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 LIBRARY ^ 
 
 UNIVERSITY OF 
 CALIFMNIA 
 
 SAN OIEGO
 
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 THE 
 
 Modern Distributive Process. 
 
 STUDIES OF COMPETITION AND ITS LIMITS, OF THE 
 
 NATURE AND AMOUNT OF PROFITS, AND OF 
 
 THE DETERMINATION OF WAGES, IN THE 
 
 INDUSTRIAL SOCIETY OF TO-DAY 
 
 BY 
 
 JOHN B. CLARK, 
 
 AUTHOR OF THE " PHILOSOPHY OF WEALTH,' 
 
 FRANKLIN H. GIDDINGS. 
 
 BOSTON : 
 
 PUBLISHED BY GINN & COMPANY. 
 I8S8.
 
 Copyright, i8S8, 
 By JOHN B. CLARK 
 
 AND 
 
 FRANKLIN H. GIDDINGS. 
 
 TVPOCRAPHV DY J. S. CuSHING & Co., PrESSWORK HV GiNN & CoMPANV, 
 
 Boston. Boston.
 
 PREFACE. 
 
 A SYSTEMATIC restatement of the facts and laws of the Distribution 
 of Wealth is not attempted in these studies. Nothing is said in them, 
 except incidentally, of interest and rent. They are studies of the 
 process by which the income of modern society is divided among its 
 principal claimants. There is presented to the student of to-day a more 
 highly organized industrial system, and a more complicated process of 
 apportioning the social income, than those that were observed by Adam 
 Smith, David Ricardo, and John Stuart Mill. By the operations of 
 trade the total product of industry is divided and subdivided among 
 certain naturally constituted groups and sub-groups. The income fall- 
 ing to each sub-group is apportioned among its component economic 
 classes, capitalists, laborers, etc., by the bargains that they make with 
 each other. In each of these dividing acts, artificial combinations, — the 
 pools, trusts, labor unions, etc., of recent times, — have come to play a 
 part so prominent that competition would seem, at the first view, to be 
 abolished at important points. The mode of its working has been, in 
 fact, so changed as to demand a new scientific treatment. 
 
 It is the aim of these studies to analyze the natural group system of 
 modern industry ; to determine where within it competition is possible, 
 and where combination is naturally invited ; to ascertain the extent to 
 which this movement checks individual rivalry ; and to determine the 
 nature and scope of that residual competition which is the controlling 
 principle of the new regime. They thus undertake to separate that 
 which is transient from that which is permanent in the Ricardian Theory 
 of Distribution. 
 
 They analyze into its elements the sum traditionally termed profits, 
 and show that an essential element, the only part of the gross sum to 
 which the term pure profit can be applied, has not been clearly distin- 
 guished by the traditional analysis, and that, as a matter of course, the 
 special laws that determine its amount have not been established. 
 They show that the tendency of modern competition is to sweep this
 
 iv PREFACE. 
 
 pure profit out of existence, while tliat of otlier forces is to cause it con- 
 tinually to reappear. The view of social evolution which these conclu- 
 sions afford is that of a progress toward equity between men promoted 
 by combinations, but guaranteed by the deeper and more general in- 
 fluence of competition itself. Injustice is diminishing, and that by 
 natural law. These studies, however, take especially into accouM the 
 ethical consciousness of society, which not only sets up an ideal toward 
 which society should tend, but, by public opinion, by legislation, and in 
 many subtle but effective ways promotes the natural movement in that 
 direction. 
 
 The complementary character of these essays by two writers is not a 
 premeditated result of joint authorship. The joint authorship was 
 agreed upon, because it was discovered that, working independently, the 
 writers had arrived at complementary conclusions. The essays were 
 originally published in the Political Science Quarterly, and are now re- 
 published by the kind permission of the editors of that review.
 
 TABLE OF CONTENTS. 
 
 CHAPTER I. 
 
 The Limits of Competition. 
 
 By J. B. Clark. 
 
 Current economic theories deducible from the assumption of unlimited compe- 
 tition. Ricardo's system originally based on actual changes in industry; 
 the conditions of his time transitional. The contest between weak competi- 
 tors and strong ones, in certain industries, now decided; the strong only 
 surviving, and these forming confederacies for the purpose of checking 
 competition. Labor doing the same. Predatory competition vaguely con- 
 ceived; Professor Cairnes' effort to obtain a systematic theory of it. His 
 conception of cost of production, and his theory of non-competing groups. 
 These groups now practically merged. Machinery the chief leveller. Sur- 
 viving groups based on intellectual and moral differences among workmen. 
 Entrepreneur's labor more permanently separated from other labor. Lev- 
 elling tendencies specially active in America; these tendencies resisted by 
 trades unions; the resistance in the end unavailing. Competition more 
 effectively resisted by producers' unions. Pools as based on a normal 
 principle, to be regulated, l)ut not suppressed. A typical producing group, 
 consisting of sub-groups or strata, each containing capitalists and laborers. 
 True competition confined by nature within the horizontal lines that sepa- 
 rate strata. Radical difference between this grouping and that of Professor 
 Cairnes. Abnormal competition the cause of combinations. Control of 
 prices their aim; the restricting of production the means employed. Resid- 
 ual competition still an efficient regulator of prices. Combinations limited 
 to natural groups; fewness of competitors a cause of union; comparative 
 equality among them a necessary condition. Pools impossil)le in agricul- 
 ture. The effect of cheap transportation. Protective tariffs aids to national 
 combinations, and barriers against international ones. Legal regulation of 
 pools desirable; the complete suppression of them neither desirable nor 
 possible.
 
 VI TABLE OF CONTENTS. 
 
 CHAPTER II. 
 The Persistence of Competition. 
 
 By F. H. GiDDiNGS. 
 
 The principle of competition fundamental in English Political Economy. 
 Studies and predictions of Mr. Bagehot. The theory of Professor Cairnes. 
 Recent revival of non-competitive methods. Suppression of competi- 
 tion predicted. Combinations play an increasingly important part, but 
 competition not destroyed. In some form a permanent economic process. 
 The combination equilibrium unstable. History of combinations. Fall 
 of prices. The nail combinations. Trunk line railroad allotments. 
 Coal combinations. The wall paper pool. Conditions determining the 
 area within which combinations can govern market competition. The 
 industrial structure of society. Two kinds of non-competing groups. 
 Any one combination usually confined within a single group. The groups 
 unlike in composition and unequal in condition. Combination difficult 
 in some, easy in others. When combination restrictions are beneficial. 
 What becomes of the competitive forces. Development of new utilities. 
 Steel substitutes for iron. Production of Bessemer steel. The higher 
 forms of competition. Combinations cannot keep production below the 
 full supply of society's needs. Nor prices above the level that yields aver- 
 age returns to labor and capital. The competitive forces. Efficiency 
 of combinations varies with industrial prosperity. Combination Policy. 
 Essential principles of Ricardian Economics re-affirmed. 
 
 CHAPTER III. 
 Profits under Modern Conditions. 
 
 By J. B. Clark. 
 
 Danger to society from vague ideas concerning business profits. Entrepreneur's 
 returns not scientifically analyzed. These returns the result of two unlike 
 functions; an employer, first, a directive laborer, and secondly, a merchant. 
 A manufacturer, a purchaser of raw materials, and of certain shares of the 
 utilities created in the manufactory. The workmen's share paid for in 
 wages, and the capitalist's in interest. Pure profit the difference between 
 the total amount paid for the elements of the product, and the amount 
 received for the product. Labor and capital involved in the mercantile part 
 of the business; payment for them included in wages and interest. The
 
 TABLE OF CONTENTS. vil 
 
 mere acquiring and surrendering of ownership the essence of the entre- 
 preneur's function. The above analysis not vitiated by the uniting of sev- 
 eral functions in one person. The elements in the cost of a product not 
 controlled by the employer; the selling price of it not controlled by him. 
 Pure profit determined by general and irresistible forces. This sum capable 
 of being reduced by bad management, but not of being increased beyond a 
 certain point by good management. Competition, a cause of high and com- 
 paratively uniform managing ability in rival establishments. The division 
 of the labor of management conducive to this result. Contrasts between 
 the law of Rent and that of Profits; the area of cultivation extending; the 
 range of managing ability narrowing. Tendency of wages of management 
 toward uniformity. Tendency of the law of increasing returns in general 
 business to produce a normal and permanent over-production. The pres- 
 ence of experimenters in the business field a disturbing influence. The 
 natural check upon too high wages of management. Pure mercantile profit 
 the only conceivable sum from which great additions to general wages can 
 come. This profit in reality a vanishing sum, having, in a competitive sys- 
 tem, only a local and temporary existence. The effect of alternations from 
 business activity to depression, and that of the opening of a continent to 
 settlement. The eR"ect of invention; the profit gained by this means a guar- 
 anty for civilization. The entire gain from invention transferred, in the end, 
 to society. The testimony of statistics to the general truth of the foregoing 
 principles. The tendency of industrial development to connect personal 
 rewards with services rendered to society. 
 
 CHAPTER IV. 
 The Natural Rate of Wages. 
 
 By F. H. GiDDiNGs. 
 
 Two sets of forces operating with reference to the rate of wages. Automatic 
 forces of competition. Self-conscious forms of human feeling and opin- 
 ion. Three different views among economists. The true wages problem. 
 Standards of just wages. Communistic and individualistic ideals. No 
 absolute contradiction. The natural value of work. The rule of ideal 
 distribution. The English doctrine of the natural rate of wages. Adam 
 Smith's definition. Ricardo's theorem. John Stuart Mill's criticism. The 
 soul of truth in the Ricardian idea. The natural rate of wages is the rate 
 that calls out the laborer's potential efficiency. The economical rate is 
 also the ethical rate. The actual rate of wages. The wages fund doctrine. 
 Cobden's formula. Competition of employers raises wages notwithstanding
 
 viii TABLE OF CONTENTS. 
 
 the economy of consolidations. Analogy of rent. Improving industry 
 multiplies employers or compels the original number to divide their gains 
 with the laborers. The actual rate of wages tends to conform to the nat- 
 ural or ethical rate. Exceptions to the rule. The competitive process 
 inherently defective. Exploitation of wages. No automatic correction 
 that meets the case. True significance of the ratio of capital to population. 
 Where altruism fails. Associated self-defence of labor necessary. What 
 labor organizations and legislation can accomplish. The sums that can be 
 added to wages. Economic analysis of the strike. Principles governing 
 the coherence of labor organizations. Mi-.take of the Knights of Labor. 
 Arbitration and legislation subject to the same principles. The rate of 
 wages made mainly by competitive forces. Moral forces acting through 
 organization and public opinion correct distributive errors due to defects in 
 the competitive process. Carried farther, legislation and demands of organi- 
 zations but retard progress.
 
 THE LIMITS OF COMPETITION. 
 
 THERE is a sense in which much of the orthodox system of 
 political economy is eternally true. Conclusions reached 
 by valid reasoning are always as true as the hypotheses from 
 which they are deduced. If we admit the fact of unlimited 
 competition, we concede in advance many doctrines which cur- 
 rent opinion is now disposed to reject. This refuge will always 
 be open to the latter-day defenders of the faith, as they are 
 confronted by greater and greater discrepancies between their 
 system and the facts of life ; it will remain forever true that if 
 unlimited competition existed, most of the traditional laws 
 would be realized in the practical world. It will also be true 
 that in those corners of the industrial field which still show an 
 approximation to Ricardian competition there will be seen as 
 much of correspondence between theory and fact as candid 
 reasoners claim. If political economy will but content itself 
 with this kind of truth, it need never be disturbed by industrial 
 revolutions. The science need not trouble itself to progress. 
 
 This hypothetical truth, or science of what would take place 
 if society were fashioned after an ideal pattern, is not what 
 Ricardo believed that he had discovered. His system was posi- 
 tive ; actual life suggested it by developing tendencies for which 
 the scientific formulas which at that time were traditional could 
 not account. It was a new industrial world which called for a 
 modernized system of economic doctrine. Ricardo was the first 
 to understand the situation, to trace the new tendencies to their 
 consummation, and to create a scientific system by insight and 
 foresight. He outran history in the process, and mentally 
 created a world more relentlessly competitive than any which 
 has existed ; and yet it was fact and not imagination that lay at 
 the basis of the whole system. Steam had been utilized, ma- 
 chines were supplanting hand labor, workmen were migrating 
 to new centres of production, guild regulations were giving way,
 
 2 POLITICAL SCIENCE QUARTERLY. 
 
 and competition of a type unheard of before was beginning to 
 prevail. 
 
 A struggle for existence had commenced between parties of 
 unequal strength. In manufacturing industries the balance of 
 power had been disturbed by steam, and the little shops of for- 
 mer times were disappearing. The science adapted to such 
 conditions was an economic Darwinism ; it embodied the laws 
 of a struggle for existence between competitors of the new and 
 predatory type and those of the peaceable type which formerly 
 possessed the field. Though the process was savage, the out- 
 look which it afforded was not wholly evil. The survival of 
 crude strength was, in the long run, desirable. Machines and 
 factories meant, to every social class, cheapened goods and more 
 comfortable living. Efficient working establishments were de- 
 veloping ; the social organism was perfecting itself for its con- 
 test with crude nature. It was a fuller and speedier dominion 
 over the earth which was to result from the concentration of 
 human energy now termed centralization. 
 
 The error unavoidable to the theorists of the time lay in 
 basing a scientific system on the facts afforded by a state of 
 revolution. This was attempting to derive permanent princi- 
 ples from transient phenomena. Some of these principles must 
 become obsolete ; and the work demanded of modern econo- 
 mists consists in separating the transient from the permanent 
 in the Ricardian system. How much of the doctrine holds true 
 when the struggle between unequal competitors is over, and 
 when a few of the very strongest have possession of the field } 
 Can the old-time competition be trusted to divide the fruits of 
 industry between one overgrown shop and another, and between 
 the owners and the workmen in each } Can this same force 
 control railroads, as it once controlled stage-coaches and packet- 
 sloops } To be more accurate, are the transactions of consoli- 
 dated railroad lines governed by the same principles as those 
 of single railroads and stage-coach lines when these are com- 
 peting with each other } Docs the old regulating principle 
 at present exist, and will general well-being continue to evolve 
 itself under its unaided influence ,-' An economic system
 
 THE LIMITS OF COMPETITION". 3 
 
 adapted to the modern era must begin by answering these 
 questions. 
 
 In most branches of manufacturing, and in other than local 
 transportation, the contest between the strong and the weak is 
 either settled or in process of rapid settlement. The survivors 
 are becoming so few, so powerful, and so nearly equal that if the 
 strife were to continue, it would bid fair to involve them all in 
 a common ruin. What has actually developed is not such a 
 battle of giants, but a system of armed neutralities and federa- 
 tions of giants. The new era is distinctively one of consolida- 
 ted forces ; rival establishments are forming combinations, and 
 the principle of union is extending itself to the labor and the 
 capital in each of them. Laborers, who once competed w-ith 
 each other, are now making their bargains collectively wdth 
 their employers. Employers, who under the old r(fgiine would 
 have worked independently, are merging their capital in cor- 
 porations, and allowing it to be managed as by a single hand. 
 We need Ricardo's insight and foresight if we are to attain the 
 economic laws that are to govern the transactions of the prac- 
 tical world. The changes which w'e are witnessing are as start- 
 ling in character as those which he witnessed, and are on a 
 scale of greater magnitude. There is this difference between 
 his scientific position and ours, namely, that he saw before 
 him an interval of contest that must of necessity, sooner or 
 later, come to an end ; while we see approaching a period 
 of union which gives a promise of indefinite continuance. He 
 studied the evolution that created a type of industrial estab- 
 lishment ; we have to study the functions of this surviving 
 type. History will aid us by furnishing a point of departure, 
 and by indicating the direction of social development, but not 
 by giving facts from which any possible induction can give the 
 principles which we seek. The light derivable from past facts 
 is negative ; that derivable from present tendencies is positive. 
 The materials for study lie in the present and the immediate 
 future ; and, to be scientific, we must be somewhat prophetic. 
 
 Predatory competition between unequal parties was the basis 
 of the Ricardian system. This process was vaguely conceived
 
 4 POLITICAL SCIENCE QUARTERLY. 
 
 and never fully analyzed ; what was prominent in the thought 
 of men in connection with it was the single element of stru2;s:le. 
 Mere effort to survive, the Darwinian feature of the process, 
 was all that, in some uses, the term competition was made to 
 designate. Yet the competitive action of an organized society 
 is systematic ; each part of it is limited to a specific field, and 
 tends, within these limits, to self-annihilation. 
 
 An effort to attain a conception of competition that should 
 remove some of the confusion was made by Professor Cairnes. 
 His system of "non-competing groups" is a feature of his value 
 theory, which is a noteworthy contribution to economic thought. 
 Mr. Mill had followed Ricardo in teaching that the natural price 
 of commodities is governed by the cost of producing them. 
 Professor Cairnes accepts this statement, but attaches to it a 
 meaning altogether new. He says, in effect : 
 
 Commodities do indeed exchange according to their cost of produc- 
 tion ; but cost is something quite different from what currently passes 
 by that name. That is merely the outlay incurred by the capitalist- 
 employer, for raw materials, labor, etc. The real cost is the personal 
 sacrifice made by the producing parties, workmen as well as employers. 
 It is not a mercantile but a psychological phenomenon, a reaction upon 
 the men themselves occasioned by the effort of the laborer and the 
 abstinence of the capitalist. These personal sacrifices gauge the market 
 value of commodities within the fields in which, in the terms of the 
 theory, competition is free. The adjustment takes place through the 
 spontaneous movement of capital and labor from employments that yield 
 small returns to those that give larger ones. Capital migrates freely 
 from place to place and from occupation to occupation. If one indus- 
 try is abnormally profitable, capital seeks it, increases and cheapens its 
 product, and reduces its profits to the prevailing level. Profits tend to 
 a general uniformity. 
 
