From Part 2, CHAPTER III
THERE are three factors of production, of which two, nature and labor, are primary and original, and the third, capital, is derivative and secondary.
Capital is the third factor in production. It is not one of the two first things in political economy, but it is a combination of these two. Much in the same way that oxygen and hydrogen combine to produce water, so land and labor together produce capital. Capital is neither land nor labor, but, resulting from the two, it is a new thing and has properties of its own Capital is every product used or held for the purpose of producing or acquiring wealth. There are two elements in this conception: first, that of stored-up goods, and second, that of use in the future.
It is often said that capital is the result of saving, but this statement is misleading.
Saving as such is a merely negative act and cannot produce any positive result. We
must have something to save -- that is, we must first produce -- and then over and
above the necessities of life there must be a surplus; if this is laid by or saved,
it may become capital.
The aid which capital renders to production is essential to any production of economic
goods save the most primitive an limited. It is, as the Austrian economist, Professor
von Bohm-Bawerk, well says, "the medium through which the original productive
powers exert their instrumentality." It consists of those things which are used
in further production or which are technically spoken of as being in the process
of ripening, whereas a store of wealth actually ready for consumption would be designated
simply as consumption goods, and not as capital. It means a surplus, and this surplus
renders possible an effective combination and organization of the productive factors.
Nothing is more disastrous than to be obliged to work to-day for the food of to-day.
When this is necessary no systematic activity is possible, for we must seize the
first opportunity which offers to get food, however miserable that food may be. Wealth
accumulated -- including consumption goods and capital -- means that we can postpone
consumption, working to-day for the food supply of some future day. We can thus organize
productive forces, we can survey the field of industry and secure the best place
to apply these forces. We can put in our seed- corn and wait until it produces
sixty or a hundred fold instead of wandering through the woods for uncertain game,
which when taken is slaughtered, and, losing its power of increase, renders no whit
easier the problem of producing to-morrow's supplies. The exact function of capital
in production may be expressed in these words: It enables men to substitute roundabout
methods for direct ones, by furnishing the tools for such production and by permitting
the lengthening of the interval between effort and final effect or consumption. Roundabout
methods of production are almost without exception more efficient than direct ones,
but roundabout methods require an increase in tools or machinery and a longer time.
As is explained in another place, capitalistic production, as it becomes more perfect,
shows a continual increase in the number of steps between the initial movement and
the final product, and a continual increase in the length of the interval. The lengthened
interval is usually a necessary condition of the indirect processes. Capital claims
and receives a part of the product, which is called interest. Often we speak of profits
in this connection, but when profits include more than interest they embrace something
else besides the simple return on capital.
Wealth Saved by being Consumed.-- Wealth, although consisting of saved products
is itself consumed. When food is used for productive purposes it is consumed as truly
as when used for present enjoyment. Let us suppose that I can raise a certain amount
of produce on my farm. I may, if I choose, raise necessaries and also delicacies,
and consume all that I raise. But let us suppose, instead, that I raise only necessaries,
and that while I raise twice as much food as I can use, I give half of my produce
to a man who constructs a barn for me. I have accumulated capital, but the consumption
of food has not been diminished thereby. Obvious as this is, it is not understood
so generally as it should be. There is a widespread impression that it is better
for a man to spend his substance in riotous living than to save it; but the man who
builds houses makes as large purchases as he who expends the same sum in feasts,
and society is richer because of the latter consumption; the houses still remain.
Increase of Capital. -- Capital is a growth, and, as a return is exacted
for the use of it, capital begets capital, as it were. This makes it far easier for
a man who has capital to accumulate more of it than for a man who has no capital to accumulate any at all. "Unto everyone which hath
shall be given; and from him that hath not, even that he hath shall be taken away
from him." So intimately is present capital connected with past capital that,
as some one has well said, there is not a nail in all England which could not be
traced back over eight hundred years to savings made before the Norman Conquest.
CHAPTER IV
The organization of the factors of production, simple at first, becomes on the whole continually more complex with the development of industrial civilization. Differentiation accompanies development. The old household economy was organized in such a manner that the existence of three separate factors in production is scarcely perceived. The same man was owner of land, labor, and capital, and all the products flowing into his hand were distributed by him among those who participated in production according to the manner which he might deem proper.
