LIBRARY UNIVERSITY OF CALIFORNIA SAN DIEGO ECONOMIC DEMOCRACY BY C. H. DOUGLAS Major, Royal Air Force (Reserve), M. Inst. Mecb. E., M. Inst. E. E. NEW YORK HARCOURT, BRACE AND HOWE 1920 COPYRIGHT, 1920, BY HARCOURT, BRACE AND HOWE, INC. THE QUINN ft BOOEN COMPANY RAHWAV. N J. TO MY WIFE urithout whose understanding this book could not have been written. PREFACE WRITTEN for the most part under the pressure of War conditions, this book is an attempt to disentangle from a mass of superficial features such as Profiteer- ing, and alleged scarcity of commodities, a sufficient portion of the skeleton of the Structure we call So- ciety as will serve to suggest sound reasons for the decay with which it is now attacked ; and afterwards to indicate the probable direction of sound and vital reconstruction. My apologies and sympathy are offered to the reader in respect of the severe concentration which its tabloid treatment of technical methods demands; but I have some grounds for supposing that the mat- ter it contains has aroused sufficient interest to excuse its presentation in this form. I am indebted to my friend Mr. A. B. Orage, the Editor of The New Age (in which review, together with the remainder of the book, it first appeared), for the use of the block which forms the frontispiece. C. H. DOUGLAS. HEATH END, BASINGSTOKE. November, 1919. CONTENTS CHAPTER I PAGE Over-rated value of consistency Spirit, not form, im- portant Socialism, the reaction from commercialism - War, the rivaler Meaning of American Declara- tion of Independence Freedom, not system, the goal 1 CHAPTER II How catch-phrases betray Abuse of Darwinian theory Result in Germany The rise of centralized control Signs of its failure and revolt against it Servility necessary to it Advantages of technical centraliza- tion 7 CHAPTER IH Danger of loose thinking Socialists too sweeping Credit side of capitalism The Servile State The real enemy Nationalization no cure Capitalism and centralism Discrediting of Jevonian Eco- nomics Definition of Money Modern money comes from credit creations Reaction in industry Scien- tific management Piece-work systems and their rela- tion to money values " Ca'canny " Financial cen- tralization and militarism 19 CHAPTER IV Personality not the ruling factor in centralism Over- rides personality Lessons of history The cult of Mediaevalism Its fallacy Industrial organization The argument for super-production Its critical im- portance Staking out the ground of argument . . 36 CHAPTER V Factory cost the heart of the problem Profit-sharing The rate of distribution of money The rate of in- viii CONTENTS PAGE crease of prices Example Where the real purchas- ing power lies Loan-credit and cash-credit The leak in the dollar Wealth and " weal "-being Profiteering not the prime objection to existing sys- tem Summary of analysis of production economics 54 CHAPTER VI Fallacious arguments based on income-returns Import- ance of loan-credit How it differs from pay and wages Why starvation may exist amidst plenty Economic sabotage Examples The mirage of fi- nance Why it can never deliver the goods ... 68 CHAPTER VII The final struggle approaching The issue Inadequacy of commodity-reward for service Social symptoms Business system not to blame Real and effective demand .Productive system technically adequate Decentralized control The Shop Steward System A means, not an end A labor fallacy ... 74 CHAPTER VIII Economic reconstruction the first necessity Poverty largely artificial Why war has increased apparent prosperity Function and control Medievalism and Ultra-modernism The idea of the Just Price Sum- mary of Analysis of Social Structure The objective of change The time-energy unit Process, the key to progress Production to a program The conditions of economic emancipation The incentive to effort Existing methods Financial manipulation Time- work Piece-work The basis of the Just Price Ad- ministration not germane to the idea The com- munity already owns the plant A theoretical solu- tion Definition of capital The Credit Center The separation of function .86 CHAPTER IX Necessity of dealing with Society as it is More purchas- ing power wanted Futility of general wage in- creases And of excess profits taxation Vital im- portance of loan-credit Definition of real credit Credit derives from the community Should be ac- counted for to the community The nature of the CONTENTS ix PAGB War Debt The State a creditor, not a debtor How to realize it Time-saving as an incentive Results of projected policy Freedom 110 CHAPTER X The relation of semi-manufactures to credit The Clear- ing-house How to " clear " overhead charges Exact statement of the Just Price How to meet the War Debt The dawn of real co-operation . . . .119 CHAPTER XI The League of Nations Its form dependent on economic system Ultimate defeat of Centralist Policy certain How a League of Free Peoples can come . . 130 CHAPTER XII Concentrated economic power must be dissipated The economic basis of sentiment Education and propa- ganda Democratic control of the Press The roots of Economic Democracy The End .... 137 VALUES PRICES AND PURCHASING POWER (See Chapter V.) The vertical columns represent the wages, salaries, and divi- dends distributed to all the persons affected, either as share- holders or employes, by the consecutive factory stages in the passage of an article from the condition of " raw material," in the bottom left hand corner, to that of an " ultimate product," in the top right hand corner. The portion of the diagonal column lying to the left of any vertical column represents the total payments made out- side the factory concerned. The cross-hatched portion of the vertical columns represents approximately the personal and normal expenditure of the individuals in receipt of purchasing power through the sources indicated, and the small white vertical columns show their cash savings. It will be seen that aggregate prices increase much faster than aggregate personal savings, causing the forced export of manufactured articles and continuous expansion of financial credits. ECONOMIC DEMOCRACY CHAPTER I Over-rated value of consistency Spirit, not form, important Socialism, the reaction from commercialism War, the revealer Meaning of American Declaration of Inde- pendence Freedom, not System, the Goal. THERE has been a very strong tendency, fortunately not now so strong as it was, to regard fidelity to one set of opinions as being something of which to be proud, and con- sistency in the superficial sense as a test of character. The Scottish political constituent who always voted for a Liberal because he was too Con- servative to change, has his counterpart in every sphere of human activity, and most par- ticularly so in that of economics, where the tracing back to first principles of the dogmas used for everyday purposes requires, in addi- tion to some little aptitude and research, a laborious effort of thought and logic very for- eign to our normal methods. i 2 ECONOMIC DEMOCRACY It thus comes about that modification in the creed of the orthodox is both difficult and con- ducive to exasperation; since because the form is commonly mistaken for the substance it is not clearly seen why a statement which has em- bodied a sound principle, may in course of time become a dangerous hindrance to prog- ress. Of such a character are many of our habits of thought and speech to-day. Because from the commercial policy of the nineteenth century has quite clearly sprung great advance in the domain of science and the mastery of material nature, the commercialist, quite honestly in many cases, would have us turn the land into a counting house and drain the sea to make a factory. On the other hand the Social Re- former, obsessed, as well he might be, with the poverty and degradation which shoulder the very doors of the rich, is apt to turn his eyes back to the days antecedent to the Industrial Eevolution ; note, or assume, that the conditions he deplores did not exist then, at any rate, in so desperate a degree; and condemn all busi- ness as abominable. 