 Wages are said to tend to equality only within limits. The 
 transfer of labor from one employment to another is checked 
 by barriers. 
 
 What we find, in effect [continues Professor Cairnes], is not a whole 
 population competing indiscriminately for all occupations, but a series of 
 industrial layers, superimposed on one another, within each of which the 
 various candidates for employment possess a real and effective power of
 
 THE LIMITS OF COMPETITION: 5 
 
 selection, while those occupying the several strata are, for all purposes of 
 effective competition, practically isolated from each other. We may 
 perhaps venture to arrange them in some such order as this : first, at the 
 bottom of the scale there would be the large group of unskilled or nearly 
 unskilled laborers, comprising agricultural laborers, laborers engaged in 
 miscellaneous occupations in towns, or acting in attendance on skilled 
 labor. Secondly, there would be the artisan group, comprising skilled 
 laborers of the secondary order, — carpenters, joiners, smiths, masons, 
 shoemakers, tailors, hatters, etc., etc., — with whom might be included the 
 very large class of small retail dealers, whose means and position place 
 them within the reach of the same industrial opportunities as the class 
 of artisans. The third layer would contain producers and dealers of a 
 higher order, whose work would demand qualifications only obtainable 
 by persons of substantial means and fair educational opportunities ; for 
 example, civil and mechanical engineers, chemists, opticians, watch- 
 makers, and others of the same industrial grade, in which might also find 
 a place the superior class of retail tradesmen ; while above these there 
 would be a fourth, comprising persons still more favorably circumstanced, 
 whose ampler means would give them a still wider choice. This last 
 group would contain members of the learned professions, as well as per- 
 sons engaged in the various careers of science and art, and in the higher 
 branches of mercantile business. 
 
 It is essential to the theory that not only workmen but their 
 children should be confined to a producing group. The equal- 
 izing process may take place even though men do not actually 
 abandon one occupation and enter another ; for there exists, in 
 the generation of young men not yet committed to any occupa- 
 tion, a disposable fund of labor, which will gravitate naturally 
 to the occupations that pay the largest wages. It is not neces- 
 sary that blacksmiths should ever become shoemakers, or vice 
 versa, but only that the children of both classes of artisans 
 should be free to enter the trade that is best rewarded. 
 
 Professor Cairnes does not claim that his classification is 
 exhaustive, nor that the demarcation is absolute : 
 
 No doubt the various ranks and classes fade into each other by imper- 
 ceptible gradations, and individuals from all classes are constantly pass- 
 ing up or dropping down ; but while this is so, it is nevertheless true 
 that the average workman, from whatever rank he be taken, finds his 
 power of competition limited for practical purposes to a certain range of
 
 6 POLITICAL SCIENCE QUARTERLY. 
 
 occupations, so that, however high the rates of remuneration in those 
 which Ue beyond may rise, he is excluded from sharing them. We are 
 thus compelled to recognize the existence of non-competing industrial 
 groups as a feature of our social economy. 
 
 It will be seen that the competition which is here under dis- 
 cussion is of an extraordinary kind ; and the fact that the gen- 
 eral term is applied to it without explanation is a proof of the 
 vagueness of the conceptions of competition with which acute 
 writers have contented themselves. Actual competition con- 
 sists invariably in an effort to undersell a rival producer. A 
 carpenter competes with a carpenter because he creates a simi- 
 lar utility, and offers it in the market. In the theory of Pro- 
 fessor Cairnes the carpenter is the competitor of the blacksmith, 
 because his children may enter the blacksmith's calling. In 
 the actual practice of his own trade, the one artisan in nowise 
 affects the other. It is potential competition rather than actual 
 that is here under discussion ; and even this depends for its 
 effectiveness on the action of the rising generation. 
 
 Cost, in the sense of personal sacrifice, governing prices 
 within the fields in which potential competition exists, is the 
 summary of this noteworthy theory. The criticism to be made 
 upon it is that the application of its more fundamental princi- 
 ple, that which connects the prices of commodities with the 
 sacrifices involved in producing them, is, in modern industry, 
 far wider than the author of the theory supposed, and wider 
 than it was, in fact, in European countries at the time when he 
 published his work. The limitations which he imposed on the 
 action of this principle are no longer necessary, and the four- 
 fold grouping of laborers according to their personal qualities 
 no longer corresponds with anything in actual life. 
 
 Modern methods of production have obliterated Professor 
 Cairnes' dividing lines. Potential competition extends to every 
 part of the industrial field in which men work in organized com- 
 panies. Throwing out of account the professions, a few trades 
 of the highest sort, and the class of labor which is performed 
 by employers themselves and their salaried assistants, it is 
 practically true that labor is in a universal ebb and flow ; it
 
 THE LIMITS OF COMPETITION. J 
 
 passes freely to occupations which arc, for the time being, 
 highly paid, and reduces their rewards to the general level. 
 
 This objection to the proposed grouping is not theoretical. 
 The question is one of fact ; it is the development of actual 
 industry that has invalidated the theory which, ten years ago, 
 expressed an important truth concerning economic relations in 
 England. Moreover, the author of the theory anticipated one 
 change which would somewhat lessen its applicability to future 
 conditions. He recorded his belief that education would prove 
 a leveller, and that it would merge to some extent the strata of 
 industrial society. The children of hod-carriers might become 
 machinists, accountants, or lawyers when they could acquire 
 the needed education. He admitted also that new countries 
 afford conditions in which the lines of demarcation are faint. 
 He was not in a position to appreciate the chief levelling 
 agency, namely, the machine method of production as now 
 extended and perfected. Education makes the laborer capable 
 of things relatively difficult, and machines render the processes 
 which he needs to master relatively easy. The so-called un- 
 skilled workmen stand on a higher personal level than those 
 of former times ; and the new methods of manufacturing are 
 reducing class after class to that level. Mechanical labor is 
 resolving itself into processes so simple that any one may learn 
 them. An old-time shoemaker could not become a watchmaker, 
 and even his children would have found difficulties in their way 
 had they attempted to master the higher trade ; but a laster in 
 a Lynn shoe factory can, if he will, learn one of the minute 
 trades that are involved in the making of a Waltham watch. 
 His children may do so without difficulty ; and this is all that 
 is necessary for maintaining the normal balance betvv^een the 
 trades. 
 
 The largest surviving differences between workmen are 
 moral. Bodily strength still counts for something, and mental 
 strength for more ; but the consideration which chiefly deter- 
 mines the value of a workman to the employer who entrusts to 
 him costly materials and a delicate machine is the question of 
 fidelity. Character is not monopolized by any social class ; it
 
 8 POLITICAL SCIENCE QUARTERLY. 
 
 is of universal growth, aixd tends, by the prominent part which 
 it plays in modern industry, to reduce to their lowest terins the 
 class differences of the former era. 
 
 The rewards of professional life are gauged primarily by 
 character and native endowment, and are, to this extent, open 
 to the children of workmen. New barriers, however, arise 
 here in the ampler education which, as time advances, is 
 demanded of persons in these pursuits ; and these barriers give 
 to a part of the fourth and highest class in the scheme that 
 we are criticising a permanent basis of existence. Another 
 variety of labor retains a pre-eminence based on native adapta- 
 tions and special opportunities. It is the work of the employer 
 himself. It is an organizing and directing function, and in 
 large industries is performed only in part by the owners. A 
 portion of this work is committed to hired assistants. Strictly 
 speaking, the entrepreneur, or employer, of a great establishment 
 is not one man, but many, who work in a collective capacity, 
 and who receive a reward that, taken in the aggregate, con- 
 stitutes the "wages of superintendence." To some members 
 of this administrative body the returns come in the form of 
 salaries, while to others they come partly in the form of divi- 
 dends ; but if we regard their work in its entirety, and consider 
 their wages in a single sum, we must class it with entrepreneur s 
 profits rather than with ordinary wages. It is a different part 
 of the product from the sum distributed among day-laborers ; 
 and this fact separates the administrative group from the class 
 considered in our present inquiry. Positions of the higher sort 
 are usually gained either through the possession of capital, or 
 through relations to persons who possess it. Though clerkships 
 of the lower grade demand no attainments which the children 
 of workmen cannot gain, and though promotion to the higher 
 grades is still open, the tendency of the time is to make the 
 transition from the ranks of labor to those of administration 
 more and more difficult. The true laboring class is merging 
 its subdivisions, while it is separating more sharply from the 
 class whose interests, in test questions, place them on the side 
 of capital.
 
 THE LIMITS OF COMPETITION: 9 
 
 If we consider individuals of the higtier group, we shall find 
 that the grounds for classifying them separately from wage- 
 workers are not always distinct. It may be doubtful whether 
 a particular man should be rated as a workman, or as a subor- 
 dinate member of the employer's staff. In the case of respon- 
 sible managers this uncertainty disappears. The manager of a 
 great manufactory does what is clearly identified as entrepreneur s 
 work, and receives a reward which, in the minds of those who 
 pay it, stands in a recognized ratio to the product which is 
 secured by his efificiency. Such a man is identified with em- 
 ployers in interest, acts with them when labor conflicts arise, 
 and carries with him the staff of assistants who help to execute 
 his plans and, in some degree, share his fortunes. Here lies 
 the essential distinction between salaried labor and the true 
 wage-labor to which our inquiry is now confined. 
 
 America affords the conditions most favorable to the levelling 
 process which is reducing the workman proper to a single social 
 stratum. To this extent our democracy has an economic basis. 
 Free education and native versatility elevate the lower sub- 
 strata, while machine processes depress the higher. High 
 general wages assist, by placing within the reach of the children 
 of the state that modicum of training which opens many callings 
 to their selection. The barriers that separated wage-earners 
 into broad non-competing strata are, to all intents and purposes, 
 things of the past. 
 
 Art may create barriers where nature has destroyed them. 
 The concerted action of men may set in motion aristocratizing 
 influences, where a natural evolution would lead to democracy. 
 Trades unions may obstruct the transfer of labor from one occu- 
 pation to another, and create a partial monopoly of favored 
 employments. Restrictions on apprenticeships like those which 
 prevailed among the mediaeval guilds might, if carried far 
 enough, erect a palisade around each of the minute trades which 
 the factory system has developed, and substitute for the general 
 strata of former times an artificial grouping far more undemo- 
 cratic in its practical working. Labor organization has in fact 
 taken this course, to an extent that produces appreciable effects
 
 lO POLITICAL SCIENCE QUARTERLY. 
 
 on relative wages. The boy who has both time and abihty to 
 learn a trade is not always permitted to do so ; and hence arises 
 the need of trade schools, especially in self-governing countries. 
 It is an important question whether the principle of equality 
 and consequent fraternity is to prevail over the artificial tendency 
 to exclusiveness and antagonism. In the long run and in the 
 general field it must prevail ; the forces in its favor are too pow- 
 erful to be resisted. The education which increases men's 
 working ability, the change of method which makes less and 
 less demands on that ability, supplemented by the public senti- 
 ment that revolts at the policy of denying to men the oppor- 
 tunity to do what they can for themselves and for society, will 
 keep within bounds the effort to monopolize skill by reviving 
 guild regulations. Trades unions may, for some time, interpose 
 obstacles to the free transfer of labor to the points of greatest 
 demand, which is the potential competition of Professor Cairnes' 
 theory ; but, in the long run, causes beyond arbitrary control 
 will keep this movement nearly free. 
 
 It is not workmen but employers who have erected the chief 
 artificial barriers against competition. A startling recent devel- 
 opment is the system of combinations by which producers of 
 particular articles have attempted arbitrarily to control the 
 supply and the market value of their respective products. This 
 apparently wholesale abrogation of economic law was unthought 
 of by early economists ; and although in Professor Cairnes' time 
 the pooling process had begun, even he regarded capital as in 
 a universal ebb and flow, ready to move spontaneously to the 
 point where it could gain the largest returns. Toward the 
 close of what we have termed the century of transition, pro- 
 ducers' combinations appeared on a large scale ; and very lately 
 they have stolen a forced march upon economists. While we 
 slept, as it were, and dreamed of the regulation of values by 
 the automatic flow of capital to the points of highest profit, the 
 principle apparently ceased to operate within very extensive 
 fields. It would be easy to name a hundred staple articles, 
 like glass, wall-paper, cut nails, screws, files, spool silk, anthra- 
 cite coal, steel rails, etc., of which the supply and the market
 
 THE LIMITS OF COMPETITION: \ \ 
 
 value are fixed by agreement by strong associations of producers. 
 The scientific significance of this transition is a question for 
 immediate study. Have we come unconsciously under a regime 
 of arbitrary values } Is the old regulating principle, competition, 
 abrogated.' Is it subject to disturbances so vast and uncertain 
 as to baffle scientific calculation } 
 
 The practical inquiry must be guided here as elsewhere by a 
 study of principles. Combinations have their roots in the 
 nature of social industry and are normal in their origin, their 
 development, and their practical working. They are neither to 
 be deprecated by scientists nor suppressed by legislators. They 
 are the result of an evolution, and are the happy outcome of a 
 competition so abnormal that the continuance of it would have 
 meant wide-spread ruin. A successful attempt to suppress them 
 by law would involve the reversion of industrial systems to a 
 cast-off type, the renewal of abuses from which society has 
 escaped by a step in development. Combinations are to be 
 accepted, studied, and, probably, regulated ; they ought not to 
 be suppressed if such action were practicable. This action is 
 fortunately not practicable except in the early stages of their 
 growth, while their form is still crude, and while the initial dififi- 
 culties of the system are great. The repressive policy may 
 then, for a time, succeed ; but it must be at the cost of social 
 retrogradation and economic loss. 
 
 Modern production is not an individualistic process ; it is the 
 act of society as a whole, and each separate man in the ranks 
 finds his function narrowly limited. Parts of the productive 
 operation are assigned to sub-organizations, and these are sub- 
 jected to a discipline which limits each member to an infinites- 
 imal part of general industry. He may be one of a group that 
 collectively cuts trees, or of another that saws logs, or of another 
 that fashions lumber into furniture. The chair that a primitive 
 settler would have hewn out with an axe is the product of one 
 of the numerous sub-organisms of society. The relations of 
 these sub-organisms to each other, though intricate, are capable 
 of clear analysis. We select a typical one for study, and, to 
 avoid confusion, consider no relations that are not essential to
 
 12 POLITICAL SCIENCE QUARTERLY. 
 
 our present purpose. Crudely represented, the furniture-making 
 group arranges itself as follows : 
 
 Finishing 
 
 Cabinet making 
 
 Transporting 
 Lumber dealing 
 
 Wood cutting 
 
 Each stratum shows a subdivision into capitalists and work- 
 men ; and in each case there range themselves on the side of 
 the capitalists a few men of managing ability, who constitute 
 with their employer a sort of collective entrepreneur, and whose 
 rewards, in the form of salaries, have more in common with 
 profits than they have with wages. 
 
 True competition is limited by nature to the strata here in- 
 dicated ; cutters compete only with cutters, lumber dealers with 
 lumber dealers, etc. The distinction between this grouping 
 and that of Professor Cairnes consists, not in the fact that the 
 classification here proposed follows the lines of occupation, but 
 in the fact that it is based on real and not on potential compe- 
 tition. Whether a workman can or cannot transfer himself 
 from one sub-group to another is a question which we do not 
 raise. We inquire simply with whom he competes while re- 
 maining in his own group and continuing to discharge his 
 special function. In this lies the practical fruit to be gained by 
 a study of the grouping. As bearing on the direct adjustment 
 of relative wages, the question to be considered is : Whether 
 wood-cutters are potential competitors of furniture makers, etc.; 
 whether they or their children have such a choice of occupa- 
 tions open to them that the rewards of all tend toward a general 
 uniformity .-• As bearing on the question which we are now con- 
 sidering, the point to be studied is : What groups of men are 
 brought into competition with each other by the nature of their 
 industrial functions, and what consequences result from this 
 grouping."* It is to be noted, moreover, that in the sale of com- 
 modities, finished or unfinished, the competition is not between
 
 THE LIMITS OF COMPETITION: 1 3 
 
 workmen, nor between employers, separately considered, but 
 between industrial establishments in their entirety. One 
 furniture manufactory as a whole competes with another. Each 
 is an organism in itself ; and although the employer in each 
 case becomes the owner of the product, and places it in his own 
 name upon the market, yet his relations with his men are such 
 as to make them partners in the sacrifice which creates the 
 product, and in the rewards derived from it. It is the efficiency 
 of both workmen and employers, and the relations between the 
 two, that determine the competing ability of an industrial estab- 
 lishment. Competition in the sale of commodities is limited to 
 establishments of the same sub-class ; it is confined by nature 
 within horizontal lines like those which, in the case of one 
 representative group, we have indicated in the foregoing 
 diagram. 
 
 These sub-groups are now solidifying. Within many of the 
 pairs of parallel lines competition has exterminated the weak 
 producers, and becoming fiercer as the survivors become fewer 
 and stronger, is compelling them, in the end, to unite or perish. 
 " Let us have peace " has become the watchword in this part of 
 the field ; and the truce which has ensued has taken the form of 
 a system of producers' combinations. 
 
