, all of the individuals concerned must be dependable.
96. COMPETITION.—A good government will shunt men into productive activities, and it will insist upon the fulfilment of lawful contracts. Subject to these two limitations, individuals are relatively free to seek their own well-being. But an earmark of economic goods is scarcity, that is, there are at a given time and place fewer of them than are desired. Men must therefore compete with one another for goods and services. The lower animals compete for food with tooth and claw; among civilized men government tries to raise competition to an ethical plane by tending to suppress all but the productive methods of competition.
Where competition is so restricted and safeguarded, advocates of capitalism assert that the results are overwhelmingly good. Where there is free competition,i.e.free competition in productive enterprise, employers commonly pay their laborers as high a wage as they feel is justified under the particular circumstances, lest their workmen abandon them for rival employers. Under similar conditions, laborers will generally endeavor to render the best possible service, so that the employer will prefer them to other laborers. This assumes, of course, that competition is effective,i.e.,that there is neither an oversupply or an undersupply of either employers or employees.
Where, again, there is free competition in productive enterprise, the price of commodities produced by a given concern cannot rise too far, for consumers will either buy those commodities of rival producers, or will use substitutes. If, on the other hand, prices drop so low that producers make little or no profits, they will withdraw from business.
Free and effective competition thus means rivalry in satisfying wants, that rivalry being engaged in for the sake of private gain. Competition tends to harmonize the interests of the individual with the interests of the community, by making the success of the individual depend primarily upon what he accomplishes for his fellows.
97. VALUE UNDER CONDITIONS OF FREE COMPETITION.—In a competitive market, as we have seen, value depends upon scarcity and utility. No one will ordinarily pay for a commodity unless it will satisfy his wants, i.e. unless it has utility. But even though a commodity has utility, no one will ordinarily pay for it unless it is so scarce that he cannot get as much of it as he wishes without paying for it. Air, for example, has great utility, but it is so abundant that it can ordinarily be secured without payment. Hence it has no value.
Price, the measure of value in terms of money, will be determined, under conditions of free competition, by the interaction of utility and scarcity. Diamonds are high in price because they satisfy intense desires and are scarce; bread is cheap because while possessing great utility, it is relatively abundant. Skilled labor receives high wages because in addition to its utility it is relatively scarce; unskilled labor often receives low wages because while possessing utility it is relatively abundant. This principle is of the very greatest consequence, and in considering the programs of industrial reform we shall come back to it again.
98. FREEDOM.—A large measure of personal liberty is a characteristic of the capitalistic system, To an increasing extent, government is restricting economic activity to productive channels, but with this qualification, the individual is comparatively free to do as he likes. The laborer is free to move about in search of work, free to seek a better job, free to accept or to reject work offered him. He may abandon his job when he chooses, and remain idle as long as he chooses, or is able. He is repressed by no paternalistic government, embarrassed by no feudal system. He is part and parcel of the competitive system, guiding his own actions and accepting responsibility for them. To a large extent, the employer is similarly free to hire or discharge men as he sees fit, to initiate a new business, or to withdraw from business altogether. In every case the individual is free, so far as legal restrictions are concerned, to use his money as he chooses. Whether it is hoarded, invested, or wasted is largely a matter for him to determine.
99. BENEFITS OF THE CAPITALISTIC SYSTEM.—The material prosperity of the modern world has been attained under the capitalistic system of industry. The system was not invented, but has developed and spread from small beginnings because the experience of centuries has proved it to be the best known system which is applicable to human industry. The starting point of all material prosperity has been the gradual development of government which suppresses violence and fraud, which enforces contracts, and which makes possible the rise of the institution of private property. The inception of the Industrial Revolution, and its spread beyond England to Europe, America, and, later, to Asia, were possible only because these bases of capitalism were already laid. To a large extent, thus, the steam engine, the railroad, the steamship, the electric light, and countless other inventions which have helped to revolutionize the world we live in, may be traced directly or indirectly to individual freedom and to the protection of property rights. In so far as science, art, and literature depend, to a considerable degree, upon material prosperity, we may go so far as to say that capitalism is the most important single basis of modern civilization.
