§1.A Reference to Marx.. Interest is the price paid simply for the use of capital. But what is capital, and in what does its use consist? What claim has it to be regarded as an independent factor of production? Our very familiarity with the term, our habit of employing it with the rich looseness of every-day life is an obstacle to the clearness of thought, which is again essential. We recognize, most of us, clearly enough that capital, although we reckon it in terms of money, consists, like income, of real things; factories, machinery, materials and the like. It is quite obvious that these things are of use, are, indeed, indispensable for production; what more natural than that capital should command a price? It almost seems as though we might pass, without further ado, to a detailed discussion of the forces which determine the amount of this price.
But this account does not bring out the essential point as brief reference to a very famous controversy will show. Some ingenious writers in the last century, the most notable of whom was Karl Marx, set out to prove that, in our modern society, workpeople are "exploited," robbed of the "whole produce of their labor," to the full extent of the return which accrues to capital. The argument was exceedingly complex in detail; but it boils down to this: The factories andmachinery which are admittedly essential to production were themselves produced in exactly the same way as consumable goods. They were produced by labor, working with the assistance of nature, and, again, if you choose, of capital in the form of further factories, machinery, etc. But these further capital goods can in their turn be regarded as the product of labor, nature and capital; and so we can proceed until it seems as though the element of capital must disappear in the last analysis, as though labor and nature were the sole ultimate agents of production, and the reward of capital represented no more than the exercise of the exploiter's power. In one form or another this argument still dominates the minds of a large proportion of the so-called "rebels" against the existing social order.
If we are to meet this argument, if, which is perhaps more important, we are to understand the true nature of capital, we cannot rest content with saying that it consists of factories and machinery, and that these are essential to the worker. Just as it was well to get behind the money terms, in which we often think of capital, to the real goods; so we have now to get behind the real goods to something else. What this something else is, the first chapter may have already done something to reveal.
§2.Waiting for Production.Between production and consumption there is an interval of time. All productive processes take time to accomplish. The farmer must plow the soil and sow the seed months before he can reap the harvest which will reward him for his efforts. Meanwhile, he must live, and in orderthat he may live he must consume. If he employs laborers he must pay them wages, that they too may consume and live. For both purposes he requires purchasing power, which represents of course command over real things; and if he has not sufficient purchasing power of his own, he must borrow from someone else who has. In either case it is not enough that the farmer and his laborers should work; no less essential is it that someone shouldwait. The farmer must wait till he has sold his crops, both for the reward of his own labor and for the repayment of the wages he advances in the meantime to his laborers. Or, if he cannot afford to wait, and borrows in anticipation of the harvest, then the lender must wait, until the farmer, having sold his crop, is able to repay him. Thus the period of time involved in all production gives rise to a demand forwaiting, which someone or other must supply, if the production is to take place. It is this waiting which is the essential reality underlying the phenomena of capital and interest. It is really this which constitutes an independent factor of production, distinct from labor and nature, and equally necessary.
§3.Waiting for Consumption.But let us carry the argument a step further. After the farmer has sold his crops, there are many stages through which they must pass, at each of which more waiting is required, before they reach the ultimate consumer. But then the waiting is at an end.
This, however, is by no means the case with a great number of commodities. Let us take the case of a speculative builder. While he is building a house he,like the farmer, must wait (or find someone to wait on his behalf), for his own reward, and for the repayment of his expenditure on wages and materials. But, after the house is built, if he lets it to a tenant for an annual rent, his waiting is far from over. Not until many years have passed will the rent payments add up to a sum which equals or exceeds his outlay. He may, of course, sell the house, and thus bring his waiting to an end. But then the purchaser must wait, no matter whether or not he is the occupier. For no one would consider the use of a house for a day, a month, or a year as an adequate return for the price it cost to buy. The occupier-owner pays for the prospect of its use for a long and perhaps indefinite number of years ahead, and he must wait to enjoy the benefits for which he pays now in full. Waiting is as inherent in the consumption of durable things as it is in all production.
Now most industries are consumers of durable things of a very expensive kind. Here we come back to the factories and machinery which ordinarily spring to our mind at the mention of the word capital. Not merely does the construction of these things involve waiting; their consumption involves waiting on a vastly larger scale. Just as with a house, many years must elapse before their derived utility can even approximate to their purchase price. It is mainly to supply the waiting involved in the consumption of such durable goods, that a typical joint-stock company issues shares for public subscription. The waiting required to cover the period of time, which its own productive process requires, is largely supplied by means of bank overdrafts or other forms of short-period borrowing. Morestrictly, fixed capital represents the waiting involved in the consumption of durable things; circulating capital the waiting involved in current production.
This distinction loses its sharpness when we consider not the affairs of a particular business, but the industrial system as a whole. Then the period of time involved in the consumption of durable instruments falls into place as part of the time required for the production of the ultimate consumers' goods. We can even, perhaps, conceive of an "average period of production" for industry and commerce as a whole; and this conception is not without its uses. For it serves to bring out the fact that the period of consumption, and the period of production in the narrower sense, are only two aspects of the same fundamental thing, the interval of time which elapses between work and the utility, which is its ultimate purpose. It serves, moreover, to make clear that anything which lengthens this interval of time increases the demand for waiting, or in other words, the demand for capital; and, conversely, that anything which shortens this interval diminishes the demand for capital.
§4.Capital not a Stock of Consumable Goods.But the distinction between the two forms of waiting, though not fundamental, is none the less worth noting. It enables us to keep our theory in conformity with fact, to look at the phenomenon of capital the right way up; and it is easy, if we are not careful, to slip into the habit of looking at it upside down. People sometimes speak as though the commodities which constitute our capital, instead of being mainly, as ourplain sense tells us that they are, factories, machinery and other durable instruments, were rather astoreorstockof immediately consumable goods. The argument takes the following form. It is consumers' goods, things like food and clothes, which the farmer, the builder and their workpeople consume while they are working. To enable them to work, therefore, it is vital that such things should not in the past have been consumed as soon as they were made; part of them must have been saved, and carried forward for future use. Furthermore, the longer the time that the work on which people are now engaged takes to yield its product, the larger must be this store of consumers' goods. For these products, when they are completed, will serve (taking society as a whole) to replace the store which in the meantime is being used up, so that the longer this replacement takes, the larger must be the initial store. Conversely, the larger the store of consumers' goods available, the more distant is the future for which we can afford to work. It is thus the store or stock of consumers' goods which represents our real capital; for it is the magnitude of this store which determines how far we can devote our energies to purposes which are remote in time.