 These unions aim to fix prices and, as a means thereto, to 
 restrict production. The one process limits actual competition, 
 and the other potential. To decide upon a price list, and to 
 abide by it, is to allay the rivalry between similar producers ; 
 to restrict production is to disturb the relations between dis- 
 similar producers. An arbitrary restriction upon the amount 
 of a commodity which can be placed upon the market checks 
 the enlargement of the industry, and thus obstructs the transfer 
 of labor and capital from group to group — which is the poten- 
 tial competition of Professor Cairnes' theory. Could each group 
 solidify into a corporation that could control its members within 
 and suppress rivalry without, the whole industrial field would 
 become definitely non-competitive. The old regulator of values 
 would be lost, and the appeal for state intervention would ac- 
 quire great force. The study of the coming interval is that of
 
 14 POLITICAL SCIENCE QUARTERLY. 
 
 the principles which make a general appeal of this kind un- 
 necessary. It is the study of competition in residual forms. 
 The process is taking on an advanced type, less simple than 
 that of earlier times, and more legitimate than that which has 
 lately developed. Residual competition of the actual kind sub- 
 sists between productive establishments of comparatively equal 
 strength in combination with each other ; and residual competi- 
 tion of the potential kind is maintained between the entire 
 combination and the remainder of society. The members of 
 the pool are still rivals ; and capital and labor may still transfer 
 themselves to and from the industry which they try to control. 
 Monopoly prices have not been long maintained by any of these 
 organizations ; and this fact is due, not to chance, but to com- 
 plex and interesting economic laws. Leaving the discussion of 
 these principles to one whose analysis derives weight from 
 practical observation, I close this paper with a brief reference 
 to the conditions which determine the transition from the era 
 of predatory competition to that of union. 
 
 If each industry were represented by a diagram like the one 
 by which we have rudely shown the relation of sub-classes in 
 the furniture-making group, it would be found that the horizon- 
 tal lines which bound the fields of competition bound also those 
 of combination. The combining groups are the natural compet- 
 ing groups of industrial society. The limitation of these fields 
 is important. The fewer are the competitors, the fiercer is the 
 strife and the greater is the need of union. The fewer are the 
 competitors, the easier is the pooling process. The effect of 
 the union is to turn the belligerent energies of society in a new 
 direction. Under the old system it was rival producers that 
 destroyed each other ; under the new system it is producers of 
 dissimilar articles whose interests come into overt conflict. To 
 limit the supply and raise the price of a commodity is to make 
 members of other producing groups give for it an increased 
 proportion of their own products ; and if this attempt is met ' by 
 a similar proceeding on their part, there results an industrial 
 war, the battles of which are fought across the horizontal lines, 
 instead of between them. If unions were general, the lumber-
 
 THE LIMITS OF COMPETITION. 15 
 
 men of the foregoing diagram would cease to attack each other, 
 and collectively do battle with the transporters and furniture 
 makers. Treaties of alliance on the old battle-ground, hostility 
 at the point of former amity, — such are the results of the tran- 
 sition to the new system. The field of economic war and the 
 nature of the belligerent process are both changed. 
 
 Combinations are the product of a social evolution, and can 
 have no permanent existence until the Darwinian contest be- 
 tween the weak and the strong has completed its work. The 
 surviving competitors must be few, strong, and nearly equal. 
 Marked inequalities of strength among the members of the 
 group defer the formation of the union, or break it when it is 
 formed prematurely. Rivals do not combine so long as one is 
 conscious of the power to exterminate the other. Moreover, 
 strength for such a contest consists not merely in the size of a 
 producing establishment, although that is an element to be con- 
 sidered ; it consists primarily in advantages for economical pro- 
 duction. Location is important, but the paramount influence 
 is the mastery of cheap methods. Natural selection locates 
 industries in the most favorable localities, and brings them to 
 some equality in method ; and until this is done there is no 
 chance for an economic truce. 
 
 In agriculture the number of competitors bars the way for the 
 formation of unions. It is to be noted that the prices of food 
 products are especially sensitive to changes in supply ; and if a 
 combination could restrict the crops uniformly and very moder- 
 ately, it could force the members of other industrial departments 
 to pay double or quadruple prices for the means of living. 
 Against such a calamity the nature of the agricultural industry 
 interposes its bar. Anthracite coal is somewhat like a food 
 product in its importance, and in the variations which the price 
 undergoes in consequence of changes in the supply. Coal-min- 
 ing affords strong inducements and exceptional facilities for the 
 pooling process, and it is here that the effects of union are 
 especially harmful to society. That the injury thus far done 
 has not been greater than it has been is due to residual com- 
 petition, though it has worked under unusual disadvantages.
 
 1 6 POLITICAL SCIENCE QUARTERLY. 
 
 The value of this regulating agent under favorable circum- 
 stances must be indefinitely greater. 
 
 Portability in the commodity produced is essential to the 
 formation of a combination on a national scale. The large estab- 
 lishment must be able to reach with its product the entire ter- 
 ritory, and that without incurring a cost for transportation which 
 would prevent it from underselling the small local producers. 
 Baskets are made with great economy in a large shop ; but their 
 bulk subjects them to a cost for transportation that enables the 
 local manufacturers, though working with less economy, to hold 
 their respective fields, and defeats the formation of a union in 
 this industry. In the silk manufacture the freight costs practi- 
 cally nothing, and the mill which produces cheaply has at its 
 command all parts of the national territory to which its agents 
 choose to travel. The silk industry offers, in this respect, a 
 favorable field for combination. Moreover, cheapness of trans- 
 portation depends not only on the nature of a product, but also 
 on the development of an efficient railroad system. The low 
 rates for freight now prevailing in this country have done much 
 to create combinations among manufacturers ; if pools among 
 the railroads themselves were to restore the former cost of 
 transportation, they would undo this work. The economic war 
 bet\C^een transporters and other groups of industrial society 
 promises to result so favorably to the other groups as to facili- 
 tate combinations among them. 
 
 In but few instances has the principle of union among pro- 
 ducers shown a capacity to cross national lines ; and in so far as 
 a protective tariff debars the foreigner from being an efficient 
 competitor within the limits of a country, it hastens the forma- 
 tion of pools within those limits. In any case foreign com- 
 petition acts as a check upon the raising of prices after a 
 combination has been formed. 
 
 The industrial world would seem to be dividing into two por- 
 tions, in one of which, embracing the most important of all 
 forms of production, namely, that of agriculture, the principle 
 of individual competition continues, and produces results so 
 beneficial to society as to justify the enthusiasm of the early
 
 THE LIMITS OF COMPETITION. 
 
 17 
 
 economists for competition as a regulator of values and a 
 divider of the fruits of industry. In the other economic divis- 
 ion, embracing transportation and a majority of manufactures, 
 the principle of combination is asserting itself, and introducing 
 a n'ginie in which prices are regulated by competition in latent 
 and residual forms. Whether these surviving types of competi- 
 tion are so nearly adequate to the regulating work which must 
 be done that no state action is called for, is a debatable question. 
 Whether state action should take the form of a legal suppres- 
 sion of combinations is a question which a brief trial of such a 
 policy would place beyond the debatable line. To regulate 
 combinations is possible and, in some directions, desirable ; to 
 permanently suppress them is impossible ; to temporarily re- 
 press them is either to force them into illegal forms, or to 
 restore the internecine war from which a natural evolution has 
 delivered us. To accept the results of this evolution and to 
 meet the demands of the new era is the part of wisdom. 
 
 John B. Clark.
 
 THE PERSISTENCE OF COMPETITION. 
 
 THE late Walter Bagehot probably knew the " market " 
 better than any other thinker who has grappled with 
 theoretical questions of political economy. This fact lends 
 weight to his views of the present, past, and future of compe- 
 tition, as presented in those luminous essays on The Postulates 
 of English Political Economy, written just before his death. 
 John Stuart Mill had said that "only through the principle of 
 competition has political economy any pretension to the charac- 
 ter of a science," ^ — a dictum that compressed into a sentence 
 the economic system of Ricardo, James Mill, Senior, and 
 McCulloch. John Stuart Mill himself distinctly recognized 
 the hypothetical character of this system, and in the chapter 
 on " Competition and Custom " he undertook to show that it 
 was only the wholesale trade and the great articles of com- 
 merce that were really under the dominion of competition. 
 At the same time he asserted that the influence of competition 
 was " making itself felt more and more through the principal 
 branches of retail trade in the large towns," and that " the 
 rapidity and cheapness of transport, by making consumers less 
 dependent on the dealers in their immediate neighborhood," 
 were " tending to assimilate more and more the whole country 
 to a large town." Mr. Bagehot, bringing to his investigations 
 a rare mastery of deductive reasoning, a breadth of view gained 
 by many excursions into the domains of history and physical 
 science, and the worldly sagacity of a practical business man of 
 Lombard Street, became convinced that the fundamental postu- 
 lates of English political economy, besides being only hypo- 
 thetically true for a great portion of modern European society, 
 were not true at all for uncivilized and semi-civilized societies, 
 nor for European societies in their primitive eras. His demon- 
 
 ^ Principles of Political Economy, chapter on Competition and Custom, second 
 paragraph.
 
 THE PERSISTENCE OF COMPETITION: 
 
 19 
 
 stration that in the undeveloped society there is no free trans- 
 ferabihty of labor was based largely on the researches of such 
 investigators as Sir Henry Sumner Maine ; but his demonstra- 
 tion that capital was not so transferable until very recent times, 
 and in modern times is so transferable only in the great com- 
 mercial nations like England, is peculiarly his own. It consists 
 in showing that the free transferability of capital, and therefore 
 the perfect competitive action of capital, depends on three con- 
 ditions, namely : the existence of a vast loan fund, the existence 
 of a vast speculative fund, and the free movement of young 
 men into those channels of business that promise the largest 
 profits.^ Formerly neither of these conditions existed. Until 
 recently they existed only in financial centres like London, but 
 to-day they exist so generally that their influence begins to be 
 universally felt. In this fact Mr. Bagehot discerned the true 
 cause of the rapid extension of competitive economics beyond 
 the limits of wholesale trade. The laws of the " great com- 
 merce " were being irresistibly forced upon the minor com- 
 merce. Accordingly he concluded : " As ' men of the world ' are 
 the same everywhere, so the great commerce is the same every- 
 where. Local peculiarities and ancient modifying circumstances 
 fall away in both cases ; and it is of this one and uniform com- 
 merce which grows daily, and which will grow, according to 
 every probability, more and more, that English political econ- 
 omy aspires to be the explanation." ^ In a word, it was Mr. 
 Bagehot's final conclusion that the mobility of labor and capital 
 is to become practically perfect, and the economic science based 
 on "the principle of competition," though not true at all of the 
 economic world of the past, is to become completely true of the 
 economic world of the future. 
 
 Meanwhile Professor J. E. Cairnes, in his attempt to adapt 
 the deductive political economy more perfectly to the present 
 facts of economic society, had discovered limitations of compe- 
 tition not imposed by "local peculiarities or ancient modifying 
 circumstances," but inherent in the nature of men, and there- 
 
 1 Economic Studies, edited by R. H. Ilutton, pp. 45-47. 
 ^ Economic Studies, p. 20.
 
 20 POLITICAL SCIENCE QUARTERLY. 
 
 fore permanent. Here, then, in the constitution of the " non- 
 competing groups " was an obstacle to the fulfilment of Mr. 
 Bagehot's predictions that could by no possibility disappear. 
 This limitation was not regarded, however, as of the greatest 
 importance. It would have the effect of creating a sort of 
 stratification of prices, but within each stratum the prices of 
 specific services and things would be determined more and 
 more perfectly by competition. Professor Cairnes himself dis- 
 tinctly admitted the importance of the loan and speculative 
 funds as a competitive force. 
 
 It is plain, too [he said], that the capital thus disposable is sufficient 
 for the purpose we have here in view, namely, to render competition 
 effective among the various industries ; since we find a portion of it con- 
 stantly moving abroad for foreign investment — a destination it would 
 scarcely receive while there was a prospect of reaping exceptionally high 
 returns from investment within the country. We have, therefore, in the 
 existence of this fund all that is required for a practically effective corn- 
 petition, so far as one instrument of production is concerned, and this 
 without necessitating any serious encroachment on the capital actually 
 engaged in productive operations.^ 
 
 Little more than a decade has passed, and we witness a state 
 of things that, to superficial observation at least, seems totally 
 to contradict these final conclusions at which Ricardian political 
 economy had arrived. Just when the disappearance of the last 
 vestiges of a volitional restriction of competition was looked 
 for, and the universal application of the " rule of the market " 
 was confidently expected, we see a wide-spread revival of eco- 
 nomic methods and agencies over which The Wealth of Nations 
 was read as a funeral service. And most remarkable of all, it 
 is not only labor, to the absolutely free competition of which 
 natural and permanent limitations were admitted, but capital — 
 that very agent which Mr. Bagehot said " runs as surely and 
 instantly where it is most wanted and where there is most to be 
 made of it, as water runs to find its level," ^ that seems to have 
 voluntarily massed itself into a solidarity, hedged itself about 
 
 ^ Leading Principles, Harper's ed., pp. 63, 64. 
 ^ Lombard Street, p. 13.
 
 THE PERSISTENCE OF COMPETITION: 2 1 
 
 with new and most ingenious restrictions, and bound itself by 
 heavy penalties not to run to any new level or deviate from 
 wonted channels. This increasing prominence of pools and 
 combinations has given a new direction to theoretical thought. 
 A majority of the working economists who have kept up with 
 the progress of events no longer look to see the supremacy of 
 an unhindered competition. By not a few of the ablest investi- 
 gators the gradual suppression of the competition now existing 
 is predicted. Instead of moving toward freer competition, they 
 affirm, we are moving away from it,^ and reasons are offered to 
 show that in the very nature of business facts no other result 
 is possible. Not only of such vast organizations of capital as 
 the railroad system is thi^ tendency supposed to be true, but of 
 almost all industries having a large permanent investment.^ 
 New agencies for adjusting prices it is expected will be neces- 
 sary. Between a solid body of non-competing employers on 
 one side, and a solid body of non-competing workingmen on the 
 other, will have to stand committees of conciliation and boards 
 of arbitration.^ The standard of \.\\c justiivi prctiitm, the "rea- 
 sonable price " of the middle ages, will be again set up and 
 enforced by an appeal, through compulsory publicity, to public 
 opinion.* 
 
 That combinations are to play an increasingly important part 
 in economic affairs, is altogether probable. But that competi- 
 tion is to be to a corresponding extent destroyed, and that 
 arbitration and publicity are to perform any other function than 
 that of equalizing temporary inequalities of competition, as 
 commercial credit equalizes temporary inequalities of economic 
 pressure, or as insurance equalizes temporary inequalities of 
 loss, are conclusions that should not be too hastily accepted. 
 We should be on our guard against two assumptions. We must 
 not assume that because competition is not observable in the 
 form seen on the produce exchange, it is not discoverable in 
 
 1 Arthur T. Hadley, Railroad Transportation, p. 65. 
 
 ' Hadley, Private Monopolies and Public Rights, Quarterly Journal of Eco- 
 nomics, October, 1886. 
 
 8 John B. Clark, The Philosophy of Wealth, p. 66. 
 
 * Report of the Connecticut Bureau of Labor Statistics, 1885, pp. 16, 106.
 
 2 2 POLITICAL SCIENCE QUARTERLY. ' 
 
 any form. We must not assume that when market competition 
 is imperfect it may be ignored, as if it were quite non-existent. 
 These assumptions would be as unwarrantable as the assump- 
 tion of the a prioj'i economists has been in regarding the laws 
 of the wholesale market as so nearly true of economic society 
 everywhere and always that conflicting facts might be dis- 
 missed as irrelevant. That competition in some form is a per- 
 manent economic process, is an implication of the conservation 
 of energy. Given an aggregate of units of unequal energy, 
 their unequal activity is an inevitable consequence. With the 
 complexity of social environment that every quarter of the earth 
 presents, and the limitless variations of heredity, a society com- 
 posed of individuals of equal energy is an impossibility. There- 
 fore, when market -competition seems to have been suppressed, 
 we should inquire what has become of the forces by which it 
 was generated. We should inquire, further, to what degree 
 market competition actually is suppressed or converted into 
 other forms, and within what limits combinations can hold 
 together and act effectively. The combination equilibrium 
 may be, at best, an unstable one. The economic affairs cf 
 every member are in a constant ebb and flow. The relative 
 advantages of members as possible competitors cannot remain 
 long unaltered. And however nearly equal they may be at any 
 moment in economic strength, they will be unequal morally. 
 Not every member of a combination goes into it expecting to 
 break the agreement, but hoping that all other members will 
 keep it ; ^ but this is a true description of the conduct of some. 
 Different producers are always unequal in respect of that larger 
 fidelity that imparts a unique value to a commodity through 
 care in selecting the best materials and the most careful and 
 trustworthy workmen. They are unequal also in those faculties 
 by which production is adapted to changing conditions. The 
 discerning and alert secure the advantages that accrue from the 
 first production of superior substitutes for articles in common 
 use, or the first adoption of more economical methods. Dis- 
 turbances of equilibrium by any of these means may requicken 
 
 ^ J. SchcEnhof, The Industrial Situation, p. 74.
 