3 At various well-defined epochs in the history of civilization there has occurred such a clash of apparently irreconcilable ideas as has at this time most definitely come upon us. Now, as then, from every quarter come the unmistakable signs of crumbling institutions and discredited formulae, while the widespread nature of the general unrest, together with the immense range of pretext alleged for it, is a clear indi- cation that a general rearrangement is im- minent. As a result of the conditions produced by the European War, the play of forces, usually only visible to expert observers, has become apparent to many who previously regarded none of these things. The very efforts made to conceal the existence of springs of action other than those publicly admitted, has riveted the attention of an awakened proletariat as no amount of positive propaganda would have done. A more or less conscious effort to refer the results of the working of the social and political system to the Bar of individual re- quirement has, on the whole, quite definitely resulted in a verdict for the prosecution; and 4 ECONOMIC DEMOCRACY there is little doubt that sentence will be pro- nounced and enforced. Before proceeding to the consideration of the remedies proposed, it may be well to emphasize the more salient features of the indictment, and in doing this it is of the first consequence to make very sure of the code against which the alleged offenses have been committed. And here we are driven right back to first principles to an attempt to define the purposes, con- scious or unconscious, which govern humanity in its ceaseless struggle with environment. To cover the whole of the ground is, of course, impossible. The infinite combinations into which the drive of evolution can assemble the will, emotions and desires, are probably out- side the scope of any form of words not too symbolical for everyday use. But of the many attempts which have been made it is quite possible that the definition em- bodied in the majestic words of the American Declaration of Independence, ''the inalienable right of man to life, liberty and the pursuit of happiness," is still unexcelled, although the promise of its birth is yet far from complete ECONOMIC DEMOCRACY 5 justification; and if words mean anything at all, these words are an assertion of the suprem- acy of the individual considered collectively, over any external interest. Now, what does this mean? First of all, it does not mean anarchy, nor does it mean exactly what is commonly called individualism, which generally resolves itself into a claim to force the individuality of others to subordinate itself to the will-to-power of the self-styled individualist. And most em- phatically it does not mean collectivism in any of the forms made familiar to us by the Fabians and others. It is suggested that the primary requisite is to obtain in the readjustment of the economic and political structure such control of initiative, that by its exercise every individual can avail himself of the benefits of science and mechan- ism; that by their aid he is placed in such a position of advantage, that in common with his fellows he can choose, with increasing freedom and independence, whether he will or will not assist in any project which may be placed be- fore him. The basis of independence of this character 6 ECONOMIC DEMOCRACY is most definitely economic ; it is simply hypoc^ risy, conscious or unconscious, to discuss free- dom of any description which does not secure to the individual, that in return for effort exer- cised as a right, not as a concession, an average economic equivalent of the effort made shall be forthcoming. As we shall see, this means a great deal more than the right to work; it means the right to work for the right end in the right way. It seems clear that only by a recognition of this necessity can the foundations of society be so laid that no superstructure built upon them can fail, as the superstructure of capitalistic society is most unquestionably failing, because the pediments which should sustain it are honeycombed with decay. Systems were made for men, and not men for systems, and the interest of man, which is self-development, is above all systems, whether theological, political or economic. CHAPTER II How catch-phrases betray Abuse of Darwinian theory Result in Germany The rise of centralized control Signs of its failure and revolt against it Servility neces- sary to it Advantages of technical centralization. ACCEPTING this statement as a basis of constructive effort, it seems clear that all forms, whether of government, industry or society, must exist contingently to the further- ance of the principles contained in it. If a State system can be shown to be inimical to them it must go; if social customs hamper their continuous expansion they must be modified; if unbridled industrialism checks their growth, then industrialism must be reined in. That is to say, we must build up from the individual, not down from the State. It is necessary to be very clear in thus de- fining the scope of our inquiry since the exalta- tion of the State into an authority from which there is no appeal, the exploitation of a public opinion which at the present time is frequently manufactured for interested purposes, and 7 8 ECONOMIC DEMOCRACY other attempts to shift the center of gravity of the main issues these are all features of one of the policies which it is our purpose to analyze. If, therefore, any condition can be shown to be oppressive to the individual, no appeal to its desirability in the interests of ex- ternal organization can be considered in ex- tenuation ; and while co-operation is the note of the coming age, our premises require that it must be the co-operation of reasoned assent, not regimentation in the interests of any system, however superficially attractive. There is no doubt whatever that a mangled and misapplied Darwinism has been one of the most potent factors in the social development of the past sixty years ; from the date of the publi- cation of ' ' The Origin of Species ' ' the theory of the " survival of the fittest" has always been put forward as an omnibus answer to any in- dividual hardship; and although such books as Mr. Benjamin Kidd's "Science of Power" have pretty well exposed the reasons why the indi- vidual, efficient in his own interest and conse- quently well-fitted to survive, may and will pos- sess characteristics which completely unfit him ECONOMIC DEMOCRACY 9 for positions of power in the community, we may begin our inquiry by noticing that one of the most serious causes of the prevalent dis- satisfaction and disquietude is the obvious sur- vival, success and rise to positions of great power, of individuals to whom the term "fit- test" could only be applied in the very nar- rowest sense. And in admitting the justice of the criticism, it is not of course necessary to question the soundness of Darwin's theory. Such an admission is simply evidence that the particular environment in which the "fittest" are admittedly surviving and succeeding is un- satisfactory ; that in consequence those best fitted for it are not representative of the ideal existent in the mind of the critic, and that en- vironment cannot be left to the unaided law of Darwinian evolution, in view of its effect on other than material issues. To what extent the rapid development of sys- tematic organization is connected with the statement of the law of biological evolution would be an interesting speculation; but the second great factor in the changes which have been taking place during the final years of the 10 ECONOMIC DEMOCRACY epoch just closing is undoubtedly the marshal- ing of effort in conformity with well-defined principles, the enunciation of which has largely proceeded from Germany, although their source may very possibly be extra-national ; and while these principles have been accepted and devel- oped in varying degree by the governing classes of all countries, the dubious honor of applying them with rigid logic and a stern disregard of by-products, belongs, without question, to the land of their birth. They may be summarized as a claim for the complete subjection of the individual to an objective which is externally imposed on him; which it is not necessary or even desirable that he should understand in full ; and the forging of a social, industrial and political organization which will concentrate control of policy while making effective revolt completely impossible, and leaving its origi- nators in possession of supreme power. This demand to subordinate individuality to the need of some external organization, the exaltation of the State into an authority from which there is no appeal (as if the State had a concrete existence apart from those who ECONOMIC DEMOCRACY 11 operate its functions), the exploitation of "pub- lic opinion" manipulated by a Press owned and controlled from the apex of power, are all fea- tures of a centralizing policy commended to the individual by a claim that the interest of the community is thereby advanced, and its results in Germany have been nothing less than' ap- palling. The external characteristics of a na- tion with a population of 65 millions have been completely altered in two generations, so that from the home of idealism typified by Schiller, Goethe, and Heine, it has become notorious for bestiality and inhumanity only offset by a slav- ish discipline. Its statistics of child suicide during the years preceding the war exceeded by many hundreds per cent, those of any other country in the world, and were rising rapidly. Insanity and nervous breakdown were becom- ing by far the gravest problem of the German medical profession. Its commercial morality was devoid of all honor, and the external in- fluence of Prussian ideals on the world has un- doubtedly been to intensify the struggle for existence along lines which quite inevitably cul- minated in the greatest war of all history. 