Now this is pure mysticism. Regarded literally, it is in direct conflict with the facts. The processes of industry are fairly regular and continuous. At any moment, large quantities of consumers' goods of almost every kind are on the point of completion; at the same moment equally large quantities are consumed. The things which we buy were finished, very likely, only recently; or, if in fact they have lain idle for sometime in stock, there is nothing essential or at all helpful in that fact. It represents rather a defect—a maladjustment which should be rectified. Even many kinds of agricultural produce do not need to be carried forward from one year to another, for they are produced in many parts of the world, where the seasons come at different periods of the year. It is conceivable, therefore, that we might consume all non-durable things the moment they were ready, and the degree to which we approximate to this ideal is a mark of the efficiency of our economic system. A large store of consumable goods is thusnota fundamental necessity of a prosperous society.
Whatisnecessary is plainly the power to produce these things in large quantities as they are required. And this power is furnished by the durable instruments of production, which we thus rightly regard as the true representatives of modern capital. If it is argued that this power to produce consumable goods may be regarded as beingin effecta store of consumable goods, it must be sternly replied that this is the language of symbolism, not of science, and that symbolism is highly dangerous in this connection. The false conception of capital as essentially a store of consumers' goods has led and still leads to many serious fallacies. It was this that gave rise to the notorious doctrine of the Wages Fund; the notion that the sum which can at any time be paid in wages is equal to the quantity of capital,aliasconsumable goods, which happens to exist. To this day it blocks, with an undergrowth of obscurantist controversies, the way to a straightforward account of the problem of trade cycles.
§5.The Essence of Waiting.But it is with positive conclusions that we must here concern ourselves. What is the essence of this waiting, as we have called it? What are its results from the point of view of the community? The individual, who saves and lends, waits in the obvious sense that he postpones consumption. He foregoes his right to purchase now a quantity of consumers' goods in consideration of the prospect of purchasing a larger quantity of such things in the future. From the standpoint of the whole community, there is a similar postponement of consumption, though it need not commence so soon. The store of consumable goods is what it is: the quantity of goods inprocessof manufacture, which will shortly be coming forward, is also what it is. For some time, therefore, a sudden access of saving cannot affect the quantity of goods available for consumption; and if, in fact, they should be consumed less rapidly, that will represent an unfortunate defect, not an essential condition of a smoothly working system. Thenecessaryconsequence comes later. The increased saving will cause labor, materials, land, agents of production generally, to be devoted to distant purposes. Men will be set to work producing durable goods, largely durable instruments of production like ships or railways or factories or plant. If the increased saving is considerable, the labor, materials, etc., required for these purposes will be withdrawn even under our present system, as under a smoothly working system they clearly must be, from the production of other and more immediately consumable things. Hence, some time later, the supplies of consumable things will be diminished, while at a laterperiod still they will be more than correspondingly increased as the result of the assistance of the new durable instruments. That is the essence of saving from the social standpoint. An early future is sacrificed to a more remote future. The aggregate consumable income of the present is unaffected; the aggregate consumable income of the near future is actually diminished; it is not until at least some years later that the aggregate consumable income is increased.
§6.Individual and Social Saving.This conclusion is important: but there is an obvious misinterpretation against which it will be well to guard. It is customary for social moralists to preach thrift and saving as a public duty, and to impart to their appeals a special note of urgency in times like the present, when, as the result of the havoc of the war, destitution is widespread over Europe. Now obviously these advisers do not mean to recommend something which will impoverish the world next year and the year after and the benefit of which will accrue only in a distant future: it is the immediate urgency of the world's needs which is rather the substance of their case. Nor would it be right to conclude that these wise men are the victims of a delusion, and advocate a course, the consequence of which they do not understand. The explanation of the paradox is simple. The more the community as a whole saves now, the less in the near future will be the aggregate consumable income of the whole community: but not of theremainderof the community, exclusive of the savers. It is the saver who must wait, whose consumption must be postponedto perhaps a distant future; butat no timedoes his saving result in a smaller income of consumable goods for other people. The aggregate consumable income of the near future will be diminished, but it may be better distributed, and it may consist of things of a differentkind. For consumers' goods, we must remember, comprise champagne and motor cars as well as food and clothes; and, if a rich man saves, it may be purely articles of luxury, the production of which will shortly be diminished. Moreover, if his saving has the effect of transferring purchasing power to impoverished people, like those in Central Europe, it will not be devoted to a distant future; it will very likely be devoted to quite immediate ends. In other words, it may not result in any "creation of capital"; it may not represent any saving on the part of the community as a whole. A relatively rich man waits, and a relatively poor mananticipateshis income to a corresponding extent; and it is precisely this that is so urgently desirable in a time of widespread poverty and chaos.
This is no matter of hair-splitting, and making plain things obscure. While it is always better for therestof us that an individual, who can afford to save, should save rather than spend (though it might be better for us still if we could have his money to spend ourselves) and while this is the more important the greater is the poverty which generally prevails; yet, as a community we cannot save so much, weoughtnot to save so much, when we are impoverished as when we are prosperous. It is vital to appreciate this truth, because, as we shall see, by no means all thesaving of the world is done by individuals. There are many forms of "collective saving," which take place in actual fact; still more which we are often urged to undertake. And it is of practical importance to realize that the very considerations, which call most urgently for individual thrift, forbid a great indulgence in such projects. A time of national poverty is not a time when it is suitable for the State to embark on large schemes of capital development: we require our resources for more immediate ends. Faced with such problems, our practical sense may no doubt suffice to keep us straight; but it is apt to do so at the expense of a complete inversion of the real issues. If, for instance, we call for Governmental retrenchment on what we deem extravagant policies of housing and education, we usually speak as though they represented the profligacy of a spendthrift as contrasted with the saving that is indispensable. The truth is rather that these policies represent a saving, an investment for future purposes, which may conceivably be greater (this must not be taken as representing my personal opinion) than the community can properly afford. This is another instance of what I mean by looking at the problem of capital the right way up.