 THE PERSISTENCE OF COMPETITION: 23 
 
 competition within the combination. Competition may be 
 forced upon the combination from without by the accumulation 
 of outside capital seeking employment. The latter is a force 
 that nothing can overcome, though it may be to some extent 
 diverted. It is the organic process of growth, multiplying cells 
 in the vital organism, multiplying individuals in society, multi- 
 tiplying capital in financial centres, — all crowding perpetually 
 upon the existing means of subsistence and profitable occupa- 
 tion, — that insures the permanence of competition throughout 
 the whole range of organic phenomena. 
 
 The history of combinations to the present time fully verifies 
 these propositions. Combinations have not prevented the com- 
 petitive investment of new capital, or sustained prices, or main- 
 tained an effective discipline among their own members. The 
 general decline of prices has gone on with little interruption 
 since 1870 ; that is, during the period within which combinations 
 have had their phenomenal growth. Late calculations ^ give 
 the money cost of the average daily supply of food, dry goods, 
 boots, and fuel, for one adult, as 43.53 cents in 1870, and 30 
 cents in 1885. The charge for moving a ton of freight per mile 
 over one of the trunk line pool roads is given by the same sta- 
 tistician as 1.853 cents in 1870, and .68 cents in 1885.2 The 
 industrial depression of 1883-84, which carried nearly all prices 
 to a much lower level than they had reached in the previous 
 depression of 1878^79, did not spare the goods "controlled" by 
 combinations. As compared with the lowest prices at which 
 they were quoted previous to 1882, cut nails were 12 per cent 
 lower in 1884, and steel rails 39 per cent lower.^ The nail 
 industry affords a good illustration of the inability of combina- 
 tions to withstand the competitive action of new capital. In 
 1883 the Western nail association made several attempts to 
 restrict production by suspending work. Notwithstanding this, 
 the number of mills was increased during the year from ^^^ 
 having an annual capacity of 8,500,000 kegs, to 79, with an 
 
 ^ Those of Mr. Edward Atkinson in Bradstrcet's of December 18, 1SS6. 
 
 2 The Relative Strength and Weakness of Nations, The Century, Janur.r}-, 1SS7. 
 
 8 BiaJstrecl's, January 10, 18S5.
 
 24 POLITICAL SCIENCE QUARTERLY. 
 
 annual capacity of 12,500,000 kegs, and half of the increase 
 was in the western district.^ In 1884 a new effort was made 
 to restrict competition ; but almost before it took shape the 
 manufacture of nails from steel began, and within a year the 
 steel nail mills that sprang up in the Wheeling district, not to 
 mention others, had a capacity of 2,600,000 kegs per annum.^ 
 Combinations that might be expected to be strong and efficient, 
 because of their enjoyment of franchises and natural monop- 
 olies, are all the while breaking because of internal disagree- 
 ments. No longer ago than the autumn of 1885 trunk line 
 railroad business was completely disorganized because the roads 
 could not agree on their respective allotments. The anthracite 
 coal combination, formed in 1873, succeeded in controlling the 
 output for three years. Prices were gradually forced to a height 
 that the market would not bear, and stocks accumulated, in 
 spite of the restriction of production, until the combination 
 broke, in August, 1876, and 500,000 tons of coal were sold at 
 auction. Another attempt, made in 1878, was broken by rate- 
 cutting by the Lehigh Valley company and the contention of 
 the Reading company for a larger allotment. A third combina- 
 tion lasted from 1879 ^^ 1884, when its efficiency was destroyed 
 by the commercial depression and the increasing resort to 
 bituminous coal.^ A fourth arrangement, made in 1885, has 
 been imperfectly successful. Of all the industrial combinations 
 that have been described in alarming terms in the popular 
 reviews and anti-monopoly organs, probably not one-tenth have 
 continuously and effectively limited competition. One of the 
 most perfectly organized and most talked about of these has 
 been the wall-paper combination, and its fortunes have been 
 peculiarly instructive. It was formed in 1880, and made a 
 great deal of money. One party was paid ;^ 20,000 a year to 
 cease production. A scale of prices was established, and every 
 member was assigned his proportion of the total production. 
 The penalty for underselling was a forfeit of ^1000, one-half 
 to go to the informer. Monthly meetings were held, at which 
 every manufacturer presented a detailed statement of his sales, 
 
 1 Braditreet's, May lO, 1884. 2 /^/^^ July 18, 1S85. 3 Ibid., January 17, 1885.
 
 THE PERSISTENCE OF COMPETITION: 25 
 
 specifying the quality and price of every roll sold, and naming 
 the purchaser. Then the executive committee equalized the 
 proceeds, taking from those that had oversold, and distributing 
 among those that had not sold up to their quota. Yet, not- 
 withstanding these elaborate precautions, competition was not 
 prevented, either within the combination or from without. One 
 member has chosen to pay $10,000 a year in forfeits rather 
 than desist from underselling. By paying factories for keeping 
 idle, the combination has tempted so much new capital into 
 the business that it is now impossible to control production 
 or prices. 
 
 The conditions determining the area within which combina- 
 tions can govern market competition, divert it into new chan- 
 nels, and convert it into new forms, are to be found in certain 
 natural demarcations in the industrial structure of society. 
 This structure, resting on the basis of crude materials, which 
 it transforms, adapts, and consumes, is constituted by the segre- 
 gation of men into functional groups, corresponding to the sub- 
 divisions of industrial operations and the broader differences of 
 personal qualification. A rude attempt to indicate this structure 
 is made in the diagram upon the following page. The subdivision 
 of operations corresponds to the evolution of general utilities into 
 utilities that are more and more highly specialized, and to the 
 division and redivision of materials into successive sub-products,^ 
 or, more strictly, into successive series of sub-products, as the 
 diagram indicates. Professor Clark has shown that the grada- 
 tion of sub-products marks off the producers into non-competing 
 groups of an entirely different kind from those described by 
 Professor Cairnes, and that the latter, constituted by such dif- 
 ferences of personal acquirement as those that separate artisans 
 from unskilled laborers, have been much broken down by 
 industrial progress. Yet there remains a grouping by differ- 
 ences of personal qualification, which Professor Cairnes failed 
 to state in sufficiently general terms. There is one class of 
 workers fit only for automatic manual labor ; namely, common 
 laborers and machine tenders. Above these is a class fit to be 
 
 1 John B. Clark, The Philosophy of Wealth, p. 112.
 
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 THE PERSISTENCE OF COMPETITION. 27 
 
 intrusted with some responsibility and liberty of self-direction. 
 It is impossible for those in the first class to compete for places 
 with those in the second, though those in the second may 
 become competitors with those in the first in times of indus- 
 trial depression. A third class is composed of the automatic 
 brain-workers, such as book-keepers ; and a fourth class, of the 
 responsible brain-workers, including the superintendents and 
 directors. The basis of these distinctions, it will be seen, is a 
 much broader one than Professor Cairncs had in mind as the 
 ground of his grouping. It is also broader than the differences 
 of moral quality that the adjective responsible, used for the 
 lack of a more exact word, suggests. It is that broadest psy- 
 chological gradation, which Mr. Herbert Spencer has described 
 as consisting of differences of mental mass and complexity.^ 
 These divisions cut transversely across those described by Pro- 
 fessor Clark, and constitute sub-groups within his groups. It 
 is, further, within the non-competing groups so constituted that 
 combinations are formed ; and, for reasons fully set forth by 
 Professor Clark, any one combination is usually confined within 
 the limits of a single group. This introduces a new complica- 
 tion, for the combination is a radically distinct aggregate from 
 the non-competing group within which it exists. While the 
 non-competing group consists of those that are supposed not 
 to compete with the members of any other group, but to com- 
 pete freely with each other, the combination consists of those 
 that are supposed not to compete at all with each other, but to 
 compete freely with those outside of its limits. The employer 
 groups and combinations are further complicated by the central- 
 ization there of capital. 
 
 It is plain that these demarcations describe groups that are 
 very unlike in composition and very unequal in economic condi- 
 tion. Heterogeneity of composition increases as we go back- 
 ward in the scale of sub-products toward crude materials, be- 
 cause the dimensions of the group enlarge, both geographically 
 and in respect of numbers. The group producing a final sub- 
 product is necessarily limited in size, not only because it repre- 
 
 ^ See the article on The Comparative Psychology of Man, Mind, January, 1876.
 
 28 POLITICAL SCIENCE QUARTERLY. 
 
 sents a minute sub-division of a more general product, but 
 because the quantity of a highly specialized product that society 
 can consume is itself limited quite narrowly. The market is 
 easily oversupplied and demands but a relatively small number 
 of producers. It follows that the possibilities of combination 
 are slight in the large and loose groups that produce the pri- 
 mary sub-products, unless their operations are protected by nat- 
 ural, or legal, especially patent-right, monopolies. In the small 
 and compact groups producing final and highly specialized sub- 
 products, the possibilities of effective combination are much 
 greater. Anthracite coal mining is a primary process, but it 
 yields to combination because it is a natural monopoly and 
 easily forms illicit alliances with the railroads. Steel making is 
 a secondary process, amenable to combination because protected 
 by patents ; but in iron making, also a secondary process, com- 
 bination is maintained very imperfectly and with great difficulty. 
 Besides being at this disadvantage in the matter of combina- 
 tion, the primary and secondary sub-product groups are sub- 
 jected to the further strain that disturbances of the economic 
 equilibrium, anywhere in the industrial structure, distribute 
 themselves backward toward the primary groups. Within each 
 group the distribution is downward, through the sub-groups 
 toward the lowest — the automatic laborers. A strike that 
 stops the production of a sub-product may cause the suspension 
 of operations and the bankruptcy of producers in the sub-pro- 
 duct group beyond it, by cutting off supplies ; but the liabilities 
 of the advanced group will be due chiefly to the preceding 
 groups, and the bankrupted employers and discharged workmen 
 will force their way downward as competitors for employment ; 
 some of the bankrupted employers obtaining places as clerks, 
 and some of the clerks and foremen taking work as machine 
 tenders and laborers. Furthermore, as Professor Clark has 
 shown, 1 the primary and secondary groups dispose of their pro- 
 ducts to society and receive their recompense only through the 
 tertiary, and arc therefore much at the mercy of any conditions 
 that the latter may impose. 
 
 1 rhilosophy of Wealth, p. 114.
 
 THE PERSISTENCE OF COMPETITION: 29 
 
 One important conclusion is now in sight. When a product 
 is supplied to society in the full measure of the social needs, 
 the supply of correlative needs being taken into consideration, 
 the further investment of capital and labor in producing that 
 product should cease. That combinations in the final sub- 
 product series may often restrict competition to this extent is 
 evident from the fact that they often attempt to do more. 
 What, then, becomes of the competitive forces — where do 
 accumulating capital and labor find employment ? We are con- 
 fronted here with our primary question, and the answer to it 
 that now appears is one full of meaning for progressive socie- 
 ties. Diversion backward into the primary or secondary sub- 
 product groups would be the natural course for labor and capital 
 to take when barred out from the final groups, but for the facts 
 just noted ; vis.^ that the primary and secondary groups are 
 dependent on the tertiary for their market, and are obliged 
 ultimately to bear a large proportion of the losses of the entire 
 industrial system. In progressive societies, rich in inventive 
 talent, channels of less resistance will be opened by the inven- 
 tion or discovery of new utilities. These may be satisfactions 
 of wants that were never met before, or they may be superior 
 substitutes for the products that the new capital was deterred 
 from producing. The possibilities in the latter direction are 
 shown by the present production from steel of such articles 
 as rails, nails, tacks, and wire, that formerly were made only 
 from iron. The production of Bessemer steel ingots during 
 the first six months of 1885 was 40,000 tons in excess of 
 the production during the second six months of 1884. The 
 production of steel rails was 70,000 tons less. The differ- 
 ence had gone into other manufactures for which puddled iron 
 was formerly used.^ In societies that have learned to value 
 quality above quantity of possessions, other channels will be 
 found in the almost limitless possibilities of bettering the 
 quality of commodities. New utilities afford opportunities for 
 capital accumulating outside of the combinations ; the improve- 
 ment of quality gives vent to competitive energies within the 
 
 1 Bradsireei^s, August i, 1SS5.
 
 30 POLITICAL SCIENCE QUARTERLY. 
 
 combinations. How this may be, is well illustrated by a cer- 
 tain brass goods combination that has maintained uniform 
 prices but made no attempt to pool production. The result 
 has been precisely that higher form of competition that John 
 Ruskin advocated in Unto This Last as the only one that 
 Christian communities should tolerate. The members of the 
 combination have rivalled each other in offering the most per- 
 fect goods for the price, and their products have attained a 
 degree of excellence that is unique in American mechanism. 
 
 But that competition shall be thus diverted into new and 
 higher forms, it is not necessary that combinations shall keep 
 production below the full supply of the social needs, or main- 
 tain prices above the level that yields average returns to the 
 labor and capital employed. Taking one series of years with 
 another, neither of these things can be done. While the area 
 within which combinations are possible is determined by the 
 industrial structure, the degree to which they can control com- 
 petition within that area is limited by the strength of the com- 
 petitive forces. These, as we have seen, are two : the pressure 
 of accumulating capital upon the opportunities of employment, 
 and the necessities of the producers already in the field. Dur- 
 ing an industrial depression the active competition of new 
 capital is at a minimum, but the established producers find in- 
 creasing difficulty in meeting their liabilities. Self-defence 
 becomes the ruling motive. Conversely, when demand is in- 
 creasing and prices are rising, the pressure of new capital 
 becomes intense ; but, the struggle to meet liabihties having 
 given place to an easy accumulation of gains, the motive for 
 resisting the competition of new capital is weak. Combinations 
 are therefore, in their historic origin and in practical limitations, 
 defensive organizations, for mutual protection against a compe- 
 tition that has become, or that threatens to become, predatory 
 and ruinous. It was during the industrial depression of 1883, 
 when production was far in excess of the demand, that the cut 
 nail combination, already referred to, tried to restore the bal- 
 ance by suspending operations. It was when the prices of 
 their product had declined nearly 13 to 15 per cent within 
 
 I
 
 THE PERSISTENCE OF COMPETITION: 
 
 31 
 
 six months, that the writing paper manufacturers effected 
 a combination that limited production temporarily, but that 
 had the ultimate effect, as one of its members assured the 
 writer, of " building new mills." When the Bessemer steel rail 
 combination made its compact at Long Branch in August, 1885, 
 to limit its output by the demand for consumption, the capacity 
 of the works represented was greatly in excess of the demand, 
 and price-cutting within the combination had been going on for 
 some time. The market improved, and, at the end of a year 
 and a half, the Bulletin of the iron and steel association 
 announced that 1,500,000 gross tons of steel rails were made 
 in 1886, against 950,471 in 1885. And this improvement of 
 the market, enjoyed by other branches of the iron and steel 
 industry also, instead of tempting the combinations to extort 
 the highest possible prices, created a strong feeling on the part 
 of manufacturers that if prices were permitted to go higher, it 
 would so largely increase production as to bring about a reac- 
 tion.^ These are but examples at random from many that might 
 be cited. If stati-stics of the extent and efficiency of combina- 
 tions could be obtained, the curve undoubtedly would rise and 
 fall with the curve of industrial depressions. 
 
 The degree to which combinations can restrict competition 
 is further limited in more specific ways. As defensive organi- 
 zations they cannot sustain their weakest members indefinitely. 
 All business is in a sense a combination. Commercial credit 
 and personal accommodation enable all parties in the great 
 struggle for existence fairly to try their powers. By such 
 assistance temporary difficulties are overcome. Combinations 
 perform a like service in a negative way by restraining conduct 
 that is mutually injurious. But just as recurring waves of 
 bankruptcy from time to time sweep off the competitors that 
 are essentially weak, notwithstanding the help that they may 
 have alternately received and extended, so an industrial depres- 
 sion of unusual severity or duration forces one or another party 
 to unload his stocks at any prices that he can get, regardless of 
 combination agreements, and consummates the extinction of 
 
 ^ Bradstreefs, December 25, 1 886.
 
 32 POLITICAL SCIENCE QUARTERLY. 
 
 those producers whose disadvantageous situation or antiquated 
 methods make their cost of production relatively high. On the 
 other hand, any attempt of the combination to become an 
 aggressive agency for the positive enrichment of its members 
 is subject to the limitation, that the conditions that might 
 enable a combination to force prices to an unnatural level are 
 the very ones that insure the most disastrous reaction upon 
 such a policy. Other things being equal, new capital will hesi- 
 tate longest about entering into competition with established 
 producers in those industries in which each producer must have 
 a plant that is costly in proportion to the value of the total 
 product of all producers. But the combination that would reap 
 advantage from this hesitancy must face the fact that it is 
 precisely this expensiveness of plant that entails heavy fixed 
 charges, — which must be met at whatever sacrifice of profits, 
 — and impels competition to a ruinous extreme if more capital 
 is tempted into the business than the normal social need re- 
 quires. A short-sighted and grasping policy by railroad com- 
 panies and industrial combinations that might, by a liberal 
 course, have kept entire markets to themselves, has resulted 
 in the building of scores of railroads and hundreds of mills for 
 which no real need existed, and the struggles of these for sub- 
 sistence has kept rates and prices below the dividend-paying 
 level for years together. 
 