12 ECONOMIC DEMOCRACY The comparative rapidity with which the processes matured was no doubt aided by an essential servility characteristic of the Teutonic race, and the attempt to embody these prin- ciples in Anglo-Saxon communities has not pro- ceeded either so fast or so far ; but every indi- cation points to the imminence of a determined effort to transfer and adopt the policy of cen- tral, or, more correctly, pyramid, control f-om the nation it has ruined to others, so far more fortunate. Thus far we have examined the psychological aspect of control exercised through power. Let us turn for a moment to its material side. Inequalities of circumstance confront us at every turn. The vicious circles of unemploy- ment, degradation and unemployability, the dis- parity between the reward of the successful stock-jobber and the same man turned private soldier, enduring unbelievable discomfort for a dollar per day, the gardener turned piece- worker, earning three times the pay of the skilled mechanic, are instances at random of the piratic working of the so-called law of supply ur-d . enianrl. ECONOMIC DEMOCRACY 13 In the sphere of politics it is clear that all settled principle other than the consolidation of power, has been abandoned, and mere ex- pediency has taken its place. The attitude of statesmen and officials to the people in whose interests they are supposed to hold office, is one of scarcely veiled antagonism, only tem- pered by the fear of unpleasant consequences. In the State services, the easy suprem- acy of patronage over merit, and vested in- terest over either, has kindled widespread resentment, leveled not less at the inevita- ble result than at the personal injustice involved. In its relations with labor, the State is hardly more happy. In the interim report of the British Commission on Industrial Unrest, the following statement occurs : "There is no doubt that one cause of labor unrest is that workmen have come to regard the promises and pledges of Parlia- ment and Government Departments with suspicion and distrust." In industry itself, the perennial struggle be- tween the forces of Capital and Labor, on ques- 14 ECONOMIC DEMOCRACY tions of wages and hours of work, is daily becoming complicated by the introduction of fresh issues such as welfare, status and disci- pline, and it is universally recognized that the periodic strikes which convulse one trade after another, have common roots far deeper than the immediate matter of contention. In the very ranks of Trade Unionism, whose organization has become centralized in opposition to concen- trated capital, cleavage is evident in the acri- monious squabbles between the skilled and the unskilled, the rank and file and the Trade Union official. Although the diversion of the forces of in- dustry to munition work of, in the economic sense, an unreproductive character has created an almost unlimited outlet for manufactures of nearly every kind, it is not forgotten that before the war the competition for markets was of the fiercest character and that the whole world was apparently overproducing; in spite of the patent contradiction offered by the existence of a large element of the population continually on the verge of starvation (Snowden, "Social- ism and Syndicalism"), and a great majority ECONOMIC DEMOCRACY 15 whose only interest in great groups of the so-called luxury trades was that of the wage- earner. The ever-rising cost of living has brought home to large numbers of the salaried classes problems which had previously affected only the wage-earner. It is realized that " labor- saving'* machinery has only enabled the worker to do more work; and that the ever- increasing complexity of production, paralleled by the rising price of the necessaries of life, is a sieve through which out and for ever out go all ideas, scruples and principles which would hamper the individual in the scramble for an increasingly precarious existence. We see, then, that there is cause for dissatis- faction with not only the material results of the economic and political systems, but that they result in an environment which is hostile to moral progress and intellectual expansion ; and it will be noticed in this enumeration of social evils, which is only so wide as is necessary to suggest principles, that emphasis is laid on what may be called abstract defects and mis- carriages of justice, as well as on the material 16 ECONOMIC DEMOCRACY misery and distress which accompany them. The reason for this is that the twin evil (com- mon more or less to all existing organized So- ciety) of servility is poverty, as has been clearly recognized by all shades of opinion amongst the exponents of Revolutionary So- cialism. Poverty is in itself a transient phe- nomenon, but servility (not necessarily, of course, of manner) is a definite component of a system having centralized control of policy as its apex, and while the development of self- respect is universally recognized to be an ante- cedent condition to any real improvement in environment, it is not so generally understood that a world-wide system is thereby challenged. In referring the existent systems to the stand- ard we have agreed to accept, however, it seems clear that the stimulation of independence of thought and action is a primary requirement, and to the extent to which these qualities are repressed, social and economic conditions stand condemned as undesirable. Now, it may be emphasized that a centralized or pyramid form of control may be, and is in certain conditions, the ideal organization for ECONOMIC DEMOCRACY 17 the attainment of one specific and material end. The only effective force by which any objective can be attained is in the last analysis the human will, and if an organization of this character can keep the will of all its component members focused on the objective to be attained, the collective power available is clearly greater than can be provided by any other form of association. For this reason the advantage accruing from the use of it for the attainment of one concrete objective, such as, let us say, the coherent design of a National railway or electric supply system (just so long as these objects are protected from use as instruments of personal and economic power), is quite incon- trovertible ; but every particle of available evi- dence goes to show that it is totally unsuitable as a system of administration for the purposes of governing the conditions under which whole peoples live their lives ; that it is in opposition to every real interest of the individual when so used, and for this reason it is vital to devise methods by which technical co-ordination can be combined with individual freedom. To crystallize the matter into a paragraph, 18 ECONOMIC DEMOCRACY in respect of any undertaking, centralization is the way to do it, but is neither the correct method of deciding what to do nor the question of who is to do it. CHAPTER III Danger of loose thinking Socialists too sweeping Credit side of Capitalism The Servile State The real enemy Nationalization no cure Capitalism and Centralism Discrediting of Jevonian Economics Definition of Money Modern money comes from credit creations Reaction in industry Scientific management Piece- work systems and their relation to money values " Ca'canny " Financial centralization and militarism. WE are thus