Growth of Complexity. -- The present century has witnessed a great
change in the organization of the productive factors, especially in commerce, manufactures,
and transportation. We have a large class that furnishes only labor, another class
that furnishes land and capital, and a third class that organizes and manages the
undertaking. A modern railway corporation serves as a good illustration. The holders
of stocks and bonds furnish capital on which they receive interest; the stockholders
carry on the business through managers, and for this service they hope to receive
a surplus above interest, called profits; labor is remunerated by wages and by salaries.
Land is supplied by the holders of the stocks and bonds, a part of their capital
being exchanged for land, and consequently we have rent also, although it does not
usually appear as a separate factor. Yet even land when it is leased may appear as
a separate factor. No doubt railways in Baltimore and Philadelphia pay ground rents,
annual returns for land itself, to those who do not own the improvements. We observe
then all these various classes, and perceive that the product or revenues of the
undertaking are divided into a corresponding number of portions. It can readily be
understood how controversy respecting the amount to be allotted to the
different classes can arise. It is said that the business community is always in
debt, because it carries on business with more or less borrowed money. The owner
of a business enterprise is an organizer and manager, and receives wages of superintendence,
a salary which he pays himself he receives a return for risk; he pays interest and
receives interest on any money he has invested; he pays wages and rent.
The Entrepreneur.-- The one who manages business for himself was formerly called an undertaker or an adventurer, but the first word has been appropriated by one small class of business men, and the latter has acquired a new meaning, carrying with it the implication of rashness and even of dishonesty. We have consequently been obliged to resort to the French language for a word to designate the person who organizes and directs the productive factors, and we call such a one an entrepreneur.
The function of the
entrepreneur has become one of the most important in modern economic society. He
has been well called a captain of industry, for he commands the industrial forces,
and upon him more than any one else rests the responsibility for success or failure.
Business which has achieved magnificent success often becomes bankrupt when, owing
to death or some other cause, an unfortunate change in the entrepreneur is made.
The prosperity of an entire town has sometimes been observed to depend upon half
a dozen shrewd captains of industry. It may be said, then, that the large reward
these often receive is only a legitimate return for splendid social services. Such
is the case, provided that this reward is gained honestly and without oppression.
Sometimes, indeed, their gains are in part legitimate and in part illegitimate. It
is this mixture, observed by all in notorious cases, which has probably more than
anything else led to indiscriminate attacks on the profits of the captains of industry.
It must be added that the mere fact that a man has gained an enormous fortune legitimately,
and as a return for social services, does not morally entitle him to use it as he
pleases, for morally a man is obliged to use everything he has, himself included,
for the benefit of humanity, and if he has great power to gain wealth, this but measures
the extent of his moral, though not of his legal, obligation to society.
The productivity of industry depends largely upon the harmonious development of all
the factors. Sometimes labor is specially needed, sometimes capital, sometimes land;
most frequently what is needed above everything else is a better organization of
them all. As a whole, organization to-day is defective, and talent for organization
and management is unfortunately rare.
Division of Labor. -- A characteristic feature of the organization
of the factors in the present stage of industrial enterprises is what is commonly
called division of labor, but which might with equal propriety be called cooperation
of labor. Productive processes, especially in manufactures, are divided into minute
parts, and one part, or perhaps two or three very small parts, are given to each
laborer. Thus, one man makes one little part of a watch, another a second part, and
there are so many little parts that to organize properly a watchmaking establishment
requires the cooperation of at least three hundred persons. There are sixty or seventy
distinct branches in the manufacture of a piano, and as many in the manufacture of
a boot. But if there is division of labor, there is equally cooperation of labor.
The parts divided must be united to form one whole. When the phrase division of labor
is used we look at one side of the process; when we use the word cooperation we are
looking at the matter from the opposite side. Division of labor, machinery, and the
use of natural powers form the chief part of the explanation of the marvelous increase
in the productivity of the productive factors. So great is that increase that one
man in our day can accomplish tasks that formerly occupied ten, one hundred, or even
a thousand men. When several men work at one completed product in such a way that
each individual is employed upon some separate piece of the whole, we have what has
been called complex division of labor. When, on the other hand, the single
process is one which calls for the joint action of two or more men, as in the case
of two men hammering the same heated iron, we have what has been called simple
division of labor.