 Hence, as combinations learn their unalterable limitations in 
 "the nature of things," they must adjust prices and production, 
 by a conscious policy, to the normal basis that otherwise will be 
 reached in a more wasteful way. They must permit the full 
 satisfaction of normal demands and allow prices to gravitate to 
 an equality with cost of production. If there is really room for 
 new plant, and new capital seeks investment in new plant, the 
 combination by standing in the way will only encourage invest- 
 ment in excess. If a member of the combination, or a new 
 competitor, is able through the adoption of new machinery or 
 better methods, or by any other advantage that he enjoys, to 
 make his goods at a lower cost than has been possible before, 
 and therefore to put them on the market at a lower price in the
 
 THE PERSISTENCE OF COMPET/T/OIV. 33 
 
 hope of increasing his sales, the combination must let him make 
 the price and leave other members to conform to it by adopting 
 his methods. Failing to do this, it will but intensify the inevi- 
 table struggle for survival when it comes. It does not invalidate 
 all this that pools sometimes pay would-be competitors for ceas- 
 ing production, and that members of combinations can some- 
 times afford to pay forfeits for price-cutting. These are but 
 means of testing the probable permanence of the existing rela- 
 tions of demand and supply. If the undersupply of the market 
 that tempts new capital is but temporary, the price paid to pre- 
 vent it from entering the field is the cost of warding off a loss 
 otherwise certain. If the undersupply continues, the attempt 
 to buy off competition will only stimulate it. If forfeits were 
 graduated according to the degree of price-cutting and the 
 volume of sales, and were made recoverable by the party paying 
 them if he demonstrated his ability to maintain his terms per- 
 manently, they might afford a nearly perfect test of the price 
 the combination must prepare to accept, and a nearly perfect 
 check against underselling for predatory purposes. Expendi- 
 tures in these ways, within the limits dictated by prudence and 
 the lessons of experience, are elements in the cost of produc- 
 tion under modern conditions as legitimate as insurance pre- 
 miums, and it is not impossible that combination actuaries will 
 yet reduce the principles governing combination forfeits to 
 something like scientific form. 
 
 If our conclusions so far are sound, can the affirmation be 
 maintained that market competition has been really suppressed, 
 or that the essential principles of Ricardian economics have 
 been overthrown 1 Ricardianism never contemplated competi- 
 tion in the production of additional goods for a market already 
 overstocked, or chronic competition in selling goods below the 
 cost of production. It assumed that when competition had 
 forced the price of any commodity down to the sum that barely 
 recompensed labor and risk, production and underbidding would 
 cease and labor and capital would find other employment. When 
 Ricardo wrote, this assumption was warranted by commercial 
 facts. It is only v.-hcn production is carried on by processes
 
 34 POLITICAL SCIENCE QUARTERLY. 
 
 involving heavy fixed charges that producers are impelled to 
 continue operations without regard to the state of the market. 
 It is only when large reserves of capital can be drawn on that it 
 is possible to sell below cost, on a great scale, for the sake of 
 winning a strategic advantage. In Ricardo's time these condi- 
 tions did not exist in any trade or manufacture. If, then, com- 
 binations deal effectively only with competition below the sol- 
 vency line, are not the essential Ricardian principles as true 
 to-day as they ever were, and are not Mr. Bagehot's predictions 
 verified .-• The competition that wastes resources and ruins com- 
 petitors is an abnormal process that in a sound industrial system 
 will necessarily create reactions against itself. Such competition 
 will probably encounter an increasingly perfect resistance. The 
 competition that forces production to supply fully the social 
 demand, and forces prices down to an equivalence with the cost 
 of production, is normal. Limitation of the range through which 
 the series of competitive acts may extend but increases the 
 amount of normal competition, since by preventing the wasting 
 of capital it increases one of the chief competitive forces. 
 
 Franklin H. Giddings.
 
 PROFITS UNDER MODERN CONDITIONS. 
 
 "\'X /"E arc drifting toward industrial war for lack of mental 
 * ^ analysis. Classes in society arc at variance over a ratio 
 of division, and have no clear conception of the thing to be 
 divided. If the profits of business constitute a limitless fund, 
 they furnish a corresponding incentive to strife ; aind if this sum 
 is virtual plunder, if it consists of wealth wrested by a social 
 arrangement from the men whose labor creates it, the discon- 
 tented class ought to include every member of society, and will 
 include most members. It needs to be definitely known what 
 profits are, and who earns them ; and again how large they are, 
 and who actually gets them. The nature of the prize of the 
 social contest and the equities of the case need to be made far 
 clearer than they have been. 
 
 Adam Smith's "profits of stock" included the general re- 
 turns of the capitalist-employer. More recent writers have 
 recognized that this person performs two functions, and receives 
 a reward in each capacity. That which accrues to him as a 
 capitalist is interest ; and that which comes to him as an em- 
 ployer, or business manager, is known as cntrcprc7icnr s profit. 
 This element is computed by deducting from his gross returns 
 the interest on the capital that he uses. 
 
 What is not recognized in the prevalent theories is that the 
 entrepreneur as such is a composite person. Besides furnishing 
 some capital he still performs two unlike functions, and receives 
 two distinct rewards. Of these rewards one is constant and the 
 other intermittent ; and it is this latter element that, as vaguely 
 conceived, constitutes the incentive to social strife. It is the 
 fact of confounding the two functions and merging the rewards 
 attaching to them that has placed economic writers where it 
 has been impossible either to make consistent theories or to 
 comprehend the developments of modern business.
 
 36 POLITICAL SCIENCE QUARTERLY. 
 
 An entrepreneur is, first, an industrial organizer ; he directs 
 the productive energies of other persons. If he be a manu- 
 facturer he divides and subdivides the labor of making a prod- 
 uct, and assigns to each workman the part of the process to 
 which he is adapted. The thing to be accomplished is pre- 
 scribed ; there is a certain article to be produced, and there is 
 an accepted manner of producing it ; and the routine function 
 which first falls to the employer consists in directing the opera- 
 tion in its execution. He guards against wastes, impels workers 
 to effective effort, and co-ordinates their labors. By his direc- 
 tion the work of many individuals is brought into organic unity. 
 He is the brain of a little social organism ; he does its executive 
 planning, and communicates to the muscles the motive impulses 
 that set them at work and control their action. 
 
 In this capacity the employer is the most important part of 
 W^Q. personnel of the shop. He is a directive laborer. The out- 
 come of his effort is a certain mechanical result, a transforma- 
 tion of matter. Directive labor, muscular labor and machines 
 together create "form utilities"; they transform iron into im- 
 plements, wool into cloth, etc. ; and in these changes of form 
 lies the value that they jointly bring into existence. Employer 
 and workman are thus far laborers together ; what they get for 
 their efforts is, in the broad sense of the term, wages ; and the 
 employer's part is distinctively the wage of directive labor. 
 
 In addition to this there comes to an employer a return hav- 
 ing a wholly different origin and nature ; it is essentially mer- 
 cantile. An employer buys, sells and gets gain like any dealer 
 on the street. The business operations of a woolen manufac- 
 turer do not begin with wool in the sorting room, and end with 
 goods in the storehouse. He must obtain the wool from dealers, 
 and must hand the goods over to purchasers. The mechanical 
 part of his business is completed at the mill, and by the work- 
 ing organism of which he is the head ; the mercantile part ex- 
 tends into the world, and brings him into connection with other 
 producing organisms. In this particular excl^anging function 
 the workmen have no part ; the employer only is recognized in 
 the market as the buyer of materials and the seller of goods.
 
 PROFITS UNDER MODERN CONDITIONS. 37 
 
 The buying of raw materials, however, does not end the em- 
 ployer's function as a purchaser ; there is something more to be 
 acquired if he is to become the valid owner of the product. 
 Into the finished goods there enter other elements than raw 
 materials, and these must be in part acquired by purchase. 
 Within the mill itself there are titles to be transferred. Day 
 by day, hour by hour, as the manufacturing goes on, new utili- 
 ties come into existence. Every turn of the engine results in 
 more cloth, more yarn, more carded wool, etc. The utilities 
 thus created have definite values ; unfinished goods may not be 
 immediately salable, but the employer would know how to rate 
 them were he to take an account of stock. Every step in the 
 process that brings them nearer to the condition in which they 
 can be placed upon the market adds something to the value of 
 the crude materials with which the process began. These in- 
 crements of utility are, as we have said, jointly created by three 
 agencies : directive labor, muscular labor and machines. This 
 determines their ownership : they belong, in undivided shares, 
 to the director, the workmen and the furnisher of machines, or 
 the capitalist. 
 
 Now the essential fact is that the employer buys out his 
 partners in the productive operation. He pays for the share of 
 the workmen in wages and for that of the capitalist in interest, 
 and acquires thereby a title to the utilities created in the mill. 
 As the raw material is his from the outset, he ends by becoming 
 the owner of every element of the product. In his own name 
 he may place the goods on the market and get what he can for 
 them. 
 
 The function of the entrepreneur as such consists therefore 
 in two operations, the one mechanical and the other mercan- 
 tile : he directs a productive process, and he buys the elements 
 that enter into the product and sells them collectively in the 
 product itself. In the one capacity he is a laborer and receives 
 a higher variety of wages ; in the other capacity he is a mer- 
 chant, and receives a margin of difference between what he 
 pays and what he gets. The finished goods are supposed to
 
 38 POLITICAL SCIENCE QUARTERLY. 
 
 bring in the market more than the cost of all the elements 
 that compose them.^ 
 
 In a complete study of profits it needs to be noticed that the 
 mercantile part of the employer's function requires both labor 
 and capital. He must spend time in obtaining materials, in 
 making contracts with workmen and capitalists, and in disposing 
 of goods. Here there is a need of labor ; and there is a neces- 
 sity for capital of the circulating kind in the holding of goods 
 until they can be sold and paid for. Mercantile labor as well as 
 mechanical is entitled to wages, and circulating capital as well 
 as fixed is entitled to interest. A mercantile wage constitutes 
 the second part of the general wage of business management ; 
 and an item of interest on circulating capital constitutes a part 
 of the general claim of capital. 
 
 The labor involved in buying and selling is only incidental to 
 the mercantile function. It is not the essence of it ; that lies 
 in the mere acquiring and surrendering of ownership. It is 
 because the elements that enter into a product come succes- 
 sively into an employer's possession, and then pass collectively 
 out of it, that he can look for a return 'over and above the wages 
 of every kind of labor and the interest of every kind of capital 
 involved in the business operation. We must group in one item 
 all that comes to an employer in compensation for effort of any 
 kind, and in another all that goes to compensate the capitalist. 
 
 The general wage of business management constitutes one of 
 the preferred claims on the returns of business ; it must be 
 deducted from them before final profits can be computed. Ordi- 
 nary wages constitute another preferred claim, interest a third 
 and the cost of materials a fourth. If, to avoid intricacy, we 
 group taxes, all forms of insurance and incidental expenses as a 
 fifth claim the sum of these five amounts will represent the 
 total cost of acquiring the title to a product In selling the 
 product for more than this sum total lies the employer's chance 
 of ultimate gain. Pure profit is the return of simple ownership. 
 It is free from all admixture of wages and of interest. It accrues 
 
 ^ This analysis of gross profits was published in Work and Wages for March, 
 1887, in an article by the writer of the present paper.
 
 PROFITS UNDER MODERN CONDITIONS. 39 
 
 to him who simply extends the aegis of his civil rights over the 
 elements of a product, and then withdraws it in order that the 
 product may pass into other hands. The C7itrcpreneiir ox assiimer 
 is he who takes upon himself the responsibility of ownership. 
 
 That the capitalist, the manager, and the owner of the prod- 
 uct may at times be one and the same person does not affect the 
 analysis ; the three functions are distinct, and the rewards 
 attaching to them are equally so. The growth of corporations 
 tends in a practical way to separate these functions. Capitalists 
 are here a body of stockholders, bondholders and business cred- 
 itors ; managers are a body of salaried officials ; while entre- 
 preneurs, in the limited sense of the term, are the stockholders. 
 Pure profit resides in the portion of the dividends that is in 
 excess of current interest on the paid-up capital. 
 
 Pure profit is the prize that lures men into business ventures. 
 On this element in the returns of industry are centered the 
 larger expectations of working men. There is no other element 
 from which they can draw a considerable dividend by a change 
 in distribution. Though interest were reduced by a half, and 
 managers' salaries curtailed in the same proportion, the sum 
 thus saved would, as divided among workmen, raise wages only 
 by a small fraction. The elastic margin of pure mercantile profit 
 appears to the undiscerning to be a more promising source of 
 gain. It is important to know how large, under modern con- 
 ditions, this sum is becoming. 
 
 The elements in the cost of a product are primarily deter- 
 mined by conditions over which the employer has no control. 
 Wages are fixed in the general market for labor ; there is not 
 one rate for a particular manufacturer and another for his rival 
 in the trade, nor are there considerable differences between the 
 rates prevailing in most of the different trades. Labor passes 
 freely from one establishment to another, and even from one 
 industrial group to another, and the permanent tendency of 
 wages is toward uniformity. This large element in the cost of 
 products is fixed by uncontrollable movements in a universal 
 market. 
 
 Interest is determined by equally general conditions, and is
 
 40 POLITICAL SCIENCE QUARTERLY. 
 
 uniform to all borrowers who furnish equal guaranties for the 
 certainty and promptness of their payments. The cost of raw 
 materials is determined in a market that is somewhat more 
 limited ; it is gauged by the transactions that take place be- 
 tween the industrial group that produces it and the several 
 groups that use it. This market is broad enough to be beyond 
 individual control. 
 
 The cost of the labor of management is subject to more dis- 
 turbing influences than almost any other economic elem.ent ; 
 and general statements concerning this item of outlay need to 
 be made with adequate reservations. Personal relations may 
 make a particular salary abnormal. The principle that tends 
 to determine the wage of business management may be formu- 
 lated and, with due caution, applied ; it is fixed in a general 
 market for labor of a given intellectual and moral quality. 
 Tried ability and integrity demand high rates of pay, but gravi- 
 tate toward any honorable occupation that offers them ; and 
 the general tendency here as elsewhere is toward a certain 
 uniformity. Rates of insurance and taxation are governed by 
 impartial rules. The elements that constitute the cost of a 
 product to the man who is to own and sell it are fixed by 
 conditions which he cannot change. 
 
 His returns are equally beyond his control. The price of his 
 product is adjusted in the open market by transactions between 
 the group to which he belongs and the various groups that con- 
 tain his custcfmers. The adjustment is similar to that which 
 governs the price of raw materials. Pure profit is the differ- 
 ence between this uncontrollable amount and the sum of the 
 equally uncontrollable amounts disbursed. The reward of the 
 entrepreneur in his capacity as owner of a product comes to him, 
 as rain from the clouds, through the action of forces lying be- 
 yond the range of his dominant influence. He has nothing to 
 do but to receive it. He must accept what comes into his 
 treasury, and submit to what goes out of it ; the difference, 
 which is pure profit or loss, is fixed without appeal.^ 
 
 ^ Gains etTected by the illegitimate manipulation of values, such as is sometimes 
 practiced in Wall Street and elsewhere, do not fall within the scope of this discussion.
 
 PROFITS UNDER MODERN CONDITIONS. 41 
 
 In his other capacity, that of manager, the entrepreneur is not 
 the helpless creature of fate. His fortune is largely in his own 
 hands. Moreover the fortune of the owner is, in a negative 
 way, entrusted to the manager, who can always mar it, though 
 he cannot always make it. In a study of profits it needs to be 
 assumed that the shop is running under competent direction ; 
 otherwise, under modern conditions, it will quickly pass from 
 the industrial field. Materials must be well selected, the work- 
 ing force well handled, and the goods rapidly and safely mar- 
 keted, or the pure profit will become a negative quantity, and 
 the business will be terminated. There are transient condi- 
 tions in which mediocrity may for some time hold its place ; 
 but the sword is over its head from the outset, and will fall in 
 due time. 
 
 The modern struggle for existence means the survival of the 
 fittest type of industrial establishment. Elements that deter- 
 mine the question of fitness are location, working method and 
 managing efficiency. The shop that is unfavorably located 
 yields its business to others ; and industries tend automatically 
 to concentrate in places where they can thrive. The mill that 
 uses an antiquated process must change it or stop working ; and 
 industries tend towards uniform mechanical excellence. The 
 establishment that is badly conducted must change its manage- 
 ment or fail ; and business tends to concentrate in the hands of 
 those who conduct it with the greatest energy and wisdom. 
 
 The centralization of industry gives a special impulse to the 
 tendency to eliminate mediocre management ; it permits a divis- 
 ion of the directive function. There are diversities of gifts in 
 the business world ; the good mechanic may be a bad financier, 
 salesman, etc. The great establishment places in every respon- 
 sible position a man specially adapted to it. The entrepreneur 
 of a highly developed establishment is a collective personality. 
 The shop that is under individual direction is no longer typical ; 
 and if we continue to speak in the singular number of the man- 
 ager, the owner, and the capitalist, it is to keep in mind the 
 essential unity of the several groups that the terms must really 
 designate. In clear cut distinctness of function, it is as though
 
 42 POLITICAL SCIENCE QUARTERLY. 
 
 they were individuals ; in efficiency, they greatly surpass them, 
 and tend to supplant them in the industrial field. Modern 
 business demands and secures an aggregation of forces in every 
 department. Groups that have supplanted individual managers 
 continue the competition among themselves, and the entrepre- 
 neur that tends to ultimately survive is a body of men, each one 
 of whom has shown special capacity in his department. The 
 typical modern manager is an organization that is perfect in 
 each separate part. 
 