led to inquire into environ- ment with a view to the identification, if possible, of conditions to which can be charged the development of servility on the one hand, and the discouragement of possibly more desir- able characteristics on the other, and in this inquiry it is necessary to avoid the real danger of mistaking effects for causes ; and, further, to beware of seeing only one phenomenon when we are really confronted with several. For instance, that from the misuse of the power of capital many of the more glaring de- fects of society proceed is certain, but in claim- ing that in itself the private administration of industry is the whole source of these evils, the 19 20 ECONOMIC DEMOCRACY Socialist is almost certainly claiming too much, confounding the symptom with the disease, and taking no account of certain essential facts. It is most important to differentiate in this mat- ter, between private enterprise utilizing capital, and the abuse of it. The private administration of capital has had a credit as well as a debit side to its account; without private enterprise backed by capital, scientific progress, and the possibilities of ma- terial betterment based on it, would never have achieved the rapid development of the past hun- dred years; and still more important at this time, only the control of capital, which on the one hand has degraded propaganda into one of the Black Arts, has, on the other, made possible such crusades against an ill-informed or misled public opinion as, for instance, the anti-slavery campaign of the early nineteenth century, or the parallel activities of the anti-sweating league at the present day. The very agitation carried on against capitalism itself would be impossible without the freedom of action givon by the private control of considerable funds. ECONOMIC DEMOCRACY 21 The capitalistic system in the form in which we know it has served its purpose, and may be replaced with advantage ; but in any social sys- tem proposed, the first necessity is to provide some bulwark against a despotism which might exceed that of the Trust, bad as the latter has become. In our anxiety to make a world safe for democracy it is a matter of real urgency that we do not tip out the baby with the bath water, and, by discarding too soon what is clearly an agency which can be made to operate both ways, make democracy even more unsafe for the individual than it is at present. The danger which at the moment threatens individual liberty far more than any extension of individual enterprise is the Servile State; the erection of an irresistible and impersonal or- ganization through which the ambition of able men, animated consciously or unconsciously by the lust of domination, may operate to the en- slavement of their fellows. Under such a sys- tem the ordinary citizen might, and probably would, be far worse off than under private enterprise freed from the domination of finance and regulated in the light of modern thought. 22 ECONOMIC DEMOCRACY The consideration of any return to isolated in- dustrial undertakings is quite academic, since there is not the faintest probability of its oc- currence, but that stage of development had undoubtedly certain valuable features which it would be well to preserve and revive. The large profit-making limited company which dis- tributes its profits over a wide area is already rapidly displacing the family business, and as will be seen, it is not alone in the profit-making aspect of its activities that its worst features lie. In attacking capitalism, collective Socialism has largely failed to recognize that the real enemy is the will-to-power, the positive comple- ment to servility, of which Prussianism, with its theories of the supreme state and the unim- portance of the individual (both of which are the absolute negation of private enterprise), is only the fine flower ; and that nationalization of all the means of livelihood, without the pro- vision of much more effective safeguards than have so far been publicly evolved, leaves the in- dividual without any appeal from its only pos- sible employer and so substitutes a worse, be- ECONOMIC DEMOCRACY 23 cause more powerful, tyranny for that which it would destroy. It is a most astonishing fact that the experi- ence of hundreds of thousands of men and women in such departments as the Post Office, where real discontent is probably more general, and the material and psychological justification for it more obvious, than in any of the more modern industrial establishments, has not been sufficient to impress the public with the futility of mere nationalization. This is not in any sense a disparagement of the excellent qualities of large numbers of Government officials; it is merely an attempt to indicate the remarkable facility with which well-intentioned people will allow themselves to be hypnotized by a phrase. It is notorious that the State Socialists of Ger- many, commonly known as the Majority Party, were of the greatest possible assistance to Junkerdom in carrying out its plans for a Prussian world hegemony; while in England the bureaucrat and the Fabian have, on the whole, not failed to understand each other ; and the explanation is simply that both, either con- sciously or unconsciously, assume that there is 24 ECONOMIC DEMOCRACY no psychological problem involved in the con- trol of industry just as the Syndicalist is, with more justification, apt to stress the psychologi- cal to the exclusion of the technical aspect. Because the control of capital has given power, the effect of the operation of the will- to-power has been to accumulate capital in a few groups, possibly composed of large num- bers of shareholders, but frequently directed by one man; and this process is quite clearly a stage in the transition from decentralized to centralized power. This centralization of the power of capital and credit is going on before our eyes, both directly in the form of money trusts and bank amalgamations, and indirectly in the confederation of the producing industries representing the capital power of machinery. It has its counterpart in every sphere of ac- tivity: the coalescing of small businesses into larger, of shops into huge stores, of villages into towns, of nations into leagues, and in every case is commended to the reason by the plea of economic necessity and efficiency. But behind this lies always the will-to-power, which oper- ates equally through politics, finance or in- ECONOMIC DEMOCRACY 25 dustry, and always towards centralization. If this point of view be admitted, it seems per- fectly clear that to the individual it will make very little difference what name is given to cen- tralization. Nationalization without decentral- ized control of policy will quite effectively in- stal the trust magnate of the next generation in the chair of the bureaucrat, with the added ad- vantage to him, that he will have no share- holders' meeting. One of the more obvious effects of the con- centration of credit-capital in a few hands, which simply means the centralization of direc- tive power, is its contribution to the illusion of the fiercely competitive nature of international trade. Although as we shall see, in considering the economics of the increasing employment of machinery for productive purposes, this phe- nomenon has been confounded with one to which it is only indirectly connected, it may be convenient at this time to point out one method by which this illusion is produced, and it is probably not possible to do so in better words than those used by Mr. J. A. Hobson in his "Democracy After the War": 26 ECONOMIC DEMOCRACY " Where the product of industry and commerce is so divided that wages are low while profits, interest, and rent are rela- tively high, the small purchasing power of the masses sets a limit on the home market for most staple commodities. The staple manufacturers, therefore, working with modern mechanical methods, that contin- ually increase the pace of output, are in every country compelled to look more and more to export trade, and to hustle and compete for markets in the backward coun- tries of the world. . . . Just as the home market was restricted by a distribution of wealth which left the mass of people with inadequate power to purchase and con- sume, while the minority who had the pur- chasing power either wanted to use it in other ways or to save it and apply it to an increased production .which still further congested the home markets, so