Territorial Division of Labor. -- There is one special form of division of labor which has received the name territorial. We have already given many instances of this form. Certain Southern states are able to produce cotton at a special advantage; the Northwest has a similar advantage in the growing of wheat; western Pennsylvania, finds her most profitable industry in the mines; western New York has certain areas specially adapted to the culture of the grape; Cuba has surpassing opportunities for the raising of choice tobacco; the Philippine Islands are favored by nature in the article of hemp; northern Wisconsin has been a center of an unusually rich timber growth; Alaska is a most fruitful field for gold mining; and so we might extend the list indefinitely. Passing from country to country, we would find the same or even greater specialized local advantages. In all such cases, through the greatly increased facilities for transportation, men of the various sections are able to devote the greater part of their [p. 159] energies to the products for which those sections are peculiarly adapted. This division of labor, by which industries are specialized in certain localities or nations, we call territorial division of labor. If the different sections compared lie in different nations, the term international division of labor is, also applicable.
Advantages of Division of Labor. -- It will be profitable for us to analyze somewhat closely the advantages of division of labor. First of all, division of labor secures a gain of time. A change of operations by the individual laborer in his work costs time. Under a proper system of divided labor less time also is consumed in learning one's business as the labor of each is more simple. In the second place greater skill is acquired, because each person confines, himself to one operation and in that becomes remarkably proficient. In the third place, labor is used more advantageously. Some parts of an industrial process can be performed by a weak person, while others require unusual physical strength; some require extraordinary intelligence, while others can be performed by a man of very ordinary intellectual powers. Each one is so employed that his power is more completely utilized, and work is found for all, young and old, weak and strong, stupid and intelligent. Again, inventions are more frequent under a system of division of labor, because the industrial processes are so divided that it is easy to see just where an improvement is possible. Moreover, when a person is exclusively engaged in one simple operation he often reflects on it and comes to understand it thoroughly, and to see how the appliances which be uses could be improved. Laborers have made many important inventions. Finally, division of labor makes possible a better utilization of capital. Each worker uses one set of tools or one part of a set, and keeps them employed all the time. When each laborer does many things he has many more tools, and some are always idle.
Disadvantages. -- The disadvantages of a division of labor should also
be noticed. The system makes it possible to employ women and children, and the proportion
of men employed [p. 160] consequently decreases. Child labor and labor
of women often displace that of men, so that in American cities one sometimes finds
fathers at home keeping house while children and wives are at work in factories.
The home is thus demoralized, and the rising generation is likely to become weak
in body and mind and depraved in character.
The dependence of man upon man is increased in the manner previously described, and
this is frequently, at least in part, an evil. Moreover, an international dependence
arises which occasionally produces intense suffering. The so- called "cotton-famine"
in the north of England during the American civil war illustrates this possibility.
America grew cotton, England manufactured it, and this seemed to work well until
it became impossible for England to secure the cotton supply from our South. The
result was intense suffering of hundreds of thousands of working people, who were
in nowise responsible for the distant war.
Laborers are often rendered helpless on the occasion of a change of production, having learned to do only one thing, which is now no longer required, and having become too old to acquire a new skill. Dickens describes evils of this kind in his Hard Times.
When labor is rendered simple it often loses both its attractiveness and its educational value at the same time. A man can love his work when he manufactures a whole watch, bearing the impress of care and skill; but who can love the mere routine of raising a sledge-hammer and letting it fall for ten hours a day? M. de Toequeville, in his Democracy in America, attributed the high average intelligence of Americans to the fact that labor, when he wrote, was not so divided with us as elsewhere.
Increased Productivity.-- The tremendous increase of productive power, due to division of labor, has often been estimated more or less accurately. It has been said, for example, that modern inventions and discoveries in the great civilized nations have rendered possible and actual a productive power for each family of five persons equivalent to the labor of sixty slaves in classical Athens. Now the civilization of Athens was based on slavery, and it is estimated that there were twelve slaves to a free Athenian family. Natural forces, therefore, if we may accept this estimate, do for us five times as much as slavery did for the classic city.