 In formulating the principle that gauges the returns of a 
 particular manager at a given time, the analogies between rent 
 and profit are instructive. They have been well utilized by one 
 of the most eminent of living economists, General Francis A. 
 Walker. Having now in view a different end, that of establish- 
 ing a law of development, and of determining the rate toward 
 which the different elements in general profits are tending, I 
 find it possible to derive complementary lessons from the con- 
 trasts presented by the Ricardian principle of rent and the 
 principle that asserts itself in the management of modern 
 business. 
 
 The area of cultivation in agriculture is governed by a law of 
 extension ; the range of managing ability is subject to a prin- 
 ciple of elimination and contraction. According to accepted 
 formulas the best land is first used, and cultivation then extends 
 to poorer and poorer qualities. The process begins with one 
 grade and ends with many. In general business, various 
 degrees of managing ability come early into the field ; compe- 
 tition eliminates one after another, till the best only is sure of 
 permanent survival. With one qualification, hereafter to be 
 stated, the process begins with many grades and ends, if it is 
 ever completed, with one. The difference in productiveness 
 between the best land and the worst is increasing ; that between 
 the best management and the worst that we need to take 
 account of is diminishing. The rent of lands varies as their 
 qualities, from nothing to an increasingly large sum ; the wages 
 of managers tend, like their business qualities, in the direction 
 of uniformity. 
 
 I
 
 PROFITS UNDER MODERN CONDITIONS. 43 
 
 Agriculture is dominated by a law of diminishing returns ; 
 and general business by a law of increasing returns. Double 
 the labor and capital expended on an acre of ground and you do 
 not double the crop ; double the labor and capital entrusted to 
 an efficient manager and you more than double the product. 
 The concentration of labor and capital renders more costly the 
 products of agriculture ; and the same influence cheapens those 
 of general business. 
 
 It follows that the demand for agricultural products tends to 
 outrun the supply ; while the supply of manufactured commod- 
 ities tends to outrun the demand. In the one case increasing 
 population is the primary fact ; and this calls for more food, etc., 
 in spite of the greater cost at which it is obtained. In the other 
 case cheapened production is the primary fact ; and this influence 
 thrusts an increasing product upon the market, notwithstanding 
 the diminished price at which it must be sold. The output of 
 great manufacturing industries is disposed of by a process that 
 tends continually to take on somewhat of the character of a 
 forced sale. The normal condition of many industries is one 
 that, from a business man's point of view, must be termed over- 
 production ; it is the condition in which more is produced at 
 each particular interval than can be sold at prices that through 
 the preceding interval prevailed. It is this final test of over- 
 supply that weak producers cannot endure. 
 
 The struggle for existence is pending, and industrial groups 
 show various degrees of approach to the consummation to which 
 it leads. In some groups the surviving establishments are 
 already in a state of high and nearly uniform efficiency ; while 
 in others they still differ considerably in this respect. There 
 is, moreover, scattered over the industrial field, an experiment- 
 ing class, whose presence renders necessary the qualification in 
 the statement of general laws to which reference has already 
 been made. These men are testing their capacity to survive in 
 the contest with men of tried ability. A few win permanent 
 places ; the remainder pass from the field ; but their transient 
 presence disguises the operation of the law of survival. They 
 must be left out of account if we are to know how far the devcl-
 
 44 POLITICAL SCIENCE QUARTERLY. 
 
 opment has proceeded, and what grade of managing efficiency 
 has a chance of permanent continuance. Any group may have 
 its experimenters who are of greatly inferior quaHty. The old 
 employer who is about to be crowded from the field marks the 
 margin of survival ; better managers may remain in the field, 
 while worse ones will be cast out. 
 
 The merging of the functions of owner and manager intro- 
 duces another element of variation, and makes farther care 
 necessary in practically testing the theoretical rule. A man 
 who, besides pure profit, receives a salary and perhaps an ele- 
 ment of interest may not take leave of the competitive field 
 when, according to simple theory, he ought to do so. After 
 profits and interest have vanished he may live on a salary, and 
 may struggle against fate till his capital is curtailed. Through 
 all variations in its application, the law of survival holds true, 
 and places in control of the material fortunes of humanity a 
 class of managing agents who are diminishing in number and 
 improving in quality. They are in fact agents and not princi- 
 pals ; it is the interests of others that are primarily entrusted 
 to their keeping ; for though their wages become relatively 
 high, they are kept within sharp limitations, while the largest 
 fruit of their invaluable labor passes by an irresistible law to 
 society. 
 
 Wages of management are radically affected by the division 
 of directive labor. The typical modern manager, as already 
 noticed, is a collective personality. Were the rare qualities 
 that are needed for conducting a great enterprise combined in 
 one man he could command a monopoly wage. It would be 
 impossible to replace him, in case he were to leave his employ- 
 ment ; and the limit of his salary would be set only by the 
 paying ability of the capitalist-owner. It is possible to replace 
 any member of a managing organization, and the salaries of the 
 members cannot well be excessive. There is a graded list of 
 candidates for the different positions. Counting rooms are full 
 of potential presidents, secretaries and treasurers ; shops are 
 full of potential superintendents ; and though some of the can- 
 didates may be, by a certain margin of difference, inferior to
 
 PROFITS UNDER MODERN CONDITIONS. 45 
 
 the men now occupying the higher places, the fact of their 
 presence places a definite check on the salaries that are paid. 
 Experience in work of the higher sort would reduce the differ- 
 ence in quality between the men in the better positions and the 
 candidates for them. The tried man has the preference ; but 
 his tenure of office depends in a measure on his success in what 
 may be termed a continuous competitive examination. There 
 are complications arising from the fact that personal relations 
 to capitalists are not without a large influence on the awarding 
 of the prizes in this contest ; but available candidates are always 
 numerous enough to place a definite limit beyond which the 
 wages of directive labor may not rise. This element of an 
 employer's returns is determined by active competition in a 
 general market for labor of a certain intrinsic quality. 
 
 There remains to be determined the amount of pure mercan- 
 tile profit. This is the final element in the analysis of the gross 
 returns of business, and if there arc principles governing it, 
 then the division of social wealth is at least a scientific process. 
 Pure profit is the seemingly uncertain quantity which lures men 
 into business, and which figures in the minds of the discon- 
 tented as the prize of agitation. Here, if anywhere, lies the 
 spring that fills the pools of unearned wealth. 
 
 Pure profit is a vanishing sum. The a priori laws of political 
 economy demand the annihilation of it, and it submits to the 
 decree. In the Ricardian sense of the term the natural amount 
 of this ultimate profit is nil. It is a positive quantity where 
 the competitive law has not fully asserted itself, and where, 
 \vithin the sphere of its control, it is checked by temporary in- 
 fluences. Economic orthodo.xy concedes to this element no 
 theoretical existence ; and where the assumptions of this sys- 
 tem concerning competition are realized, the practice of the 
 world becomes orthodox ; pure profit actually disappears. This 
 is an unanticipated vindication of logic. Ricardo did not pre- 
 dict such an outcome, nor did he so far analyze the returns of 
 industry as to distinguish the element that is subject to the law 
 of annihilation. Yet his system involved the principle, and the 
 conformity to it of actual practice is the latter-day triumph of 
 Ricardianism.
 
 46 POLITICAL SCIENCE QUARTERLY. 
 
 With capital seeking investment at the prevalent rate of in- 
 terest, with directive labor seeking employment at the high rate 
 of wages that its quality demands, can they fail to find each 
 other out, if by union they can each secure a premium ? Can 
 anvthing prevent them from simultaneously migrating to the 
 point where, besides their wages and interest, they can com- 
 mand an ulterior gain ? Nothing can do so in theory. Ordinary 
 risk is not a barrier, since that is counterbalanced by the item 
 of insurance which in our analysis we have recognized. Eco- 
 nomic formulas call for a prompt migration of labor and capital 
 to the point of special inducement ; and the formulas are justi- 
 fied. A subject of common remark is the reckless promptness 
 with which the movement actually takes place. An employer 
 who is getting more than interest and wages of direction is in- 
 terested to enlarge his product by drawing on the loan fund of 
 the market ; and a capitalist who by engaging in industry can 
 secure more than interest and wages of direction, is interested 
 to create a new establishment by drawing on the market for 
 directive labor. By enlargements from within and accessions 
 from without the productive plant is enlarged, the product in- 
 creased and the price of it reduced to the point at which capital 
 and labor of every kind receive only their normal reward. 
 The point of stable equilibrium is that at which a capitalist- 
 employer realizes neither more nor less than interest on his 
 capital and a salary for his time. 
 
 Stable equilibrium is not usually rest. Influences may dis- 
 turb the adjustment, and in this instance they do so as regu- 
 larly as it is effected. It is not to be anticipated that the 
 myriad of different industries that occupy the economic field 
 will ever simultaneously reach their natural level of productive- 
 ness. Pure profits will always be found at numerous points, 
 though at no one of them will they prove permanent. If we 
 continue to watch a particular industry we shall see pure profit 
 appearing, as the result of a disturbing influence, and then 
 slowly vanishing, as competition reasserts its control. If we 
 watch the entire industrial field we shall see pure profit appear- 
 ing, now here and now there, shifting forever its place in the 
 field, but never absent from it.
 
 PROFITS UNDER MODERN CONDITIONS. 47 
 
 One influence which periodically raises the returns of busi- 
 ness above their natural limit is the rhythmical movement of 
 trade, or the fluctuation from under-consumption to over-con- 
 sumption that results from internal changes in the economic 
 system. The period of active demand yields profits where, 
 other conditions remaining the same, that of slackened demand 
 entails losses. The two results should be made to offset each 
 other by averaging the returns of a considerable number of 
 years, if the true status of an industry is to be ascertained. 
 When, in a long interval, the pure profits just balance the losses 
 the natural rate of returns may be considered as maintained. 
 
 The settlement of a fertile continent is a disturbing influence 
 that may extend through a hundred years, and this period must 
 then be regarded as a prolonged interval of adjustment. Com- 
 petitive law cannot fully vindicate itself while soil exploitation 
 — not agriculture — is pouring treasures into every one's lap. 
 Yet in the end the slow moving law will assert its power. The 
 opening of America to settlement created an originally high 
 level of general profits, from which level competition has re- 
 duced them with varying rates of rapidity. Some localities and 
 some industries still realize abnormal gains from this source. 
 
 There is another disturbing influence which gives a promise 
 of constantly recurring as long as the economic system con- 
 tinues. It acts intermittently, and on particular industries, 
 but is always present at a thousand different points in the gen- 
 eral field. It is the legitimate creator of pure mercantile profit ; 
 and though we call its action a disturbance, since it counteracts 
 the action of competitive law, yet this influence is as natural as 
 the force that it abrogates. It affords a guaranty for continued 
 civilization. It is the result of a unique human service, that is 
 the most far-reaching in its effects of any that an industrial 
 worker can render. This is the making and applying of inven- 
 tions. While the rest of humanity are working, an elect few 
 are searching. The results of their search come partially and 
 temporarily to themselves ; the major rewards diffuse them- 
 selves among the members of society as a whole, who in the 
 end absorb the total jrain. The natural rewards of invention
 
 48 POLITICAL SCIENCE QUARTERLY. 
 
 are the most economical and effective of all possible modes of 
 ensuring the advance of material civilization. They come in a 
 form adapted to secure a maximum result with a minimum of 
 expense to the beneficiaries. They are not stipends, but prizes ; 
 and their effect is to enlist the services of scores of men where 
 only one can receive a personal return. 
 
 Invention may give to an establishment a temporary monop- 
 oly of a new process or a new product, and raise profit for the 
 time being above the natural level. The making of such dis- 
 coveries is not a part of the routine work of a manager. It does 
 not fall within the scope of any function for which a salary is 
 paid. Some Yankee ingenuity, some power of adapting me- 
 chanical means to ends is indeed required in a successful super- 
 intendent. The exercise of it in minor ways lies within the 
 routine of his business. But the inventions that we are now 
 considering are those that materially change that routine. If a 
 salaried manager makes such an invention, it is extra-ofificial 
 work, and entitles him to the same reward that would accrue 
 to any other inventor. 
 
 The relations between the makers of inventions and those 
 who introduce them are an interesting subject of study; and so 
 are the effects which the introduction of them has on establish- 
 ments that continue to use the older methods. It is not, how- 
 ever, desirable to obscure our main propositions by too many 
 corollaries. The device that effects an important economy 
 must, in the end, force itself into general use, and thus end 
 the advantage which prior possession gives to its originators. 
 Patents expire, and secrets become known. The public gets a 
 part of the benefit from the first introduction of an economical 
 process, and gets the whole benefit in the end. Competition 
 restores the natural rate of profit, and leaves, as a permanent 
 result, an increase of productive power, an elevation of the level 
 of human life. Patent laws are an evidence that the personal 
 rewards to be gained by this service are too small, rather than 
 too large, and that it is the aim of the state to prolong the fruits 
 of invention beyond the limit of time during which, by natural 
 law, the inventor could enjoy them.
 
 PROFITS UNDER MODERN CONDITIONS. 49 
 
 If the theory here advanced is true, an inquiry into the busi- 
 ness profits reaHzcd in this country during the past few years 
 should show that some industries are, and others are not, ap- 
 proaching the condition in which only natural profits are 
 afforded. Statistics that group several branches of manufac- 
 turing and state returns in the aggregate may be expected to 
 show a profit somewhat above the natural rate ; and figures for 
 the country at large must certainly do so. The general rate of 
 profit in the United States is high, not only because of gains 
 realized by many inventions, but because of returns still realized 
 by the quick exploitation of natural resources. Statistics taken 
 a few years hence would probably eliminate much of this latter 
 variation. The profits from invention would remain, and the 
 returns of any considerable group of industries must be expected 
 to show a permanent average profit somewhat above the natural 
 limit. 
 
 On the other hand, the returns of particular branches of 
 industry would show, in many cases, a close approximation to 
 the limit. Figures taken in a single case would show the stage 
 of development that one industry has reached ; they would show 
 whether it is still enjoying a residuum of originally high profit, 
 or whether the competitive pressure has reduced its gains to the 
 rate that can be permanently maintained. 
 
 It will be seen that the facts that we need in order to fully 
 verify our theory are not at present to be had. Fortunately, 
 however, the facts that are most useful are those that relate, 
 in each case, to one specific department of business ; and here 
 the knowledge which each employer in that department pos- 
 sesses is of more than ordinary scientific value. For many 
 purposes aggregates and averages taken from many branches 
 of production are necessary ; and these the business man can- 
 not furnish. For our present purpose averages are misleading, 
 and the returns of different departments taken each by itself, 
 give the testimony that we desire. It is not difficult to obtain 
 facts of this kind which strikingly illustrate the tendency of 
 recent influences to crowd profits to a point that affords noth- 
 ing beyond interest and the wages of management.
 
 50 POLITICAL SCIENCE QUARTERLY. 
 
 The returns of the textile industries of New England, as 
 shown in the report of the Boston stock market, reveal the fact 
 that a few members of this extensive group have, during the 
 fifteen years preceding 1886, enjoyed a certain immunity from 
 the full effects of competitive law. The returns of the group 
 as a whole have, during that interval, been strikingly near to 
 the point of natural profit. The same appears to be true of the 
 shoe and leather industries. The iron and steel manufactures 
 and the numerous branches affiliated with them compose a group 
 so extensive that its average profits would be unavailable for 
 our purpose. Though such gains as those which patents secured 
 to the screw-making industry may now be rare, there are de- 
 partments enough in which competition is held in temporary 
 abeyance to cause considerable deviation from the theoretical 
 standard. Yet within this general group may be found numer- 
 ous cases in which the law is verified ; and the same is true 
 in other parts of the manufacturing field. 
 
 Public transportation is a department of production essentially 
 peculiar. The local traffic of railroads enjoys a certain im- 
 munity from the full effects of competition. ' This source of 
 variation from theoretical standards is apparently counter- 
 balanced by influences of an opposite character, and the rail- 
 roads of the United States show an approximation to the 
 normal rate of profits that is even closer than that of the textile 
 industries. More and better statistics than are now available 
 are certain soon to be collected ; and there is no risk in affirm- 
 ing that where the prescribed conditions exist, the normal rate 
 of profits will be realized. Labor of every sort will be paid for ; 
 capital will be rewarded ; but there will be no bonus for any one.^ 
 
 We are living in a half-developed system, and in the law of 
 its growth may discern more clearly than was formerly possible 
 an outline of the form that it will ultimately take. That law 
 connects the rewards of business life with services, and gauges 
 them in amount by the value of those services. It gives more 
 
 1 I am indebted to the Hon. Joseph II. Walker, of Worcester, Mass., for statistics 
 tending to show that, in manufacturing industries, profits in excess of the natural 
 rate, when they are not secured by inventions, have of late been rapidly disap- 
 pearing.
 