likewise with the world markets. . . . Closely linked with this practical limitation of the expansion of markets for goods is the limi- tation of profitable fields of investment. ECONOMIC DEMOCRACY 27 The limitation of home markets implies a corresponding limitation in the investment of fresh capital in the trades supplying these markets. " Because capitalism per se is largely the in- strument through which the will-to-power operates in the economic sphere, some examina- tion of its methods is necessary. The accumu- lation of financial wealth through the making of profit is merely one of the uses or abuses of money, but it is in this sense that capitalism is associated to a very great extent in the popular mind with the processes of manufacture, pro- duction and distribution, and it is in this sense that the word is here employed. The capital- istic system is based fundamentally on the financial perversion of the law of supply and demand, which involves a claim that there exists an intrinsic relation between need or re- quirement, and legitimate price or exchange value; a statement in Jevonian Political Econ- omy which is becoming increasingly dis- credited, and is negatived in the limitation of monopoly values, by common consent, in re- 28 ECONOMIC DEMOCRACY spect of public utility companies, such as light- ing, water and transportation undertakings. Proceeding from an economic system based on this assumed relation, however, the capital- istic producer only parts with his product for a sum in excess of that representing its cost to him, receiving payment through the agency of money in its various forms of cash and financial credit, which, so far as they are convertible, have been defined as any medium which has reached such a degree of acceptability that no matter what it is made of, and no matter why people want it, no one will refuse it in exchange for his product. (Professor Walker, "Money, Trade and Industry," p. 6.) So long as this definition holds good, it is obvious that the possession of money, or finan- cial credit convertible into money, establishes an absolute lien on the services of others in direct proportion to the fraction of the whole stock controlled, and further that the whole stock of financial wealth, inclusive of credit, in the world should, by the definition, be sufficient to balance the aggregate book price of the world's material assets and prospective pro- ECONOMIC DEMOCRACY 29 duction; and generally it is assumed that the banks regulate the figures of wealth by the creation of credits broadly representing the mobilization value of these assets either in esse or in posse, such value being for financial pur- poses the transfer or selling price and bearing no relation to the usage value of the article so appraised. But for reasons which will be evident in con- sidering the costing of production at a later stage of our inquiry, the book value of the world's stocks is always greater than the ap- parent financial ability to liquidate them, be- cause these book values already include mobil- ized credits ; the creation of subsidiary financial media, in the form of further bank credits, be- comes necessary, and results in the piling up of a system on figures which the accountant calls capital, but which are in fact merely a function of prices. The effect of this is, of course, to decrease progressively the purchas- ing power of money, or, in other words, to con- centrate the lien on the services of others, which money gives, in the hands of those whose rate of increase is most rapid. Intrinsic improve- 30 ECONOMIC DEMOCRACY ments in manufacturing methods operate to de- lay this concentration in respect of industry, but the process is logically inevitable, and, as we see, is proceeding with ever-increasing rapidity; and we may fairly conclude that the profit-making system as a whole, and as now operated, is inherently centralizing in char- acter. With this concentration of financial power and consequent control, however, there is pro- ceeding in industry another development, ap- parently contradictory in its results, but of the greatest importance in the consideration of the subject as a whole. During the period of transition between individual ownership and company or trust management, and under the stress of competition for markets, it became of vital importance to cut down the selling price of commodities, not so much intrinsically as in comparison with competitors; and as a means to this end, standardization and quantity-pro- duction in large factories are of the utmost im- portance, carrying with them specialization of processes, the substitution, wherever possible, of automatic and semi-automatic machinery for ECONOMIC DEMOCRACY 31 skilled workmanship, and the incorporation of the worker into a machine-like system of which every part is expected to function as systemati- cally as a detail of the machine which he may operate. The objective has, to a considerable extent, been attained the scientific manage- ment systems in factories (an outstanding in- stance of this policy), based on the researches of efficiency engineers such as Mr. P. W. Taylor and Mr. Frank Gilbreth, have resulted in a rate of production per unit of labor, hundreds or even thousands per cent, higher than existed before their introduction. As a bait for the worker these methods have commonly been accompanied by systems of payment-by-results, such as the premium-bonus system in its various forms as adapted by Hal- sey, Rowan, Weir, etc., round which has raged fierce controversy since in the very nature of things, being based on the consideration of profit, they were unable to take into account the operation of broad economic principles. It is no part of the argument with which we are con- cerned to discuss such systems in detail, but any unprejudiced and sufficiently technical consid- 32 ECONOMIC DEMOCRACY eration of them will carry the conviction that while the immediate effect of their introduction was undoubtedly to raise earnings and so ap- parently to delay the concentration of wealth, it was correctly recognized by the worker that his real wage tended to bear much the same ratio, or even to fall, in comparison with the cost of living, since the purchasing power of money in terms of food, clothes, and housing fell faster than his wages rose. As the mechanical efficiency of production rose, therefore, discontent and industrial strife became accentuated, and an unstable equi- librium was only maintained by the operation of such factors as have become known under the names of "ca'canny," restriction of out- put, etc., and before the war the operation of piece-work systems in large industrial engi- neering works almost invariably resulted in the establishment of a local ratio between time rates and piece-work earnings, generally rang- ing between 1.25 and 1.5 to 1. It is not neces- sary to discuss the ethics of such an arrange- ment; it is merely necessary to note that the settled policy of Labor, acting presumably on ECONOMIC DEMOCRACY 33 the best advice it could get in its own interests, was to exercise a control over production \>y fixing its own standard of output irrespective of time. The situation created by the demand for munitions of all kinds during the war has, of course, profoundly modified this attitude, with the result that a temporary very large increase in real earnings undoubtedly took place in 1915 and 1916, taking the form of a rapid distribu- tion of stored commodities ; but it is quite ques- tionable whether this level is even approxi- mately maintained, 1 and with the cessation of the wholesale sabotage of war, it will unques- tionably fall as economic distribution through the wages system becomes ineffective; apart from actual scarcity. Quite apart, therefore, from all questions of. payment, there has grown up a spirit of revolt against a life spent in the performance of one mechanical operation devoid of interest, re- quiring little skill, and having few prospects of advancement other than by the problematical acquisition of sufficient money to escape from it. iThis was written in 1918; and events have demonstrated its correctness. 