§7.The Necessity of Interest.It is only now that we are in a position to appreciate the true functions of a rate of interest, and the nature of its claims to be regarded as a "real cost." Interest, it is sometimes said, is necessary to provide for the future. It is far more certain that interest is necessary to provide for the present. It is a matter of legitimate doubt how farit is necessary topayinterest to secure a supply of capital; there is no doubt at all that it is necessary tochargeinterest to limit the demand for it. As we saw in Chapter I, a world socialist commonwealth would require to retain a rate of interest, if only as a matter of bookkeeping, in order to choose between the various capital undertakings that were technically possible. And this is the primary function which the fate of interest fulfils in our present-day society. It separates the sheep from the goats. It serves as a screen, by means of which capital projects are sifted, and through which only those are allowed to pass which will benefit the future in a high degree. For this essential purpose it is hard to imagine how a better instrument could be devised.
§8.The Supply of Capital.Let us dwell for a moment on this image of a screen, or sieve. One condition of a good sieve is that its meshes should all be of the same size. This condition the rate of interest almost perfectly fulfils. But it is also important that the meshes should be of therightsize. Whether this is true of the actual rate of interest is a far more doubtful matter. It is, indeed, plain that it is not altogether devoid of merit in this respect. In times of general world poverty, like those which follow upon a great war, it is desirable, as has been argued, that more of our productive resources should be devoted to immediately useful purposes, and a smaller portion dedicated to a distant future. This readjustment the rate of interest helps to bring about. For it rises to a higher level, and there is accordingly a strong inducement to all manufacturers and tradersto economize their use of capital, and thus to set free productive resources for more urgent needs. But, while the meshes of the sieve, as it were, contract in times when it is desirable that they should contract, we have no reason for supposing that they will contract in just the degree that is desired, neither more nor less; or, indeed, that at any time they approximate to the right size. We in the twentieth century owe much of the material wealth that we enjoy to the fact that over the last century men saved as largely as they did. But our natural gratitude should not restrain us from doubting whether they were really well advised to do so. If we ask the questionhowthey managed to do so, our doubts are deepened. For first place among the explanations must be assigned to the inequality in the then distribution of wealth. It was because many men in England were rich enough to save that our railways were built, and the resources of new Continents were opened up. But England, a century or even half a century ago, was not really a rich community. And if the national income in those days had been distributed more evenly among the people, can we doubt that they would have spent a far larger proportion of it on immediate needs; can we doubt that they would have been right to do so? We may rather doubt, in view of the reactions of poverty on physical and mental efficiency, on social harmony, even possibly on population, whether we to-day would have been really injured as much as might appear. How, then, can we suppose that the sum of the amounts which it suits individuals to save will bear any close relation to the resources which the community can properly devote to futureends? Are we to regard an unjust distribution of wealth as a mysterious dispensation of Providence for securing perfect harmony between the future and the present? The point need not be labored further. There are no grounds for assuming that we save, as a community, even roughly what we ought to save. If we wish to believe we do, we must turn for support from economics to theology.
It is important to be clear upon this issue in order to distinguish it from another, with which it sometimes seems to be confused. This is the question, briefly outlined in Chapter II, of the effect of changes in the rate of interest on the supply of capital. As was there indicated, there are good reasons for supposing that a fall in the rate of interest would induce some people to save more, and conversely. But the balance of probability is in favor of the conclusion that theneteffect of changes in the rate of interest, though perhaps slight, is usually of the more ordinary kind. The decisive argument in this connection is the fact, upon which we have just touched, that savings are supplied largely by people who are relatively rich, and who become richer when the rate of interest rises. For at this point it is necessary to be careful. It is easy to slide from the above conclusion into an argument of the following kind. A higher rate of interest leads to more saving; it is thus necessary toevokemore saving; it is thus required as anincentiveto induce people to incur thesacrificeof waiting; this sacrifice represents the "real cost" for which interest is paid.
This terminology of incentive, inducement and sacrifice is of very dubious validity. A rich man, whois made richer by a rise in the rate of interest, will probably save more, but it will be rather because he has become richer than because he is tempted by the higher rate: and the less we talk about his sacrifice the better. Nor is it clear that the attraction of a high rate of interest is an operative factor on the mind of a man to whom saving means a real sacrifice of immediate comfort or enjoyment. Certainly it is only one among many factors, and seldom an important one. A really poor man will think not so much of the annual income which will accrue from his savings, as of the capital sum upon which he or his family can fall back if a rainy day should come. And for this purpose he might save as much as he saves now, even if there were no interest to be obtained thereby. He might even be prepared to lend what he had saved, at least to banks (a deposit with a bank is in effect a loan), for the mere advantage of safe custody. The people who save rather for the sake of the capital sum that can be realized than for that of the annual interest are very numerous, and probably include many men in receipt of quite considerable earned incomes. Moreover, those who consider mainly the future annual income which their savings will yield them, are usually more concerned with its absolute amount than with the ratio it bears to the amount they must save in order to acquire it. For this reason, as has been often recognized, they may save less when the rate of interest rises, since a smaller quantity of savings will insure to them the future annual income they desire to obtain. There is no need to be dogmatic upon any of these points. The psychology of saving is both complex and obscure. Our conclusionmust be the negative one that we have insufficient evidence to warrant the assertion that the particular rate of interest which happens to prevail is a measure of the sacrifice involved in saving, even in the case of what we might regard as the "marginal saving." And, if we cannot assert this, we must be careful not to assume it as the basis of other arguments, or as part of a general analysis of price or exchange value.
It is of some interest to observe that the difficulties which our world socialist commonwealth would encounter if it attempted to dispense with the rate of interest, would not necessarily include that of obtaining a supply of capital. It might, indeed, not find it easy to determine the proportions in which it should allocate its productive resources between immediate and distant ends. Our present system cannot be said to have evolved satisfactory principles for the solution of this question; and the socialist commonwealth would have to work out its own solution. But when it directed that labor and materials should be devoted to purposes of long-period utility, there would be an automatic collective saving, of which no one would be conscious as an individual sacrifice. Even at the present time, our capital is not supplied entirely by the savings of individuals, but to an extent, which though quite incalculable is yet certainly considerable, by involuntary saving of an essentially similar type to the above.