100. DEFECTS OF THE CAPITALISTIC SYSTEM.—But capitalism is not without its defects. The lack of centralized control in industry allows of planless production. [Footnote: During our participation in the World War, it is largely true that much of the productive energy of the country was organized and directed as a unit. This was a temporary expedient, however, resorted to for the purpose of winning the war.] Entrepreneurs frequently produce without adequate knowledge of demand, and without knowledge of rival production. When business is booming and profits are high, it often happens that so many individuals go into business that eventually there is over-production, i.e. there are more goods at a particular time than can be sold at a profit. Crises, unemployment, and "hard times" are often the direct result of this over-production. Malnutrition, disease, vice, crime, and pauperism are often its indirect results.
In still other ways the capitalistic system allows of an uneconomical expenditure of labor and capital. There is no adequate method of directing labor and capital toward the production of durable and helpful commodities, and away from the production of luxuries and such harmful commodities as have not been made illegal. Under competitive conditions, too, a number of shops or stores may exist in a community that might easily be served by a single firm. This is wasteful duplication, just as advertising is a waste when it goes beyond the point of informing the public as to whereabouts and character of commodities. Still another source of waste is traceable to an excessive number of middlemen, each of whom adds to the price of the product as it passes through his hands.
101. THE INEQUALITY OF WEALTH.—In all of the great industrial countries of the world, including the United States, the existing distribution of wealth is roughly in the form of a pyramid, i.e., at the top or apex of the pyramid there is a relatively small number of persons who enjoy large incomes, while at the base there is a large number with relatively small incomes. This inequality is explained by Professor Taussig on two grounds: First, it is likely that some individuals originally secured an economic advantage over their fellows because of inborn superiority of some kind. Second, the economic advantage thus secured has been maintained from generation to generation by inheritance. Where, for example, wealth is invested so that the principal remains intact while a large annual income is thrown off as interest, the heirs may live in affluence, regardless of ability or desert. Thus we have a leisure class emerging as the result of inborn differences between men, supplemented by the accumulation of wealth and its transmission by inheritance.
102. THE QUESTION OF INDUSTRIAL REFORM.—It goes without saying that great inequalities in the distribution of wealth are undesirable. If any improvement is humanly possible, we ought not to rest content so long as millions of our citizens have too few of the good things of life, while others have much more than is necessary for comfort and happiness. The test of an economic system is whether or not it provides a good world to live in, and so long as large numbers of individuals have fewer necessities and comforts than it is possible to give them, our economic system must be considered defective. The people as a group are both the means and the end of progress. Democracy cannot rest upon any other basis than the greatest good to the greatest number.
103. APPROACHING THE PROBLEM.—In approaching the problem of industrial reform it is necessary to cultivate a fair and sane attitude. We must attack all of the problems of American democracy, certainly. But in so far as some of these problems involve the integrity of the capitalistic system, we should distinguish between ills which are clearly traceable to that system, and defects which obviously would exist under any industrial system. Capitalism cannot be discredited, for example, by pointing out that crime exists in all capitalistic countries. Though capitalism may accentuate some types of crime, our knowledge of human nature leads us to suspect that a considerable amount of crime would exist under any known system of industry. Again, criticism should be constructive; it is easy to point out the defects of an institution, but it is quite another thing to provide a good substitute for that institution.
The problem before us is a double one: First, can we remedy the defects of the capitalistic system? And, if so, by what method shall we proceed? Second, if the defects of capitalism cannot be remedied, what industrial system shall be substituted for capitalism? It is not a question of whether or not capitalism is faulty, but of whether it is more faulty than the system that would be substituted for it. The virtues of capitalism, most authorities believe, clearly outweigh its defects, and though some other system may eventually prove to have as great virtues with fewer defects, the burden of proof is upon those who advocate other systems than capitalism. Until the advantage is clearly shown to be on the side of a rival system, it will be wise to retain capitalism.