34 ECONOMIC DEMOCRACY The very efficiency with which factory opera- tions have been sectionalized has resulted in a complete divorcement between the worker and the finished product, which is in itself conducive to the feeling that he is part of a machine in the final output of which he is not interested. His foreman and departmental heads are, from the largeness of the undertakings, almost inevi- tably out of human touch with him, while all the well-known phenomena of bureaucratic methods contribute to maintain a constant state of irrita- tion and dissatisfaction ; and in all these things is the nucleus of a centrifugal movement of for- midable force. Nor is this feature confined to industrial life. The connection between mili- tarism and capitalism as vehicles for the ex- pression of the will-to-power has frequently been pointed out. By the device of universal liability to military service a general threat has been made operative which would appear, ul- tima ratio regis, to set the seal on the ability of authority to dictate the terms on which the existence of the individual can continue. But it is doubtful whether there ever was a time when this threat was held more lightly, and ECONOMIC DEMOCRACY 35 the disregard of consequences so widespread. It is not suggested that conscription either mili- tary or industrial is regarded with compla- cency; the exact opposite is, of course, the truth. But just for the reason that the whole conception of a militarist world is instinctively recognized as an anachronism, so, just to that extent, is the determination to defeat at any cost schemes involving compulsion strength- ened in the minds of a population normally acquiescent. CHAPTER IV Personality not the ruling factor in centralism Over-rides personality Lessons of History The cult of Mediaeval- ism Its fallacy Industrial organization The argument for super-production Its critical importance Staking out the ground of argument. " \ 7E are, therefore, faced with an apparent V V dilemma, a world-wide movement to- wards centralized control, backed by strong arguments as to the increased efficiency and consequent economic necessity of organization of this character (and these arguments receive support from quarters as widely separated as, say, Lord Milner and Mr. Sidney Webb), and, on the other hand, a deepening distrust of such measures bred by personal experience and ob- servation of their effect on the individual. A powerful minority of the community, deter- mined to maintain its position relative to the majority, assures the world that there is no alternative between a pyramid of power based on toil of ever-increasing monotony, and some form of famine and disaster; while a growing 36 ECONOMIC DEMOCRACY 37 and ever more dissatisfied majority strives to throw off the hypnotic influence of training and to grapple with the fallacy which it feels must exist somewhere. Now, let it be said at once that there is no evasion of this dilemma possible by the intro- duction of questions of personality a bad sys- tem is still a bad system no matter what changes are made in personnel. The power of personality is susceptible of the same definition as any other form of power, it is the rate of doing work ; and the rate at which a given per- sonality can change an organization depends on two things : the magnitude of the change de- sired, and the size of the organization. As it is hoped to make clear, the effect of a single or- ganization of this pyramidal character applied to the complex purpose of civilization produces a definite type of individual, of which the Prus- sian is one instance. Pyramidal organization is a structure designed to concentrate power, and success in such an organization sooner or later becomes a question of the subordination of all other considerations to its attainment and retention. For this reason the very qualities 38 ECONOMIC DEMOCRACY which make for personal success in central con- trol are those which make it most unlikely that success and the attainment of a position of authority will result in any strong effort to change the operations of the organization in any external interest, and the progress to power of an individual under such conditions must result either in a complete acceptance of the situation as he finds it, or a conscious or unconscious sycophancy quite deadly to the preservation of any originality of thought and action. It cannot be too heavily stressed at this time that similar forms of organization, no matter how dissimilar their name, favor the emergence of like characteristics, quite irrespective of the ideals of the founders, and it is to the principles underlying the design of the structure, and not to its name or the personalities originally operating it, that we may look for information on its eventual performance. In considering the objectionable features which have arisen from modern industrial and political systems in the light of this centralizing tendency, it is instructive to turn for a moment ECONOMIC DEMOCRACY 39 to the examination of the differences which have developed in them with respect to those they have displaced, and without covering afresh the ground which has been sufficiently well traversed by the exponents of National Guilds, Syndicalism and other systems of in- dustrial self-government, it may be well to point out that the industrial revolution of the late eighteenth and early nineteenth centuries was largely marked in principle by the separa- tion of the workman from the ownership of his tools and the control of his business policy. All craft was handicraft; the equipment of a tradesman was of the simplest; the selling price of the product was practically material cost plus direct labor cost ; direct labor cost was indistinguishable from profit, and practically the whole of it was available for the purchase of further material, and the product of other men's industry. So far as our knowledge goes, and the theory of industry would confirm such an assumption, there was within the craft guilds no involuntary poverty or unemployment at all comparable to that with which we are too familiar, and, at any 40 ECONOMIC DEMOCRACY rate, within the circle of their influence the standard of material comfort rose directly in proportion to the total production, while at the same time the craftsman maintained a pride in his work and considerable independence. With the advent of machinery came the in- tervention of the financier into industry; will- ing to provide the able craftsman with the means to extend the exercise of his skill on payment for his services. The development from this stage, through the small workshop run on borrowed money by the enterprising man who both worked himself and directed the work of others, to the larger factory in which the function of the craftsman ceased to be exercised by the employer, who retained only the direc- tion and management ; to the large limited lia- bility company or Trust, in which the crafts- man, the management, and the direction of policy, became still further separated, has been logical and rapid, and this development carries with it changes of a fundamental character. Behind all effort lies the active or passive acquiescence of the human will, and this can only be obtained by the provision of an objec- ECONOMIC DEMOCRACY 41 tive. By the separation of large classes into mere agents of a function, it has been possible to obtain the more or less complete co-operation of large numbers of individuals in aims of which they were completely ignornnt, and of which, had they been able to appreciate them in their entirety, they would have completely dis- approved, while at the same time Education and Ecclesiasticism have combined to foster the idea, that so long as the orders of a superior were obeyed, no responsibility rested on the individual. It is not, of course, suggested that commer- cial policy has been deliberately and uniformly dictated by unworthy motives far from it; nor is it unlikely that had the processes of pro- duction and distribution been separated from any control over individual activity along other lines, its development might have been in the best interests of the community ; but since it has been accompanied by a growing subjection of the individual to the machine of industrialism, it is quite unquestionable that the whole process of centralizing power and policy and alleged re- sponsibility in the brains of a few men whose 42 ECONOMIC DEMOCRACY deliberations are not open to discussion ; whose interests, largely financial, are quite clearly in many respects opposed to those of the individ- uals they control, and whose critics can be vic- timized; is without a single redeeming feature, and is rendered inherently vicious by the con- ditions which