§9.Involuntary Saving.When a municipality embarks on a municipal tramways scheme or any other industrial enterprise, and pays off by means of a sinking-fund the capital which it borrows in the first instance, theproceeding amounts, as the defenders of municipal trading have rightly claimed, to a compulsory and unconscious saving on the part of the citizens. Their consumption has been postponed willy-nilly as the result of the increased rates or the high charges which they have had to pay; and, when the subscribers to the original loan have been paid off, the capital of the community is enhanced to the extent of that loan. Central governments might similarly increase the supply of capital by devoting annual revenue to capital purposes; though their actual record, as it happens, is mainly of a different kind. But what is chiefly a possibility in the case of Governments has actually been carried out on an enormous scale by other institutions. The development of the joint-stock company system has introduced a new factor into the problem of the supply of capital, which is of immense though but dimly perceived importance. The directors of a company are technically no more than the servants of the shareholders. It is the profit of the shareholders that it is the directors' duty to promote with a single mind, and the whole capital of the concern, including its reserves both open and concealed, is the shareholders' exclusive property. But realities have a way of differing from forms, and just as in political affairs it is common to regard the State as a very different thing to the people who compose it, as a sublime entity with a separate existence of its own, so directors are apt to distinguish between the company and the shareholders. It is the company to which they owe allegiance. To pay away in dividends to shareholders money which they could employ in extending the business or strengtheningthe position of the company appears to some directors a necessity hardly less unpleasant than an increased wages bill, or an Excess Profits Duty. Concessions must indeed be made to the shareholders' rapacity: but when something has been done in this direction, dust can easily be thrown in their not very observant eyes. Reserves, which within limits are a necessity of sound finance, can be accumulated beyond those limits, and, when the further limits of an extreme but just arguable conservatism have been passed, there remain the innumerable devices, known to every resourceful Board, of hidden reserves, the secret of which is unmenaced by the meager information of a balance-sheet. In all this the shareholder, as the directors occasionally assure themselves, has no real grievance, for he will gain in the long run, from the appreciation in the capital value of his shares, all and perhaps more than all that he foregoes in the meantime in the way of dividends.
In the long run the shareholder is not injured; but in the meantime he is in effect compelled, without any consciousness of the proceeding, to save and to reinvest in the company a portion of the dividends, which he might otherwise have spent. The reserves which are accumulated are not allowed to lie idle: they are employed either in what are really capital extensions of the business, or in the purchase of outside securities, and in either case they represent an increase in the total supply of capital. The principal which these proceedings represent is capable of indefinite extension.
But however possible it might be to secure a supply of capital without the inducement of a rate of interest,that rate is indispensable for dealing with the demand. It is no good saying, "Three per cent seems a fair rate of interest; let us try and limit it to that." Given the amount of savings which are supplied, the rate of interest must be allowed to reach whatever figure is necessary to confine the demand to that amount. Given the quantity of resources which you have available for future needs, the meshes of the sieve must be made as narrow as is necessary to confine the projects that pass through within those limits. And so, indeed, it becomes necessary for any particular business to pay for its capital interest at the market rate, not so much to secure the saving of it as to secure its allocation from the common pool.
§10.Interest and Distribution.It is unavoidable that this interest should accrue to whoever it is that supplies the capital. If the capital were supplied, as it might conceivably be, collectively by the community, the interest would accrue to the community, and all would be well. But as things are, the capital is supplied mainly by the savings of individuals, and largely by individuals confined to a relatively narrow class. The profits of Capital have thus a vital influence on the very serious matter of the distribution of wealth between social classes. Now, as experience shows, there is no element in profits which is capable of such radical change in so short a space of time, as is the rate of interest. Even before the war it had become hard for people in Great Britain to realize that 3 per cent Consols had stood at 114 as late as 1896. "How blest," wrote two cynical satirists of society in the same period:
"How blest the prudent man, the maiden pure,Whose income is both ample and secure,Arising from Consolidated ThreePer cent Annuities, paid quarterly."[1]
It is impossible to read those lines now without a sense of irony, different from that which they were intended to convey.
Not only is the rate of interest now double what it was a generation ago; we have no good reason to suppose that the present high level will quickly be reduced. The havoc of the war, of which the widespread poverty of Europe and the huge debts of Governments are but two different aspects, makes it almost inevitable that the rate should rule high in the present decade. This cannot but exercise a profound influence, of a most disquieting character on the general level of profits, and to a lesser extent (for here we must allow for the effects of high taxation) on the distribution of real wealth between social classes. Here we are on the threshold of tremendous issues. We almost feel the earth quake beneath our feet. We hear the muffled roar of far-reaching social controversy:
"And 'mid this tumult Kubla heard from farAncestral voices prophesying war."
[1]Narcissus, by Samuel Butler and Henry Festing Jones.
§1.A Retrospect on Laissez-faire.When, a century and a half ago, the foundations were being laid in the Western world of systematic economic theory, the public attention was much occupied with a subject, which indeed has not ceased to hold it: that of the failings of Governments. The general interest in that topic was shared by the pioneers of economic thought, of whom, in Great Britain, Adam Smith was the most notable. It was indeed their practical concern with the concrete economic issues of the day which very naturally gave the impetus to their scientific quest. It was hardly less natural that they should have expressed their opinions on these concrete issues with considerable emphasis.
Now the keynote of their practical conclusions was that Governments were doing immense mischief by meddling with a great many matters, which they would have done better to leave alone. In this they were in general agreement with one another; incidentally—let there be no mistake about it—they were right. But, as invariably happens in public controversy, their opinions became crystallized in a compact formula, or cry, with unduly sweeping implications. This was the cry of "laissez-faire." Let Governments preserve law and order; and leave the economic sphere alone. Theeconomists picked no quarrel with this formula; it served well enough for workaday purposes to indicate the lines of policy which they rightly thought essential in their day.
The history of this cry is the history of every cry which has won a wide acceptance from mankind. It did good work for perhaps half a century; but then many crimes were committed in its name. The instrument which had been forged to clear away a noxious tariff jungle and the monstrous laws of Settlement, was turned against Lord Shaftesbury and the Factory Acts. Not only was inaction recommended to Governments as the highest wisdom; other institutions, like trade unions, were warned off the economic grass. An ideal of perfect competition became an idol to which much human flesh and blood were sacrificed.