 PROFITS UNDER MODERN CONDITIONS. 5 I 
 
 to intellect than to muscle, and more to character than to either ; 
 the largest stipends that it offers are for fidelity to trusts. It 
 checks undue discrimination in favor of mere position, and 
 ensures to the men in the industrial ranks rates of pay not 
 too far below those enjoyed by their leaders. It offers special 
 prizes for the discovery of secrets of effective work. It limits 
 more closely than statute law could do the personal benefits 
 that accrue to the men who render this service, so that when 
 the law is invoked it is for the purpose of increasing them. By 
 organization and discovery it constantly places humanity upon 
 new vantage ground in the struggle for well-being. Less and 
 less, measured in effort, is becoming the cost of a day's enjoy- 
 ments ; greater and greater, measured in enjoyments, are the 
 returns of a day's labor. In cheapened production, which is 
 never appreciated, and is often blindly resisted, lies, according 
 to this social law, the chief hope for modern workers. The 
 leaders and discoverers whose labor ensures this constant gain 
 find their rewards limited in amount and in time, while the 
 wealth that they diffuse throughout society is, in both direc- 
 tions, limitless. The outline of the coming industrial state has 
 the shape neither of despotism nor of democracy ; it is the 
 
 outline of a true republic. 
 
 John B. Clark.
 
 THE NATURAL RATE OF WAGES. 
 
 IN his chapter on " Popular Remedies for Low Wages " 
 John Stuart Mill described a certain " considerable body of 
 existing opinion on the subject." The opinion here referred 
 to was not critical opinion merely, it was also opinion as an 
 active force. Taking form in legislation, or, less coercively, in 
 moral influence, it undertook to provide that the workman 
 should have "reasonable" or "sufficient" wages. That is, it 
 was exerted to maintain wages " above the point to which they 
 would be brought by competition." 
 
 As in Mr. Mill's time, so now, there are two sets of forces 
 operating with reference to the rate of wages. One set is com- 
 posed of the forces of competition. Their action is automatic. 
 Their resultant is a mechanical equilibrium. The other forces 
 are self-conscious forms of human feeling and opinion. They 
 set up a standard of justice, and take form in moral judgments, 
 appeals to reason, the policy of labor organizations, legislation, 
 and administration. Whatever their efficacy for good or ill, the 
 self-conscious forces are acquiring an increasing prominence. 
 
 In regard to these two kinds of forces that make, or are 
 supposed to make, the rate of wages, we may discover three 
 different views among economic thinkers. 
 
 By economists of severely deductive habits and somewhat 
 reactionary tendencies, the self-conscious forces are dismissed 
 as of no importance except as a disturbing element. They are 
 regarded as impotent to affect the rate of wages in the long run. 
 Competition is held to be the only agency that needs to be con- 
 sidered, because, sooner or later, the rate of wages will be made 
 inexorably, in the outworking of an automatic natural process. 
 
 Another class of thinkers, if we may call them such, deniers 
 of natural law in the social world, reach the opposite conclusion. 
 Competition they regard as a kind of human conduct that can 
 be checked and presently made end of, like crime or intemper-
 
 THE NATURAL RATE OF WAGES. 53 
 
 ance. The self-conscious social efforts are believed to be quite 
 sufficient, if fully put forth, to make the rate of wages, so far 
 as the making is an affair of distributing a certain total product 
 among the parties engaged in its production. 
 
 According to a third and middle view, the self-conscious 
 forces sustain some relation to the physical and automatic forces 
 by way of limitation and supplement. Just what this relation 
 is, is a fact for scientific investigation to determine. 
 
 In science, as in practical affairs, the mean hypothesis is 
 often more promising than either extreme, and it certainly is so 
 in the highly complex sciences of social phenomena. Assuming 
 then, provisionally, that the rate of wages is the resultant of 
 competitive and moral forces acting simultaneously, the true 
 wages problem, as it presents itself to the economist to-day, 
 is to resolve this resultant, and ascertain whether it lies mainly 
 within the projection of the competitive, or mainly within the 
 projection of the moral forces. 
 
 We may conveniently begin the study of this problem by 
 examining the standards of ideal, or just, wages, that are set 
 up, and attempting to 'decide what, if any, is their common and 
 valid content. We may then study the competitive process as 
 it goes on in the absence of consciously imposed restrictions 
 and ascertain how nearly the results approximate to the ideal. 
 Lastly, we may inquire whether the application of the self- 
 conscious forces serves, or can serve, to make the approximation 
 more complete. 
 
 We are so accustomed to make a sharp distinction between 
 the communistic and the individualistic ideals of society that it 
 may seem absurd to affirm that, within rather broad limits, there 
 is no absolute contradiction between the communistic rule : 
 "From each according to his abilities, to each according to his 
 needs," and the individualistic rule : " To each according to the 
 value of his work." But if we go back to organic principles we 
 shall soon discover that, as a general and average fact, the one
 
 54 POLITICAL SCIENCE QUARTERLY. 
 
 rule cannot mean anything else than the other, and that, so far 
 as the two do not coincide they correct each other. Taking 
 the phenomena of life as a whole, there is, and must be, an 
 equivalence between needs and work, and an equivalence 
 between the satisfaction of needs and the existence of abilities 
 to work. Needs are, in general, but the requirements of certain 
 things to replace the tissue consumed in physical and mental 
 efforts, or to build up and develop tissue for greater future 
 efforts. These efforts, adjusted to useful ends, are work, and 
 apart from work, therefore, there are no genuine needs. Ex- 
 cepting the needs of childhood, old age and misfortune — excep- 
 tions more nominal than real — desires or requirements for other 
 ends than those of useful service for self or others are pseudo- 
 needs, illegitimate in economy as in ethics. The satisfaction 
 of needs is not limited, however, to the mere restitution of an 
 exact equivalent of human energy already expended. To some 
 extent it anticipates work to be done. Nature makes generous 
 advances to her children, but inexorably enforces payment.^ 
 A given amount of food contains more energy, usually, to be 
 set free through its consumption, than was expended in obtain- 
 ing it. Consequently, the value of work is usually a little more 
 than the value of the antecedent work from which it was evolved. 
 To these advances persistently utilized — advances converted 
 into abilities, abilities in turn put forth in work — the progress 
 of mankind from savagery to civilization has been due. 
 
 Occasional and individual misadjustments between needs and 
 work are sure to occur, because social changes make misadjust- 
 ments of every possible kind. It is in order then to inquire 
 how the misadjustmcnt comes about, and what is its true cor- 
 rection. It may be that men whose needs have been and are 
 fully supplied are not converting their supplies into an equiva- 
 lent of useful work, or it may be that men who are willing to 
 work and have the will to develop their abilities beyond present 
 
 * Professor Sumner's assertion : " Whenever nature yields to man an atom which 
 he has not earned, or advances it one second of time l)cfore he has earned it, we may 
 all turn socialists and utopists " (Collected Essays in Political and Social Science, 
 p. 50), contradicts the truth of both biology and history.
 
 THE NATURAL RATE OF WAGES. 55 
 
 limits arc inadequately supplied with what they need. Obviously 
 the remedy in the one case is to bring educational disciplines 
 to bear ; in the other to correct, as far as possible, errors in 
 distribution. The correction belongs for the most part within 
 the sphere of moral effort, education, and philanthropy. It 
 belongs to economic effort so far as the value of the laborer's 
 work falls below the amount that will both recompense him for 
 energy expended, and afford him something for the development 
 of his potential abilities ; for this is its natural value, the value 
 nature commonly gives it. The rule of ideal distribution is, to 
 each accordinir to the full natural value of his work. 
 
 II. 
 
 Such being the ideal, how far does the competitive process 
 tend to make it actual .-• What is the rate of wages in the 
 absence of self-conscious agencies acting in other than com- 
 petitive ways } 
 
 English political economy has always more or less distinctly 
 affirmed that in any society there is a certain natural rate of 
 wages. The first description of natural wages was strikingly 
 different from the definition that soon after gained acceptance. 
 It was Adam Smith's saying, — the first sentence in his discus- 
 sion of wages, — that "the produce of labor constitutes the 
 natural recompense or wages of labor," and was made in view 
 of "that original state of things" when there was neither land- 
 lord nor master, and the whole produce of industry belonged 
 to the laborer. The truth, so fundamental in our modern 
 philosophy of wages, that in a later industrial state also — 
 when the active population has been differentiated into vari- 
 ous classes of employers and employed — the wages of the 
 laborer are still approximately equivalent to what he produces, 
 is not worked out in The Wealth of Xaiions. If Adam 
 Smith ever distinctly perceived that the employer's profit is 
 value created by his own services, not by the laborer's exer- 
 tions, the idea was no link in the chain of thought that took 
 shape in the chapter on wages. Consequently, in treating of
 
 56 POLITICAL SCIENCE QUARTERLY. 
 
 labor as conditioned by landlord and master, his thought gravi- 
 tates to the minimum limit to which wages can be forced by 
 competition. " There is, however," he says, " a certain rate 
 below which it seems impossible to reduce, for any considera- 
 ble time, the ordinary wages even of the lowest species of 
 labor." This rate is the wage that will maintain the laborer, 
 and enable him to rear another laborer to take his place in the 
 next generation. If the wealth of a country were stationary, 
 the competition of the laborers and the interest of the masters 
 would soon reduce wages to this lowest rate which is consistent 
 with common humanity. If wealth is increasing, and so long 
 as it continues to increase, wages will be above the minimum. 
 If wealth were decreasing, wages would fall below the lowest 
 humane rate until, by famine, "the number of inhabitants in 
 the country was reduced to what could easily be maintained by 
 the revenue and stock which remained in it." ^ 
 
 This analysis was seized upon by Ricardo, who condensed it 
 into a definition. Giving a new, and, as it proved, permanent 
 meaning to the term "natural" which Adam Smith had used 
 in a sense so different, Ricardo defined natural wages as "that 
 price which is necessary to enable the laborers, one with another, 
 to subsist and to perpetuate their race without either increase 
 or diminution." 2 To its author this definition meant a great 
 deal more than the words explicitly affirm. Saying nothing of 
 Ricardo's analysis of minimum wages in terms of food, which 
 we need not follow, it is plain that the limit below which he 
 supposed wages could not permanently fall is considerably above 
 tlie minimum described by Adam Smith. He assumed that the 
 laborer was master of the minimum rate below which wages 
 could not be permanently lowered. " It is not to be under- 
 stood," he said, "that the natural price of labor, estimated 
 even in food and necessaries, is absolutely fixed and constant. 
 It varies at different times in the same country, and very mate- 
 rially differs in different countries. It essentially depends on 
 the habits and customs of the people." It is safe to say that 
 
 1 The Wealth of Nations, chapter viii. 
 
 2 Principles of Political Economy and Taxation, chapter v.
 
 THE NATURAL RATE OF WAGES. 57 
 
 if this last assumption of Ricardo's had been warranted by the 
 facts of the actual industrial world, English political economy 
 would have escaped the wrath of humanitarians and the name 
 of a dismal science. But when John Stuart Mill restated and 
 elaborated the body of doctrine evolved by his predecessors, he 
 was not long in proving that the moral minimum of wages was 
 a myth. Any disadvantageous change in the circumstances of 
 laborers, — that is, any reduction of actual below natural wages, 
 — he pointed out, "may permanently lower the standard of living 
 of the class in case their previous habits in respect of popula- 
 tion prove stronger than their previous habits in respect of com- 
 fort. In that case the injury done will be permanent, and their 
 deteriorated condition will become a new minimum tending to 
 perpetuate itself as the more ample minimum did before ; "^ and 
 this has happened and does happen so frequently as to render 
 all propositions ascribing a self-repairing quality to the calami- 
 ties which befall the laboring classes, practically of no validity. 
 
 III. 
 
 Yet it does not follow that there is not a true natural rate of 
 wages, well above the limit at which a man must starve or beg. 
 There is a soul of truth in Ricardo's idea, and it happens to be 
 the only part of the doctrine that the economist, as such, is 
 really concerned with. Far above the limit of mere subsistence 
 there is a limit below which the permanent reduction of wages 
 is uneconomical. The maximum production of wealth depends 
 on the most complete and perfect division of labor, and the 
 division of labor depends not only on the extent of the market 
 but on the size of the population. The extent of the market 
 itself depends on the size of the producing and consuming popu- 
 lation, and an occupation can become differentiated from allied 
 occupations and developed into a distinct trade, business, or 
 profession, only when there is a considerable number of persons 
 to engage in it. There is, therefore, a limit below which the 
 reduction of the laboring population reduces the incomes not 
 
 ^ Principles of Political Economy, book ii, chapter xi.
 
 58 POLITICAL SCIENCE QUARTERLY. 
 
 only of laborers themselves but of all classes in the community. 
 The farmer cannot develop the resources of his land, or the 
 manufacturer increase his product. The reward of management 
 is curtailed and interest reduced. Again, there is for each 
 laborer a maximum efficiency in proportion to his consumption. 
 Up to a certain point the more real wages put into him the 
 more useful service can be gotten out of him. To quote once 
 more from Adam Smith, the industrial experience of a century 
 has been but cumulative proof of his saying : " A plentiful sub- 
 sistence increases the bodily strength of the laborer, and the 
 comfortable hope of bettering his condition and of ending his 
 days in ease and plenty animates him to exert that strength to 
 the utmost."^ As statistical science and methods improve, it 
 should be possible to ascertain the economical rate of wages 
 for any given occupation at any given time, and with a fair 
 approximation to accuracy, by means of statistical averages 
 drawn from selected results. These would include statistics of 
 the cost of labor of the same nationality, employed under sub- 
 stantially similar conditions except differences of real wages. 
 
 Now this economical rate is none other than the ethical rate. 
 To give the laborer the wage that calls out his full efficiency 
 and affords him a comfortable hope for old age, is to give him 
 no less than that sum which is sufficient to develop his potential 
 abilities. In communities accustomed to change and progress, 
 the actual rate of wages must equal this ethical and economical 
 rate, or fall very much below it. Where the ideas and aspira- 
 tions of the successful are communicated to all classes the 
 laborer can never remain in an equilibrium of contentment. 
 The stimulus and tone of his life is the prospect of doing better. 
 Remove that stimulus and he does not simply remain a station- 
 ary economic quantity, he deteriorates from that moment. His 
 efficiency is impaired, he adds less and less to the world's sum 
 total of wealth. Losing the ambition to do as well as he can, 
 he loses also the ambition to live as well as he can, to make the 
 most of what he has. He falls into unsanitary habits. His 
 vitality and that of his children is impaired, and, while he may 
 
 ^ The Wealth of Nations, chapter viii.
 
 THE NATURAL RATE OF WAGES. 59 
 
 have as many children as he would have if living in wholesome 
 prosperity, not as many of them will survive to maturity. Both 
 in efficiency and in numbers the labor force is diminished, and 
 the total production of society is lessened. Consequently, in a 
 community advancing in wealth and refinement, that cannot be 
 an economical rate of wages which is insufficient to enable the 
 workingman to share in the general expansion of life. 
 
 Giving to the laborer the full natural value of his work, the 
 economical rate of wages is no less than the produce of his 
 labor. The economical rate, moreover, is the rate to which 
 wages actually would conform if competition were governed 
 only by the expectation of gain, and the losses of excessive 
 competition could not be shifted by the competitors upon others. 
 Competition carried to the extent of keeping wages as low as 
 this rate is beneficial to all. It forces men to make the most 
 of their opportunities, it sharpens thought and disciplines char- 
 acter, and calls the creative powers into fullest action. Carried 
 the least degree farther, competition merely deadens and 
 destroys, and the majority of men do not habitually carry 
 competition to destructive lengths when acting freely by the 
 impulse of natural motives. The economic limit of competition 
 is its natural limit — not always its actual limit — and the rate 
 of wages made by competition restricted within this limit is a 
 natural rate. 
 
 Therefore, in the fullest sense, the economical rate is at once 
 the true natural and the true ethical rate of wages. Stripped 
 of fallacy and rightly developed, the Ricardian doctrine of 
 natural wages is identical with the earlier affirmation of Adam 
 Smith. The natural remuneration of the laborer is the produce 
 of his labor, and in an improving society this produce is not less 
 than the "reasonable" and "sufficient" wages which humani- 
 tarian feeling demands. 
 
 IV. 
 
 Let us now inquire to what extent the actual rate of wages, 
 so far as competition determines it, tends to conform to the 
 natural rate.
 
 6o POLITICAL SCIENCE QUARTERLY. 
 
 The wages-fund doctrine has been finally overthrown, and it 
 has been abundantly demonstrated that the actual rate of wages 
 is made by the productiveness of industry ; but the proposition 
 has not been reduced to perfect definiteness. That is to say, 
 it is no longer disputed that wages are more when product is 
 more and less when product is less, but there is still dispute 
 whether increasing production tends to benefit chiefly the 
 employer or chiefly the laborer. The decisive answer to this 
 question will be given some day by statistics. Meanwhile we 
 can satisfy ourselves on two important points. 
 
 The formula of Cobden that wages rise when two bosses are 
 after one man and fall when two men are after one boss, means 
 that every increase in the number of employers who can make 
 a sufficient profit from their business to maintain themselves as 
 employers, acts favorably on the rate of wages. And this is 
 true, notwithstanding the fact that consolidations of productive 
 undertakings, concentrating them in the hands of the most 
 competent men, are attended with economy of production. So 
 long as new employers can find a place in any industry, and 
 profitably maintain themselves in it, the benefits arising from 
 concentration have not yet been distributed in wages and 
 reduced prices of utilities. The profits of the employers 
 hitherto in the field have been abnormally large. It is not the 
 intrusion of poorer employers into the field that increases the 
 profits of abler employers, any more than it is the actual resort 
 to poorer land that increases the rent of better land. It is the 
 increasing value of the produce of the best land, due to its 
 failure to supply an increasing demand upon it, that makes the 
 profitable cultivation of poorer land possible and affords rent to 
 the best. The actual cultivation of the worst land that can be 
 cultivated with profit establishes a limit beyond which the value 
 of the produce of the best land cannot rise. But for the prod- 
 uce of poor land the owners of fertile land could obtain famine 
 prices.^ So of employers. If there is any condition necessi- 
 tating a resort to poorer employers it is the failure of the best 
 
 ' Malthus understood, or at least stated, the cause of rent more accurately than 
 Ricardo. Cf. James lionar, Malthus and his Work.
 