operate during the selective process. When it is further considered that these positions of power fall to men whose very habit of mind, however kindly and broad in view it may be and often is in other directions, must quite inevitably force them to consider the individual as mere material for a policy cannon-fodder whether of politics or industry the gravity of the issue should be apparent. Along with this development has gone a parallel change in the status of the individual. The apprentice, the journeyman and the master were all of one social class; the apprentice or journeyman dined at his master's table and married his own or some other master's daugh- ter; the standard of life therefore, without, of course, being identical, was comparable as be- tween various grades. The implication of this was considerable it involved a common stand- ECONOMIC DEMOCRACY 43 ard to which everyday difficulties could be re- ferred. A consideration of these facts, and a comparison of the conditions produced by them with those existing in our industrial districts in more recent years, has led reformers of the type of William Morris and John RusMn to idealize this period and to place to the debit of machinery and quantity-production all the miseries and ugliness visible in the Midlands and the manufacturing North of England. This attitude seems mistaken, and here again we are met by a confusion between cause and effect: there is absolutely no virtue in taking ten hours to produce by hand a necessary which a machine will produce in ten seconds, thereby releasing a human being to that extent for other aims, but it is essential that the individual should be re- leased; that freedom for other pursuits than the mere maintenance of life should thereby be achieved. How, then, are we to deal with this dilemma? It cannot seriously be contended that the ad- vancement gained as a result of the application of material science to the requirements of so- ciety should be abandoned, and that men should 44 ECONOMIC DEMOCRACY abjure the use of anything more complicated than a hammer and chisel or a spinning wheel. But while progress in the replacement of man- ual effort by machinery seems both natural and beneficial, "it is equally clear that the spiritual and intellectual revolt against the conditions which have grown up alongside this material progress is fundamental and widespread, and will not be satisfied by any mere betterment movement. The whole policy of Governments and industrialists alike in respect of this con- flict of interest has been one of grudging com- promise, partly as the result of the natural tendency of humanity to "laissez faire" methods and partly no doubt from a settled conviction that nothing but compromise was possible; that the existing order is based on natural law, and is not amenable to any radical modification, and that all critics are either cranks and dreamers, or else are solely actuated by a desire for the sweets of office. It is most important to recognize that there are two dis- tinct problems involved in this dilemma: one technical, the other psychological, and it is just because the psychological aspect of industry ECONOMIC DEMOCRACY 45 has been confused with and subordinated to the technical aspect that we are confronted with so grave a situation at this time. There is little reason to doubt that we are rapidly attaining command of the means for the solution of any reasonable requirement of a purely technical nature, and it may be well therefore to consider briefly the usual methods which the modern in- dustrial system has developed to deal with the organization of large numbers of individuals to the end that their combined effort may result in commercial success. Very broadly the main difference lies between what may be defined as the military and the functional systems of control, or some combina- tion of the two, and these involve an interesting difference of conception. As we have seen, the development of indus- trial activity has been very largely a practical application of the economic proposition in re- gard to the division of labor; the " military" organization conceives a large business or a Government Department as an aggregation of human units to carry out on a large scale that which one immensely able and versatile man 46 ECONOMIC DEMOCRACY could do on a small scale, and, broadly consid- ered, the perfect organization of this character would be derived by dissecting the various at- tributes of the perfect one-man business, mak- ing each of them a Department, and staffing them with men who in the aggregate repre- sented nothing but an expansion of that at- tribute. Fortunately, the perfect organization of this character has yet to appear, but the effect of the endeavor to achieve it has quite definitely left its mark on civilization it is easy to distinguish the soldier and the civil servant, or even the infantryman and the bom- bardier, and the development due to the un- balanced exercise of one set only, of perhaps many abilities resident in the human unit, is a very definite factor in the existing discontent and one which, if perpetuated, could only be increased by wider education. A little consideration will at once suggest that this type of organization carried out to its furthest limits is pyramid control in its sim- plest form, and it is clear that successive grades or ranks decreasing regularly in the number of units composing each grade, until supreme ECONOMIC DEMOCRACY 47 power and composite function is reached and concentrated at the apex, are definitely char- acteristic of it. The next step is to split the functions of the higher ranks so that each unit therein becomes the head of a separate little pyramid, each of which as a whole furnishes the unit composing a larger pyramid ; in every case, however, even- tually concentralizing power and responsibil- ity in one man, representing the power of finance and of control over the necessaries of life. Several points are to be noticed in the condi- tions produced by such an arrangement: Firstly, there is fundamental inequality of opportunity. The more any organization, whether of society as a whole, or any of the various aspects of it, approaches this form the more certain is it that there cannot possibly be any relation between merit and reward it is, for instance, absurd to assume that there is only one possible head, for each railway com- pany, Government Department, or great indus- trial undertaking. There is no doubt what- ever that the intrigue which is a commonplace 48 ECONOMIC DEMOCRACY in such undertakings has its roots almost en- tirely in this cause, and contributes in no small degree to their notorious inefficiency. Another objection which becomes increas- ingly important as the concentration proceeds is the divorce between power and detail knowl- edge. This difficulty is recognized in the ap- pointment of official and unofficial intelligence departments which, of course, are in themselves the source of further abuses. Having these points to some extent in mind, American industry has developed what is most unquestionably a very important modification of principle that of functional control in place of individual control ; that is to say, the individ- ual is only controlled from one source in regard to one function say time-keeping. In respect of such matters as technical methods he deals with an entirely different authority, and with still another in respect of pay. The real objection to this is the effect on the source of specialized authority of so narrow a function as is demanded by much so-called scientific management, but there is very little doubt that the underlying idea does contain the ECONOMIC DEMOCRACY 49 germ of an industrial system which would be in the highest degree efficient if its psychological difficulties could be removed, and it is signifi- cant that this form of organization produces its own type of personality. It will be seen, therefore, that we have, in the industrial field, a double problem to solve: while retaining the benefits of mechanism for productive purposes, to obtain effective distri- bution of the results and to restore personal initiative. The proposition which is being urged from orthodox capitalistic quarters as a means of dealing with this situation is a little ingenuous. It consists of an intensification policy by which, in some mysterious way, all the unpleasant fea- tures, by being exaggerated, are to disappear, and it is usually summed up at the moment in the phrase, "We must produce more." A fair statement of this demand for unlimited and in- tensified manufacturing would no doubt be something after this fashion : 1. We must pay for the war and for better- ment schemes. 