But, what is more to our present purpose, the idea took root of an intimate association between the laws of economics and the policy oflaissez-faire. People who opposed some long-overdue measure of State regulation believed themselves to be justified by the eternal verities of economic law, and this claim even the advocates of the measure seldom ventured to dispute. They took refuge rather in a conception of economic law as a dangerous monster, whose claws must be clipped in the interests of the higher good. This notion that all interference with so-called "free competition," is a violation (though very likely fully justified) of economic laws has sunk deep into our common thought. So that to this day, whenever we see at work the hand of a State department, a trust or a trade union, we are apt to say "Demand and supplyare here in abeyance," and possibly we add "A good thing too." Since in the matter of wages, the hand of the trade union is very generally evident, it is impossible to discuss the subject-matter of this chapter, until we have rid our minds of this quite baseless prepossession. To sweep away this cobweb, I urge the reader to recall here the general tenor of the analysis of the preceding chapters. Whether we were dealing with the price of an ordinary commodity, with joint products, land or capital, we came across relationships which seemed altogether more fundamental than our present industrial system; nor, we may incidentally observe, were we ever required to suppose that the present system was one of "perfect competition." These relationships were almost invariably such that even a world socialist commonwealth would find it necessary to maintain them. It was not suggested, and most certainly it must not be thought, that a world socialist commonwealth, or even a more modest remodeling of the social order would not effect great changes, possibly for good, and possibly for ill. The same economic laws might be made to bear very different fruits, but they themselves would remain unchanged. What is true in all these other fields—this should be our predisposition—is not likely to be quite untrue in the field of labor.
§2.Ideas and Institutions. Another point is worth noting here. We are sometimes advised to distinguish sharply between "What should be" and "What is"; often two very different things. The advice is pertinent and useful, particularly in the sphere of sociology.But our incorrigible habit of confusing the two things together is not without justification, or at least excuse. For, in fact, they gravitate towards one another with a force which is just as strong as the capacity of man for understanding and controlling his environment. When we have a system which is clearly bad,andwhen we see our way to make it better, we generally make the change however tardily. Our sense of "What should be" thus reacts upon "What is." Meanwhile, until we can make the system better, our appreciation of "What is" affects our sense of "What should be." And the more so, as we are sensible. For "What should be" is pre-eminently an affair of relativity. A man may hold very strongly that equal pay to every individual is desirable, as he puts it, as an ideal. But this will not prevent him, in a world in which managers are paid far more than manual workers, from maintaining hotly (at any rate, if he is sensible) that to pay the manager of a particular concern a manual worker's wage would be monstrously unfair. He would also argue that it would be highly inexpedient. Equity and expediency are, in fact, intricately intertwined in our sense of "What should be"; and our sense of "What should be" in the particular is governed by our knowledge of "What is" in the general.
These may seem unnecessary commonplaces. But they have a vital bearing on themodus operandiof economic laws. These laws do not workin vacuo. They work through the medium of the acts of men. The acts of men are greatly influenced by their institutions, and by their ideas of right and wrong. Both institutions and ideas may serve to smooth rather than obstruct thepath of economic laws; because the laws may represent either "what should be" in the general, or "what is" in the general, and therefore "what should be" in the particular. This may hold true even of a trade union or a sense of "fair wages." The business of economic theory is not to justify a regime oflaissez-faire, still less to show the folly of bringing morals into business. Its value is rather that it may help us, by improving our understanding, to shape our institutions, and to adopt our moral sentiments so as to promote the public welfare. With these general notions in our minds, let us turn to see how stands the case with Labor.
§3.The General Wage Level. The term Labor may be used in a broad or in a narrow sense. It may be confined to weekly wage-earners: it may be extended to include all those who work, as the phrase goes, "with either hand or brain." It is with all classes of Labor, in the broadest sense of the term, that we must here concern ourselves. It will be convenient, however, in the first instance to ignore the differences between them, and to consider the forces which determine what we may regard as the general wage-level.
The general laws of supply and demand hold good. The wages of labor tend to a level at which the demand is equal to the supply. For, if the demand exceeds the supply, if, in other words, labor is scarce, wages tend to rise, sooner or later in any case, and the more promptly in proportion as the workpeople are organized. Conversely, if the supply exceeds the demand, if in other Words there is general unemployment, wages tend to fall, and the strongest trade unions cannot resist the tendency,though they may delay it. Moreover, the higher the wages that must be paid, the smaller, other things being equal, is the demand for labor. For, even if we leave foreign competition out of account, and consider, as it were, labor throughout the world as a whole, the demand for labor is by no means inelastic. It is derived along with the demand for the other agents of production in the manner described in Chapter V. As was there shown, the greater the supply of the other agents of production, the greater is likely to be the demand for labor; but these other agents can be substituted for labor in a great variety of ways, and an increase in wages (unless accompanied by increased efficiency) will make it profitable for employers to effect such a substitution, where it was not profitable before. Thus, higher wages for the same labor efficiency must stimulate the tendency for capital to act as a substitute for labor at the expense necessarily (since the aggregate supply of capital will not be increased thereby) of its tendency to serve as a complement; and this must mean a decrease in the volume of employment. Hence the power of labor to secure a general advance of wages by concerted or simultaneous trade union action, applied if you will, not merely to every industry, but to every country, is necessarily very limited. Beyond a certain point, such a policy must result in general unemployment; and, if pushed sufficiently far, in unemployment so extensive that it would continue even in periods of active trade. Such a policy could neither be maintained in practice nor would it be a wise policy from the workers' point of view.
In other words, given on the one hand the conditionsof the demand for labor (i.e. the supply of capital, natural resources, business ability, risk-bearing and knowledge of technical processes, etc., which happens to exist), and given on the other hand the supply of labor (i.e. both the numbers of workpeople and their efficiency), the wage-level in the long run is fairly rigidly determined. The introduction of the phrase "in the long run" in this connection is apt to provoke comment which may be pertinent, but may be misconceived. The worker, it is pointed out, is deeply concerned with "the short run" in which he has to live. It is very true; and it is this that supplies one of the many justifications of trade unionism. To secure for the workers advances of wages, which economic conditions justify, sooner than would otherwise have been obtained, is certainly no trivial or contemptible function. But it is none the less an illusion to suppose that the general wage-level can be appreciably and permanently raised by trade union action, except in so far as it increases the efficiency of the workers or incidentally stimulates the efficiency of the employers.