From Part
3, CHAPTER VII
Cooperation is of two kinds: coercive, which means cooperation controlled by governmental action, and voluntary. We have here to do with voluntary cooperation, and this is what is usually meant when cooperation is spoken of. Workingmen combine their own capital, purchase their own plant, manage their own affairs in their own way, at their own risk, sharing profit or loss as the case may be. This is called productive cooperation. ... It is held that this arrangement promotes economical use of material and machinery by employees, generally increases their zeal and efficiency, and hence results in a larger total product and a larger revenue for the wage-receivers.
If we call industry, as ordinarily organized in our great mercantile and manufacturing establishments, a form of despotism, we may call an establishment where laborers participate in capital ownership and management, under the chief control of some one who is recognized as an industrial superior, a constitutional monarchy. These terms, although indicative of mere analogies, are, after all, instructive. The despotic principle, the one-man power, both in politics and in industry, is an excellent thing in its own time and place, and in industry it has necessarily continued longer than in the political sphere. It is a phase of development, but it ought not to be regarded as final. A large part of the industrial troubles of modern society undoubtedly find their origin in the fact that development of the economic department of social life has proceeded more slowly than the development of other departments. Elsewhere the despotic principle has been softened or displaced, whereas in the economic sphere it still continues and forms a discordant element. Yet it is difficult for most of us to see how for a long time to come we can wholly dispense with the one-man principle in industry. It should, however, be softened as far as practicable, and men should be gradually trained to understand industrial republicanism or democracy. ... As opposed to "industrial despotism" and "industrial monarchy," "industrial democracy" means self-rule, self-control, the self-direction of the masses in their efforts to gain a livelihood. Industrial democracy is industrial self- government, and this is found in pure cooperation.
A good example of pure cooperation is afforded by the three cooperative barrel manufacturing companies in Minneapolis, which together have an output of nearly two million barrels annually. Pure cooperation, when well established, prevents strikes by completely identifying the interests of labor and capital. It stimulates energy and encourages thrift. The self-interest which usually animates only the employer here animates all cooperators. No slighting of work can be tolerated, and, eye-service vanishing, much labor of supervision is done away with.
It was once thought that corporations could not succeed, and even Adam Smith decided
against them after a long a priori argument, but the inherent advantages of corporate
industry have after a long struggle made themselves manifest, and corporations are
in very great measure replacing the individual in business. In the same way, it is
believed by some students of the subject that the inherent advantages of cooperation
will sooner or later make themselves felt, and after a period of adversity, of struggle,
and of slowly increasing success cooperation will finally gain industrial supremacy;
thus uniting harmoniously labor and capital and ushering in an era of industrial
democracy.
CHAPTER IX
Monopoly means that substantial unity of action on the part of one or more persons engaged in some kind of business which gives exclusive control more particularly, although not solely, with respect to price. It will be found on examination that some monopolies are social in their origin, while others are natural as opposed to social. Of the social monopolies some are consciously instituted by government, with the desire to further the general welfare. Such monopolies we therefore call general welfare monopolies. Among these are patents, copyrights, trademarks, ... Another class of social monopolies consists of those which have their origin in special privileges granted either by government directly, ... [or] existing by the tolerance of government. There are three distinct classes of natural monopolies: those arising from such a limitation of supply of raw material as enables a small group of persons to control the entire output; those arising from secrecy regarding methods or processes; and, finally, those arising from properties inherent in the business. These last ones, because they play an important part in the everyday life of men, will be considered more at length later.
Social Monopolies.-Only
a word can be said about social monopolies. Businesses are social monopolies when
they are made monopolies not by their own inherent properties, but by legislative
enactment or by the formation of a close connection with powerful natural monopolies,
whereby they are made to partake of the qualities of the latter. Such monopolies
are social in the sense that they have their origin in the social will or consent,
and continue to exist by virtue of positive social action-as in the case of legislation-or
by social tolerance. Kings and queens formerly granted exclusive business privileges
to favored persons, and permitted no one except those named to engage in certain
undertakings. These early monopolies became so odious that sovereigns were compelled
to abandon their claims of right to grant exclusive economic privileges. ... [Also,]
Government creates exclusive privileges by copyright and patent laws, but this is
done professedly in the interest of the general public and not of any favored class.