 I 
 
 THE NATURAL RATE OF WAGES. 6 1 
 
 employers to supply the demand for employer functions. The 
 number of men of superlative business genius is small, and the 
 powers of the ablest men are not unlimited. If there were no 
 resort to a commoner grade of talent the value of the employer 
 function would rise above any assignable price. So far from 
 deducting in any way from the laborer's real wages, the multi- 
 plication of employers who can sustain themselves above bank- 
 ruptcy reduces the prices of goods and increases the wages of 
 labor. 
 
 Does a condition of improving industry tend to multiply 
 employers .'' The true answer to this question is that the num- 
 ber of employers tends to multiply just as far as the more 
 gifted employers, or combinations of gifted employers, fail to 
 discharge the employer function with decreasing cost to the 
 community, thereby leaving for real wages an increasing portion 
 of the total product of industry. This law is absolute. That 
 combinations economize production we know. It is one of the 
 most striking phenomena of modern industrial life. It is as if 
 the owners of superior lands should discover some means by 
 which increasing investments of capital in agriculture should 
 yield increasing, instead of diminishing, returns. They could 
 then drive the cultivators of the poorer lands out of the market 
 if they chose, but only by dividing their increasing gains with 
 consumers. Should they attempt to retain all, the humbler cul- 
 tivators would again meet them in the market. It is the same 
 with employers. Centralization of the employer function and 
 the extinction of the smaller employers is possible only by con- 
 veying to the laborer a larger share of product than he previ- 
 ously enjoyed. There is, indeed, a limit in every industry 
 beyond which the intrusion of new competitors will ensure the 
 bankruptcy of some ; and when that limit is reached the 
 stronger survivors endeavor, by a judicious policy as to prices, 
 to hold the field. But there remains the limitless domain of 
 new utilities, and the specialization of utilities depends not only 
 on that geographical extension of the market wiiich Adam 
 Smith described, but even more, under modern conditions, on 
 the productiveness of industry, the greater or lesser incomes of
 
 62 POLITICAL SCIENCE QUARTERLY. 
 
 the people. When a man's income is increasing he does not 
 increase all his expenses in proportion ; he adds some new ones 
 outright, purchases some utilities that he did not enjoy before. 
 When his income is decreasing he lops off some at a stroke. 
 
 From all this it would appear that in communities enjoying 
 increasing prosperity the actual rate of wages must tend con- 
 stantly to conform to that true natural rate which is at once 
 the economical and the ethical rate. That this is, indeed, the 
 real tendency in the industrial nations at the present time, 
 there is much reason to believe ; but there are, unfortunately, 
 many exceptions extending over large areas of population and 
 through long intervals of time. To conform to the natural rate 
 would be the real tendency everywhere and always, if competi- 
 tion were always uniform and normal. But in the actual indus- 
 trial world competition is never uniform, and because not 
 uniform it is often carried to ruinous excess. 
 
 V. 
 
 I have elsewhere shown that the competitive process, judged 
 by economic or ethical standards, is inherently defective,^ and 
 this because, like all natural processes, it assumes a rhythmical 
 form. " Competition begins only after gains in excess of nor- 
 mal profits have accrued to employing producers. As a conse- 
 quence of this fact, when competition does begin it goes to 
 excess." When, passing the normal limit, competition assumes 
 that terrible intensity that presages business ruin, the employer 
 is driven to every expedient to save some part of his narrowing 
 margin of profit. The readiest expedient, the most available 
 for the moment, though costliest in the end, is the exploitation 
 of wages. In a mild way this is done by tacitly or openly 
 restricting competition in the purchase of labor. Whatever 
 brings additional employers into productive enterprise and in- 
 tensifies competition in the sale of products will naturally in- 
 tensify competition in the purchase of labor ; but we must be 
 careful not to confound the two processes. To some cxtc^^t it 
 
 * The Theory of Profit Sharing, Quarterly Jctirual of Economics, April, 1887.
 
 THE NATURAL RATE OF WAGES. d-iy 
 
 is easily possible for employers to separate them in their indus- 
 trial practice, thereby adding to their profits a sum that would 
 otherwise be added to wages. In its worst and most brutal 
 form the exploitation of wages becomes a positive extortion 
 from working men and women who have been reduced by mis- 
 fortune to such straits that all power of resistance is gone. It 
 becomes the "sweating" system of the clothing trades, the 
 "plucking" system of the coal districts. Between these ex- 
 tremes are all those gradations that substitute the labor of 
 women for the labor of men, the labor of children for the labor 
 of women, and replace the native laborer with a foreign compet- 
 itor of a lower grade of life. All these exploitations, reducing 
 wages below the true economical rate, react disastrously on 
 production, in time, and are contrary to the interests of em- 
 ployers as a class ; but they profit for a while, and may continu- 
 ously profit the individual employer who can shift upon society 
 or his competitors the losses that his practice creates. He 
 divides his ill-gotten ga.ins with the consumer, and thereby, 
 commanding the market, compels worthier competitors to 
 adopt his methods. 
 
 Now to these deplorable results of ill-regulated competition 
 there is no automatic correction, springing from motives of 
 individual self-interest, that meets the case. The wide-spread 
 belief that, if the exploitation of wages is carried so far as actu- 
 ally to enrich the employer, the sum so gained, if converted into 
 capital, will return to labor, is still shared by many respectable 
 economists. It is true to the extent that increasing capital 
 does act favorably on wages. In overthrowing the wages-fund 
 doctrine economists have somewhat lost sight of the real func- 
 tion performed by capital in employing labor. The owners of 
 accumulating capital, casting about for productive investments, 
 select, according to their best judgment, those that promise to 
 yield the best returns. Labor for such new enterprises must be 
 drawn, by the offer of increased wages, from other employ- 
 ments — to some extent even when there is a large body of 
 unemployed workmen, since the unemployed are always the 
 relatively inefficient. Even the replacement of old capital gives
 
 64 POLITICAL SCIENCE QUARTERLY. 
 
 rise to this process of selection among actual and possible enter- 
 prises with reference to their anticipated profitableness, and the 
 consequent drafting of labor from the less profitable to the more 
 profitable employments. The accumulation of new capital 
 amplifies and accelerates it. Hence the ratio of capital to popu- 
 lation, though having in its static aspect no such relation to 
 wages as the old doctrines ascribed to it, has yet a dynamic 
 relation that is definite and important. But when the capital 
 has been wrung from labor, the original wrong is never righted. 
 The capital has become the property of the employer, and 
 has increased his power. The way in which it has been 
 obtained has cultivated the disposition to acquire power in 
 that way by continuing to exploit wages, even when indus- 
 trial conditions no longer afford an excuse. The loss sus- 
 tained by the laborer may never be repaired, for degradations 
 of men and women are converted into organic changes. A 
 lower type of life is the result, and ultimately the reaction 
 is completed in a positive impairment of the productive force 
 of the community. 
 
 Neither are the evil results of unequal competition corrected 
 by efforts springing from altruistic motives, so long as these are 
 not reinforced by associated action. The ultimate cure for 
 industrial evils is, indeed, in the growth of altruistic feeling. 
 Employers must cease to exploit wages, either to avoid loss 
 or to increase their profit and power. They and others must 
 endeavor, by personal help and encouragement, to counteract 
 the tendency to degradation in the unfortunate and discouraged. 
 But that these efforts on the part of those who have the dispo- 
 sition to make them may avail, a restraint must be put on those 
 who have no such disposition. Unselfish men, acting as indi- 
 viduals, without reference to each other, would be crowded out 
 in the struggle for survival. That ninety-nine fair employers 
 may have a chance, there must be some restraint upon the hun- 
 dredth unfair one ; and that restraint can be effectively organ- 
 ized only by the interests injuriously affected. It must be their 
 united resistance and co-operation.
 
 THE NATURAL RATE OF WAGES. 65 
 
 VI. 
 
 So \vc arc brought, at last, to consider the action of those 
 
 self-conscious forms of feeling and opinion which undertake to 
 
 ■govern the competitive process by such means as the policy of 
 
 labor organizations and legislation. What can they accomplish ? 
 
 It requires neither argument nor marshalling of facts to prove 
 that by no means whatever can employers be forced to surren- 
 der from their gross profits, for addition to the wages of their 
 employees, any part of the sum that constitutes the normal 
 reward of the employer function. Any attempt, temporarily 
 successful, to secure more, would simply drive employers out 
 of business and throw labor out of employment. But when 
 competition among the undertakers of enterprise is carried to 
 its full normal limits there will be no ulterior profit in excess 
 of such reward of the ctitrcprcnetir function as will maintain 
 that function unimpaired. With capital accumulating for in- 
 vestment, the competition of producers as sellers of their pro- 
 ducts is sure to reach its full normal limits. The only sums, 
 then, that can be added to wages by any means whatever are: 
 First, the sum labor is in danger of losing, either (i) through the 
 failure of employers to compete as freely as purchasers of labor 
 as they compete as sellers of products, or (2) by that merciless 
 competition which takes advantage of the laborer's ignorance 
 or weakness to rob him and divides the plunder between the 
 employing producer and the buyer of goods. Secondly, the 
 sum that might be produced by calling into action any potential 
 manhood and ability of the laborer that actual competition fails 
 to develop. Can as much as this be accomplished } 
 
 The power of the labor organization is the strike, actual or in 
 reserve, and back of the strike the ability of the organization to 
 hold together. Unless there is some ulterior motive for permit- 
 ting the strike, the employer can better afford to yield to the 
 demand of labor any sum less than the amount the strike will 
 cost him and not exceeding the aggregate of the sums above de- 
 scribed as possible additions to wages. Let us designate this 
 aggregate by d and the cost of the strike by c. Included in the
 
 66 POLITICAL SCIENCE QUARTERLY. 
 
 sum ^will be a sum d' which, if d does not go to labor, cannot 
 go to the employer. It is the sum wrested from labor by the 
 illegitimate forms of competition and given to the consumer in 
 an abnormal reduction of price, as for example in the case of 
 the white underclothing made by sewing women. All that an 
 employer can add to his own profit at the expense of labor is 
 d—d'. If, now, the demand of labor over which a strike is 
 threatened is for a sum exceeding d, the employer has no alter- 
 native but to resist until labor is starved into submission or the 
 business is indefinitely suspended, since he may as well quit 
 business entirely and accept a salary as to permanently surren- 
 der a part of the normal and equitable reward of his own ser- 
 vices. Again, if there is a good prospect that labor can be 
 brought to surrender before the cost of the strike c, plus d' (the 
 sum conveyed by competition to the consumer) amounts to the 
 sum d, it is the employer's policy to resist it for the sake of sav- 
 ing as an addition to his profit the remainder, d— (c -\- d'). If, 
 on the other hand, labor can hold out until c—d' equals d, the 
 employer can better afford to surrender at once the entire sum 
 d, unless there is an ulterior object to be gained by resistance. 
 
 Such an ulterior object, if it could be achieved, would be the 
 discouragement of organized and concerted action by labor, and 
 it could be achieved if the sum to be lost by labor in maintaining 
 its organization was greater than the sum to be lost by permit- 
 ting its disintegration or if the organization of labor limited and 
 weakened itself by mistakes of policy. On the contrary, if labor 
 must lose as much by disintegration as it can possibly lose in 
 defending its organization, and if the amount that the employer 
 can add to his own profits by breaking down the organization 
 is small at the best in proportion to the sum that labor can gain 
 by concerted action, employers will not follow a policy of war- 
 fare against labor organizations. 
 
 And these, it is easy to see, arc the actual facts. The sura 
 that labor has to gain is the sum d. The utmost that the em- 
 ployer can add to his profit is d—d\ the sum withheld from 
 labor by unequal and illegitimate competition, less the sum con- 
 veyed by illegitimate competition to the consumer. And the
 
 THE NATURAL RATE OF WAGES. 67 
 
 loss by labor of the sum d means, as wc have seen, the progres- 
 sive degradation of labor. If the loss is inevitable, workmen 
 may as well lose by strikes as by competition with each other. 
 They can afford to sacrifice in defence of organization all that 
 it is possible for them to lose. 
 
 By organization, therefore, labor can secure the whole sum d 
 Avhen abnormal competition tends to convey it to employers and 
 consumers, and the organization can be broken only by its own 
 defects of constitution or mistakes of policy. The principles 
 governing the coherence of the labor organization are the same 
 as those governing the coherence of combinations of producers. 
 It is essentially defensive, not aggressive. It is more or less 
 coherent as it is more or less homogeneous in composition. It 
 can only correct the results of imperfect competition and bring 
 illegitimate competition within normal limits. If it attempts to 
 secure more than the sum d, it curtails employment and sets up 
 economic reactions against the whole wages class. And it 
 must allow to its members the best wages they could severally 
 make by their individual competition. Men will join and re- 
 main in labor organizations only if they can thereby secure 
 better wages than they can secure by individual efforts. They 
 will secede if their superior abilities are refused reward, or if 
 mistaken policy reduces wages below the sum they could com- 
 mand as individuals and still be above the minimum at which 
 resort to charity begins. The Knights of Labor in their earlier 
 organization violated the law of homogeneity. In reorganizing 
 on trade lines they are attempting to conform to it. Trade 
 unions have traditionally made the mistake of refusing to allow to 
 the best workmen the wages they could command as individuals. 
 
 We need not linger to prove that arbitration and legislation, 
 so far as they have to do with wages, are subject to the same 
 general limitations as the policy of labor organizations. They 
 have to do only with securing to labor the sum d. They can 
 add to wages only the sum that would be added by competition 
 in the purchase of labor as perfect as the competition in selling 
 products, and by restriction of competition in selling products 
 to normal limits.
 
 68 POLITICAL SCIENCE QUARTERLY. 
 
 VII. 
 
 Must we not therefore conclude that the rate of wages is 
 made mainly by the competitive forces, and that the moral forces, 
 acting through organization and public opinion, are powerful to 
 correct the distributive errors caused by the inherent defective- 
 ness of the competitive process, but that, beyond such corrective 
 work, they are unavailing ? Apparently we must, if we consider 
 the direct process only. But beyond the direct, immediate process, 
 is an indirect process in which moral forces have a larger sweep. 
 We have seen that on the productiveness of industry depends 
 not only the absolute amount of the laborer's remuneration, but 
 also its relative amount, the proportion it bears to the whole 
 product. And that the productiveness of industry is condi- 
 tioned by the moral quality of the people is no new truth of 
 either political economy or practical wisdom. Whatever per- 
 sonal or associated effort, education or legislation, can do to 
 develop the physical vigor and moral powers of vvorkingmen, 
 will amplify the product of their labor and increase their in- 
 comes. It will narrow somewhat the gulf between the abilities 
 and incomes of the few and those of the many. The function 
 of the man of business is essentially that of co-ordinating the 
 factors and processes of the economic world — labor, capital, 
 invention, and superintendence in the factory, supply and 
 demand in the market. Throughout organic nature, and no 
 less in human society, the co-ordinating function is useful and 
 costly compared with the mere expenditure of energy in direct 
 and simple ways. If the many are to share in the great rewards 
 now enjoyed by the few, they must become competent to assist 
 in discharging the functions now discharged by the few. This 
 thought suggests another, that, perhaps in a much more direct 
 way than has been supposed, the more serious economic dis- 
 turbances of modern times, those industrial depressions that 
 follow the enormous displacements of cnpital and labor which 
 invention and discovery are continually making, are aggravated 
 or mitigated by the intellectual and moral qualities of the people. 
 For on what else docs the utilization of such changes with least
 
 THE NATURAL RATE OF WAGES. 69 
 
 loss depend, than on the ability of the people to make quickly 
 and easily the necessary readjustments? This is a large and 
 perhaps a fruitful subject, on which we cannot enter at this time. 
 It is sufficient to know that, if not in the way contemplated by 
 Ricardo, yet in a way immeasurably more important, the rate 
 of wages depends on "the habits and customs of the people": 
 above all on the habit of " acting upon each other not as the 
 forces of inorganic nature work, in blind impact and resistance, 
 but rather as the forces of organic life, assimilatively — each 
 finding his ends in the ends of the others, and all working 
 in and through the others for the development of one organic 
 social whole, in which each individual is at once the means and 
 the end of all the rest." ^ The growth of this habit will contin- 
 ually raise the natural rate of wages — the rate below which 
 reductions are wasteful and immoral. The competition that 
 forces actual wages down to that natural rate — to the rate, that 
 is, that rewards a man according to the use he makes of the 
 powers with which he is endowed, affording him the means to 
 develop them, but not to idle them away — also tends, no less 
 certainly, to raise the natural rate, for it stimulates effort and 
 quickens thought. It is the chief cause of intellectual progress 
 and systematic endeavor. Legislation, arbitration and efforts of 
 organizations, so far as they correct the tendency of competition 
 to reduce actual below natural wages, play their part also in 
 raising the natural rate. Carried the least degree farther, they 
 but interfere with the normal action of other forces, and thereby 
 retard progress. 
 
 Franklin H. Giddings. 
 
 ^ Daniel Greenlcaf Thompson, The Problem of Evil, p. 2S0.
 
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