§4.The Supply of Labor in General. The efficiency of labor may be regarded as affecting either the demand for labor on the one hand or the supply of it on the other, according as we look at the matter from the worker's or the employer's standpoint. The employer is concerned with the labor costs per unit of his output, the worker is concerned with the wages he receives. An increase in the efficiency of labor may, and usually will, mean both a decrease in labor costs to the employer and an increase in the earnings of the worker. It isthus wholly to the good. But the effects of an increase in the supply of labor in the sense of a growth in the numbers of the population are far more dubious. Unaccompanied by an increase in thedemandfor labor, itmustresult in a diminished remuneration for the individual worker. To some extent indeed the demand for labor would almost certainly be increased. The supply of Capital may expand, perhaps proportionately, perhaps more than proportionately to the increase in population. But one factor of production, as we have seen, is not capable of such expansion. This is the factor of Land, or Natural Resources. It is the limitation of this factor which gives rise to what we have most of us heard of as The Law of Diminishing Returns. It is this that is the essence of the problem of Population, portrayed in somber hues more than a hundred years ago by Malthus.
This problem will form the subject of the sixth volume of the present series. In the meantime it may be suggested that we are easily credulous if we suppose that the problem has been finally disposed of by the peculiar progress of an abnormal century. But that experience has at least destroyed the view that thereneed be, or even is in fact in Western countries, a relation between real wages and the numbers of the people so close and direct that an improved standard of living must be temporary only, doomed to destroy itself by the increased population it engenders. One may perhaps go further and say that it is doubtful even in what direction changes in remuneration will influence the aggregate supply of labor. When we pass to "what should be," it is plain that there is nothing whateverto be said for the sort of relation indicated above. The view once widely held that the principle of population must inevitably keep the mass of people close to the verge of the bare means of subsistence was no statement of a desirable ideal. It was a nightmare; a nightmare none the less though it may haunt us yet. It is far from fanciful to suggest that it is because this relation is so obviouslynot"what should be" that it may be ceasing to hold true in fact. But it would be very fanciful indeed to maintain that as yet "what should be" is represented by the actual population. Thus, just as with capital, so with labor, there is no reason to suppose that the aggregate supply is determined by any fundamental economic law, or corresponds in practice to what is socially desirable.
§5.The Apportionment of Labor among Places.Again, as with capital, it is when we turn to theapportionmentof labor between different employments that both economic law and social ideal make their appearance. It will be well, however, to consider briefly in the first instance the different question of its apportionment between places. This was hardly necessary in the case of capital, because the possibilities of foreign investment are very numerous and easy: the mobility of capital is thus sufficiently strong (once again it is onlymarginaladjustment that is necessary) to establish over at least a large part of the world something near to a uniform rate of interest. But this is not the case with labor. People do indeed move from place to place within a country, and from one country to another, in response to economic opportunities. That even thelatter movement may be a considerable thing, the present population of the United States is a striking testimony. But obviously the mobility is very incomplete. Here, then, we have what we mightlooselycall an economic law that labor tends to "flow" (as it is sometimes unhappily phrased) to those places where it can command the highest reward; we have this tendency in evidence, but it is far too weak to enable us to lay down what would deserve more strictly the title of an economic law, that in the long run the reward of the same kind of labor is roughly equal in all places. Perhaps we can say this for many districts in a single country; but for few countries is this true as between all their districts. As between countries, it is not remotely true.
Here, however, the imperfection of economic law is balanced by an extreme uncertainty as to the ideal. Perfect mobility of labor may beeconomicallydesirable in a very narrow sense of the term; but it opens out a vista of racial, national and cultural problems, into which it will be better for us not to enter here. We must take for granted the population of a country, like that of the world, as a given fact.
When we do this, the question of its remuneration is on all fours with the more general question discussed above. That the remuneration of the labor of a country is mainly governed by the relations between demand and supply is an inexorable fact. In view of the international mobility of capital, the main distinctive factor in the demand for the labor of a particular country is the supply of natural resources, which it knows how to use. Where the natural resources are great relatively to thepopulation, there wages will rule high; where the converse is true, wages will rule low. This result of economic analysis is abundantly confirmed by experience. The relatively high wages in the new world, the low standard of living in the densely populated East; the economic history of Ireland are so many object-lessons of its truth.
§6.The Apportionment of Labor among Social Grades.The question of the apportionment of the labor of a country among different employments falls under two heads. Some differences of occupation are associated particularly in Great Britain with differences of what we know as class. The movement of labor between different social grades is clearly a very different thing from its movement between different occupations in the same grade. The grades themselves are not easy to define: not a little ingenuity has been expended on the attempt, and perhaps the best brief classification that has been put forward is one which divides labor into the following four grades:—
But the matter is one perhaps for the satirist of manners rather than the economist. It suffices for our purpose that the distinctions, however vague, are very real.
It is obvious the mobility of labor between the occupations of a platelayer and a barrister is not very great. It may seem perhaps to be even smaller than itis. For here it is important to bear in mind a general consideration which is equally applicable to horizontal movements within any social grade. There may be a considerable movement of labor between different employments without any individual worker having to change his occupation. The personnel of any industry is constantly changing. At one end, men die, retire, or are pensioned off; at the other end, young recruits are taken on. By a diversion of the new recruits from one employment to another, a radical change can be made in the occupational census in a comparatively short space of time. It is in this manner that such movement as takes place is largely effected at the present time. Within the ranks of the professional classes, a man does not commonly leave the profession to which he has been trained. But hischoiceof profession is determined by him or his parents not solely on pecuniary grounds but usually with an anxious scanning of the general prospects, which include pecuniary advantages together with many other things. The same thing is true in no small measure of manual wage-earners. This general consideration must be borne in mind throughout the remainder of this chapter.
But even the sons of platelayers do not commonly practise at the bar. The obstacles in the way are various and subtle. Many of them are ideas, inherited from a bygone epoch, about keeping other people "in their proper stations," which the whole drift of circumstance, and the spirit of the age are rapidly wearing down. In the new world such obstacles are rare. But an obstacle of a more tangible and formidable kind arises from the fact that the liberal professions andmany business careers require a long and expensive education and training, which the platelayer is quite unable to afford to give his son.