Natural Monopolies.- Natural monopolies have been the subject of frequent reference in other chapters of this book. It now remains to sum up and complete what has been said and to consider them with particular reference to distribution. Natural monopolies are those which rest back on natural arrangements as distinguished from social arrangements. The term natural is here used in its well-understood and customary sense as indicating something external to man's mind. A natural monopoly is one which, so far from giving expression to the will of society, grows up apart from man's will and desire, as expressed socially, and frequently even in direct opposition to his will and desire as thus expressed. The principal natural monopolies have been enumerated. They are wagon roads and streets, canals, docks, bridges and ferries water ways, harbors, lighthouses, railways, telegraphs, telephones, the post office, electric lighting, water works, gas works, street cars of all kinds. As a result of years of work in this field of study the author has formulated a statement which summarizes and combines the true features of such natural monopolies. The formulation is as follows: "Whenever there is a decided and continuous increment in gain resulting from combination, we have a tendency to monopoly which will overcome all obstacles. It is this increment in gain which is the cause of monopoly. Now, that cause operates when we have to do with businesses which occupy peculiarly favorable spots or lines of land furnishing services or commodities which must be used in connection with the plant."
Combination and Competition.-It was long ago said by a shrewd English engineer that where combination is possible competition is impossible. Combination is always possible in the case of undertakings which are natural monopolies.* It is inevitable, for it is not only cheaper to do a given amount of business by a monopoly than by two or more concerns, but even very much cheaper. If two gas companies in a city, having each a capital of a million dollars, are able, operating separately, to make ten per cent profits, when combined they will make much more than ten per cent, possibly even fifteen or twenty per cent. There is a force continually at work drawing them together. It works as constantly if not as uniformly as the attraction of gravitation, and in I the discussion of natural monopolies we can safely predict consolidation.
What shall be our policy? Monopoly is inevitable. Private monopoly is odious. The test of experience approves public monopoly. Fear and trembling have usually attended experiments in public monopoly, but, as a rule, the results have in the long run been gratifying. Public ownership and public management of railways have in Germany succeeded in many respects even better, than their advocates anticipated, and the opinion of experts in Germany favors them without an exception, so far as the author has been able to learn.
The Advantages Claimed.-The principal advantages which, it is hoped, will attend public ownership and management of such monopolies are as follows:
1. Increase of Public Prosperity.-First, a diffusion of the income from the monopolies among the community will take place, and this will tend to prevent an undue concentration of wealth, while promoting general prosperity.
2. Economy.-The second great advantage is the greater economy of public ownership and management. In every city are manifold evidences that attempted competition eats up a large part of what might be profit. Gas can well be supplied at a profit in most. great cities, if the business is a perfect monopoly, for seventy-five cents or less per thousand. English cities supply it for less. The city of Wheeling supplies gas for seventy-five cents a thousand and "makes money." The Baltimore Gas Company's charge of one dollar and ten cents a thousand-the price just fixed by the legislature-apparently will not earn a great deal of money for the stockholders. What is the reason? Simply this: that the present company is a combination of half a dozen or more companies which have built works, dug up the streets, put gas mains in them, and run pipes into houses. An enormous sum of money-millions of dollars-has been wasted, and this waste is represented by bonds, as well as by an enormously inflated capitalization. The capital has simply been wasted. No one has received the benefit, but the people of Baltimore have suffered the loss, inconvenience, and damage of uselessly torn-up streets. The experience of Baltimore is that of nearly all large American cities. When services of a monopolistic nature are performed by the public, water, gas, and electric-lighting services can all be combined, and great economies secured. A better management is the result.
3. Purification of Politics.-The third great advantage of the public ownership and management of natural monopolies is the purification of politics. Private monopolies must be controlled by public authority. But control means interference with private business, and interference begets corruption. When, however, we have public ownership and management of natural monopolies, public interests and private interests are identified ....
4. Will Overthrow Injurious Social Monopolies.-The fourth advantage is that the discrimination between public and private business here advocated will prevent the existence of many social monopolies which are oppressive. Certain business men have been able to build up injurious social monopolies through their having been favored by those in control of natural monopolies, as, for example, by receiving lower freight rates than their competitors have been able to secure. The just and equal treatment of all citizens by all natural monopolies would help to give all a fair chance, and would confine the concentration of business to its legitimate limits.
*The author here is speaking chiefly about the second sub-class under natural monopolies, namely, B. II.