1. Is it correct to speak of a "capitalistic system"?
2. What is the chief economic function of government?
3. Name the four methods of getting a living. Which will be encouraged by a good government?
4. To what extent is the attitude of a good government toward industry a negative one?
5. What is the relation of government to the institution of private property?
6. What is the importance of laws requiring the enforcement of contracts?
7. Why is there competition?
8. How does competition tend to harmonize the interests of the individual with those of the community?
9. Why are diamonds high in price? Why is bread low in price?
10. What is the relation of capitalism to economic freedom?
11. What can be said as to the benefits of capitalism?
12. What are the chief defects of capitalism?
13. Outline the existing distribution of wealth.
14. On what two grounds does Professor Taussig account for this situation?
15. What facts should be borne in mind in attacking the problem of industrial reform?
1. Williamson,Readings in American Democracy, chapter x.
Or all of the following:
2. Ely,Outlines of Economics, chapter ii.
3. Fetter,Modern Economic Problems, chapter ii.
4. Hobson,Evolution of Modern Capitalism, chapter i.
5. Seligman,Principles of Economics, chapter ix.
1. Define capitalism. (Hobson, page 1.)
2. How has the development of mines affected the growth of capitalism? (Hobson, page 6.)
3. What is the relation of colonization to capitalism? (Hobson, pages 10-12.)
4. What is the relation of capitalism to a large labor supply? (Hobson, pages 13-14.)
5. Define private property. (Ely, page 21.)
6. Discuss the theories of private property. (Fetter, pages 18-20.)
7. What were the earliest forms of private property? (Seligman, page 126.)
8. What was the effect of the domestication of animals upon the institution of private property? (Seligman, pages 126-127.)
9. What are the limitations of private property? (Fetter, pages 20- 21.)
10. What is meant by the term "vested interests"? (Ely, pages 25-26.)
11. What is "fair" competition? (Ely, pages 29-30.)
1. Suppose an unscrupulous individual fraudulently secured possession of property belonging to you. What steps would you take to secure justice?
2. What penalties are inflicted in your state for highway robbery, embezzlement, theft, forgery, and similar crimes against property?
3. Suppose that you are a florist and that you have ordered a large quantity of flowers from a greenhouse keeper for your Decoration Day trade. Assume that you could not sell the flowers at a profit if they arrived later than Decoration Day. Assume, also, that you have reason to suspect that the greenhouse keeper will not be prompt in delivering the flowers ordered. Draw up a contract (to be signed by him) which would protect you against his tendency to carelessness.
4. Select for study an isolated rural district, a small town, or a section of a suburb in which the community secures its supply of a given commodity from a single shop or store. Compare the price of the commodity, and its quality, with the price and quality of a similar commodity in stores located in communities served by several competing stores. What do you conclude as to the value of competition?
5. Make a study of bill-board advertising, listing the number of advertisements inviting purchase of competing commodities. Write to a bill-board advertising company for advertising rates, and draw your conclusions as to (a) the cost of advertising, and (b) the waste involved in advertising competing commodities.
Make a similar study of magazine advertising, writing to the advertising manager of the magazine selected for study, in order to secure advertising rates.
6. Relation of good government to economic prosperity. (Carver,Elementary Economics, chapter vii.)
7. Competition. (Seligman,Principles of Economics, chapter x.)
8. Methods of struggling for existence. (Carver,Elementary Economics, page 40.)
9. The development of economic freedom. (Seligman,Principles of Economics, chapter xi.)
10. Distribution of wealth in the United States. (Taussig,Principles of Economics, vol. ii, chapter liv; King,Wealth and Income of the People of the United States, chapter ix.)
11. Place of machinery in the capitalistic system. (Hobson,Evolution of Modern Capitalism, pages 27-29.)
12. The impersonality of modern life. (Lessons in National and Community Life, Series B, pages 97-104.)
13. The extent of poverty in modern life. (Burch and Patterson,American Social Problems, chapter xvi.)