Now this expense of training is highly relevant not only to "what is," but to "what should be." It includes, it should be observed, a negative as well as a positive element; a long period of waiting before income begins, as well as the actual outlay on educational and other charges. When the burden both of the waiting and the positive costs must be borne either by the individual or the family, there are few people who would seriously dispute that this goes to justify, on grounds of fairness as well as of expediency, a higher level of annual remuneration later on; though many people would doubtless argue that the amenities and dignities of the professions should be taken into account on the other side. But the same consideration makes it a matter of legitimate doubt whether it would be desirable, even as an ideal, that the community should provide so completely the costs of training and of maintenance in the waiting period, as to make it no longer "fair" that the individual should be remunerated more highly than workers in less expensive occupations. For this would mean that more labor would be absorbed in the former employments than in principle would be socially desirable, for reasons which the argument of the next chapter will make plain. But the most desirable number of doctors, barristers, teachers, etc., is not a thing which can be settled on purely economic grounds, and it is unprofitable to carry further this particular line of thought. Few people would advocate, as an ultimate ideal, that the remuneration of the professional gradesof labor should exceed that of lower grades bymorethan the extra expense of training and waiting they involve. That the excess is usually greater than this at the present time seems very probable: though it is a matter on which it is very hard to generalize. But it would certainly be far greater than it is if the principle oflaissez-faireruled supreme in these affairs. Fortunately it does not, and has never done so. Even before the days of free elementary education, the endowment of education was not unknown. The ancient public schools and universities, which have come down to us from the Middle Ages, are a standing witness to what in this field a far poorer community thought fit to do. Their systems of scholarships and exhibitions, no less than their courts and towers, deserve our notice. For these were designed to form what we now call "a ladder" by which talent could climb from the humblest origins to the callings which then seemed the summit either of spiritual or of worldly ambition.
This reference to "talent" makes it well to consider here a factor which necessarily complicates, though it does not substantially affect, the whole argument of the present chapter. There are differences of natural ability, which no education or training can obliterate, which it should rather be their business to excite. These differences are associated to a great extent with differences of occupation; theyshould beso associated far more closely than in fact they are. They are also associated with differences of remuneration even within the same occupation; "what should be" here is a question which we may excuse ourselves from discussing. The principle which, however vague, is sufficient forour present purpose is that the samenatural abilityshould command the same reward in all occupations, subject to differences which should not exceed the differences of educational cost and initial waiting they involve. We cannot assert, as an economic law, that this is generally true in fact. If ever it becomes true, it will be due not to "laissez-faire," or "free competition," but to social arrangements, which express a sense of what is right.
§7.The Apportionment of Labor among Occupations.When we pass to the apportionment of labor among different occupations in the same social grade, the same principle as to "what should be" applies in a simpler form. Equal natural ability should command an equal reward in all occupations; assuming that differences in cost of training can be ignored. The reward must, of course, be interpreted not in terms of money only but of "real wages," with allowance for the varying amenities of different tasks. Now it was here that the extreme advocates oflaissez-fairemade one of their cardinal mistakes. They assumed that this ideal would be best secured by "perfect competition." The employer would choose the worker who would come for the lowest wage; the worker would choose the employer who would pay him the highest wage; and so, by a process similar to the higgling of a commodity market, the desirable uniform wage-level would become established. But in fact the conditions of the labor market differ greatly from those of a commodity market. People are ignorant, do not look ahead, cannot afford to risk the loss of a job, however wretched, which they happento have got. For reasons such as these, a considerable departure fromlaissez-faireis necessary in order to realize the theoretical results oflaissez-faire. To prevent the putting of boys in large numbers into "blind alley" occupations, you must supplement the foresight of parents with Juvenile Employment Exchanges and After-Care Committees. To secure a proper uniformity of wages within the same occupation, you must have trade unions. To secure a proper uniformity between different occupations, you must have again trade unions, or, failing them, Trade Boards.
That the actions of trade unions are very largely of this type is a fact insufficiently appreciated by the middle-class public. The elaborate system of piece-rate lists which has been evolved in the Lancashire cotton industry is primarily designed to secure the same wage for workers of equal efficiency in all mills, irrespective of the degree to which the machinery is antiquated or up to date. This result is wholly to the good: not only does it secure "fairness" for the worker, it stimulates the employer wonderfully to efficiency. The same result could never be secured so effectively by the free play of competition. But this tendency, which is easily the predominant element in the trade union regulations of the cotton trade, is at least an important element in the policy of "The Common Rule" of all trade unions, though it may often be mixed up with the more questionable tendency to eliminate differences of pay for differences of natural ability, and the unquestionably bad tendency to discourage output. As between different occupations, the insistence of a trade union that wages must be leveled up towards the wages obtainingin similar trades acts again as a far more powerful force than competition.
But the actions of trade unions are by no means wholly of this type. They often serve rather to secure still higher wages for workers who, comparatively speaking, are already highly paid. It makes little difference whether this effect is secured directly by wage demands, or indirectly by restricting the right of the entry to the trade. In either case the consequences are the same, and there should be no ambiguity as to their nature. They are certainly bad for the community, certainly bad for theotherworkers of the grade, almost certainly bad for the workers of the grade regarded as a whole. The higher wages must raise the money costs of production, and result, sooner or later, in fewer workpeople being employed in that occupation; larger numbers must accordingly seek employment elsewhere; and this cannot but depress the wage rates of less strongly organized trades. Thus the effect is twofold: a larger proportion of workpeople will be employed in badly paid occupations; and the wages there will be lessened.
The power of a strong trade union to secure wage advances of this type is considerable, but it must not be exaggerated. Trade unions employ as a matter of course devices which, in the case of trusts, we regard as the extremest weapons of monopoly. To say, "If you buy from anyone except us, you must not buy at a lower price than ours," which Messrs. J. & P. Coats are represented as having done, is analogous to insisting that if non-unionists are employed, it shall be at the trade union rate, as every trade union very properlyinsists. To say, "You must buyonlyfrom us," the method of the boycott, as it is called, is analogous to the very common refusal to work with non-unionists at all. But in one important respect the tactical position of a trade union is weaker than that of an ordinary combination. It has usually got a buyers' combination up against it, in the shape of an association of employers. The latter will be governed in their attitude towards the workpeople's demands, not only by immediate expediency, but also by their own sense of "what should be"; and they will usually resist demands for wages greatly in excess of those obtaining in comparable trades. In this way, the tendency for workers of the same efficiency to receive the same real wages in all employments is far stronger than might at first sight appear.
If we had to rely for this result upon trade unions alone, it would be highly problematical. For here a psychological curiosity emerges, which, familiar and intelligible as it is, is none the less a curiosity. So far from still higher wages for well-paid workpeople being regarded in the world of manual labor as detrimental to the interests of other workpeople, it has become almost a point of honor to believe the contrary. A wage dispute in a particular trade is conceived as an engagement in a far-flung battle between Capital and Labor, in which success at any part of the line will facilitate the victory of the whole army. This conception contains a measure of truth, as regards immediate and purely temporary effects; though, even here, it is made to seem unduly plausible by the recurrence of trade cycles, which cause wages at anytime to move in the same direction all along the line. But, if the foregoing analysis has been appreciated, the essential falsity of this notion should be evident. It is an illusion, which should receive no endorsement, either tacit or express, in any work on economics. The general wage level of a country cannot be regarded (except temporarily, and within narrow limits) as a function of the efficiency of labor organization; it depends on the far deeper economic facts set out in §3 above.
Let us now try to summarize the conclusions of this section. Thereisa tendency towards a uniformity of real wages for workers of the same grade and of the same efficiency. This tendency is not due to competition alone. It is helped by many acts of a collective kind, arising from a sense of "what should be"; it is obstructed by other acts of a like kind, where the sense of "what should be" is based on imperfect understanding. The more people act in accordance with "what should be," and the better their understanding, the more will this tendency approximate to an accurate economic law.
§8.Women's Wages.The wages of women represent a problem of great public interest, upon which the principles laid down in this chapter have a most important bearing, and which in its turn serves to illustrate these principles further. It has been suggested that male and female labor can be regarded as a strong case of Joint Supply, and the suggestion is not merely facetious. The essential point, that the proportions of available male and female labor are fairly constant (notthat they may not alter with time and circumstances, but that they are essentially independent of the conditions of demand) holds true not only of a country as a whole, but hardly less of a particular district. If men and women are to be regarded as separate grades, they are grades between which immobility is complete. Now men and women differ in many ways which affect both the demand for and the supply of their services. On the one hand, far fewer women wish to enter business employments of any kind, as women have plenty of work that must be done at home. On the other hand, though women can do many kinds of work as well as or better than men, it so happens that for much the greater number of services, which are in large demand in the business world, men are the more efficient. Incidentally, it happens that many occupations which womenmightdo as well as men are closed to them by exclusive regulations. The resultant of these forces is that men and women are for the most part employed in different occupations, and the scale of payment in women's occupations is far lower than that in men's. Of this last fact singularly small complaint is made.
It is otherwise, however, when we come to occupations where men are either wholly or partially employed, where women are at least approximately as efficient as men, and where the barriers to their entry are at least formally removed. There a ferocious controversy rages over what is known as the principle of "equal pay for equal work." It is easy to understand why the male trade unionists in, let us say, the engineering trades, should support this claim. It is also, indeed,intelligiblewhy the enthusiasts for Women's Rightsshould urge it; but it is much more doubtful whether they are wise. Possibly they are wise enough in their generation, since it might not serve them on this matter to get across the men. But it is clearly not prudential considerations of this kind by which they are mainly actuated. They make the demand, with extreme intensity of feeling, as a demand for fundamental justice. They are also very obviously inspired with the belief (similar to the illusion which is a point of honor with the male trade unionist) that high wages for women in well-paid occupations will help to raise the wages of sweated women workers in other trades.
Now, here again, any lack of candor would be inexcusable. The effect of this policy on the wages in women's trades is certainly to reduce them. The policy serves, as powerfully as any trade union custom, to restrict the entry of women into the men's employments, and often spells virtual exclusion. For the "equal efficiency" may be approximate only, and there may be advantages in male labor from the employer's standpoint which are none the less important, because they are not easy to define. Moreover, from the employer's standpoint, the efficacy of female labor will be largely a matter forexperiment, and "equal pay" will give him no inducement to experiment at all. The diminished number of women in these occupations (as compared with what might have been) increases the number who must fall back on the purely women's trades; and itmustserve to reduce the wages there, where organization is by no means strong. I am far from asserting that this consideration is conclusive against the principle of "equal pay for equal work"(though I think it conclusive against a rigid interpretation of it); for other matters, such as the standpoint of the male trade unionist must be taken into account. But the reactions on the wages in women's trades permit of no ambiguity.
In occupations of another type, the issue takes a somewhat different form. In the teaching profession, "equal pay" would not exclude the women; it would be far more likely to exclude the men. For, though the advocates of the principle would declare that their intention is that the salaries of women should be leveled up to those of men, it is more probable that the ultimate outcome would be a leveling down. Educational authorities have the ratepayer and the taxpayer to consider; and, apart from this, they have their own interpretation of "what should be." To pay a woman less than a man for the same work may seem glaringly unfair; but it is not very clear why a woman, who is an elementary school teacher, should be paid much more than, say, a hospital nurse, merely because in the former case a number of men happen also to be employed. In fact, there is a clashing of equities in this connection; and there is little doubt which of them the educational authorities would prefer. A leveling down of the men's salaries would make it all but impossible to attract men of the desired type into the profession, and would thus lead to the virtual extinction of the male elementary school teacher. This might seem in a narrow sense to be economically desirable. Why should not men take their services to the tasks for which they can command a higher reward, and which women cannot do as well? But whether this wouldbe desirable in the true interests of education is a far more doubtful matter. And this is the real problem of "equal pay for equal work" for male and female school teachers. The reader will notice that I have refrained from alluding to the controversy as to whether men should receive more on the grounds that they have wives and families to maintain. That, although a most absorbing issue, is not the real issue in practice at the present time. The real issue is a clashing between a sense of "what should be" on obvious general grounds and a sense of "what should be " in the particular, derived from the very patent and general "what is" that men receive as a rule far higher pay than women.