2. This means high taxes. 50 ECONOMIC DEMOCRACY 3. Taxes must come from profits and earn- ings, which are parts of one whole. 4. High earnings, high profits, and low labor costs, and low selling and competitive costs, can only be combined if increased output is ob- tained. 5. High earnings will mean wider markets. Now this is a very specious argument; a large number of people, whose instincts warn them that there is a fallacy somewhere, have not felt themselves able to offer any effective criticism of it, since some practical knowledge of technique is involved. The labor attitude has either been a simple non-possumus, or a restatement of the evils of capitalistic profit- making, together with sufficiently pungent in- quiry into the qualifications of the holders of the major portion of the securities representing Government indebtedness, and their title to rank as the winners of the war, and the chief beneficiaries of the peace. All this is quite to the point, but it is not even the chief economic objection to such a policy. First of all, let it be admitted that a consider- ECONOMIC DEMOCRACY 61 able amount of manufacturing will have to be done, firstly, to reinstate the devastated areas, and afterwards to meet the accumulated de- mand, and these together will provide an outlet for a very large quantity of manufactured goods. These goods will not, of course, be furnished for nothing, and the money to pay for them will in the main be supplied by loans, which to begin with clearly mean more taxes for some one, where the work done is on public ac- count. But, says the super-producer, this money will be distributed in wages, salaries and profits, which will enable the whole population, at any rate of this country, where we propose to do our manufacturing so long as labor and other conditions are favorable, to buy more goods, or, conversely, save more money, and eventually enjoy more leisure and freedom. Let us give to this statement the attention it deserves, because on it hangs the fate of a whole economic system. If it is true as it stands, then the whole system which stands be- hind it, the fight for markets, the cartels, trusts, and combines, and the other machinery of com- petitive trade, are justified at any rate by na- 52 ECONOMIC DEMOCRACY tional self-interest. In order then to make this analysis it is unavoidable that we should enter into some detail with regard to the accountancy of manufacturing; not forgetting that the un- equal distribution of wealth is an initial re- striction on the free sale of commodities, and that in consequence what we are aiming at, in order to meet the final contention of the argu- ment, is not an expansion of figures, but an equalization of real purchasing power. Now, purchasing power is the amount of goods of tine description desired which can be bought with the sum of money available, and it is clearly a function of price. It is a widely spread delusion that price is simply a question of supply and demand, whereas, of course, the upper limit of price only is thus governed, the lower limit, which under free competition would be the ruling limit, being fixed by cost plus the minimum profit which will provide a financial inducement to produce. It is important to bear this in mind, because it is frequently assumed that a mere glut of goods will bring down prices quite irrespective of any intrinsic economy in- volved in large scale production. Unless these ECONOMIC DEMOCRACY 53 goods are all absorbed, the result may be exactly opposite, since deterioration must go into succeeding costs. Cost is the accumulation of past spendings over an indefinite period, whereas cash price requires a purchasing power effective at the moment of purchase. Where competition is restricted by Trusts, price is cost plus whatever profit the Trust considers it politic to charge. CHAPTER V Factory cost" the heart of the problem Profit sharing The rate of distribution of money The rate of increase of prices Example Where the real purchasing power lies Loan-credit and cash-credit The leak in the dollar Wealth and " weal "-being Profiteering not the prime objection to existing system Summary of analysis of Production Economics. EOKED at from this standpoint it is fairly clear that the kernel of the problem is factory cost, since it is quite possible to con- ceive of a limited company in which the shares were all held by the employees, either equally or in varying proportions, according to their grade, and the selling costs were internal that is to say, all advertising was done by the firm itself, and the cost of its salesmen, etc., was either negligible, or confined to their salaries. We should then have the complete profit-shar- ing enterprise in its ultimate aspect, and the argument against Capitalism in its usual form would not arise. Such, an undertaking would, let us assume, make a complicated engineering product, re- 64 ECONOMIC DEMOCRACY 55 quiring expensive plant and machinery, and would absorb considerable quantities of power and light, lubricants, etc., much of which would be wasted ; and would inevitably produce a cer- tain amount of scrap the value of which would be less than the material in the form in which it entered the works. The machinery would wear out, and would have to be replaced and maintained, and generally it is clear that for each unit of production there would be three main divisions of factory cost, the " staple" raw material, the wages and salaries and a sum representing a proportion of the cost of upkeep on the whole of the plant, which might easily equal 200 per cent, of the wages and salaries. As the plant became more automatic by im- provements in process, the ratio which these plant costs bore to the cost of labor and salaries would increase. The factory cost of the total production, therefore, would be the addition of these three items: staple material, labor and salaries, and plant cost, and with the addition of selling charges and profit, this would be the selling price. As a result of the operations of the under- 56 ECONOMIC DEMOCRACY taking the wealth of the world would thus be apparently increased by the difference between the value of all the material entering the fac- tory, and the total sum represented by the sell- ing price of the product. But it is clear that the total amount distributed in wages, salaries and profit or dividends, would be less by a con- siderable sum (representing purchases on fac- tory account) than the total selling price of the product, and if this is true in one factory it must be true in all. Consequently, the rate at which money is liberated by manufacturing processes of this nature is clearly less than the rate at which the total selling price of the prod- uct increases. This difference is due to the fact that while the final price to the consumer of any manufactured article is steadily growing with the time required for manufacture, during the same time the money distributed by the manu- facturing process is being returned to the capi- talist through purchases for immediate con- sumption. A concrete example will make this clear. A steel bolt and nut weighing ten pounds might require in the blank about eleven and a half ECONOMIC DEMOCRACY 57 pounds of material representing, say, 85 cents. The net selling price of the scrap recovered would probably be about 2 cents. The wages value of the total man-hours expended on the conversion from the blank to the finished nut and bolt might be $1.25, and the average plant charge 150 per cent, on the direct time charge, i.e., $1.87. The factory cost would, therefore, be $3.95, of which $1.87, or just under one-half, would be plant charge. Of this plant charge probably 75 per cent., or about $1.40, is repre- sented by the sum of items which are either afterwards wiped off for depreciation and con- sequently not distributed at all at that time, or are distributed in payments outside the or- ganization, which payments clearly must be subsequent to any valuation of the articles for which they are paid, and so do not affect the argument. Without proceeding to add selling charges and profit it must be clear that a charge of $3.95 on the world's purchasing power has been created, of which only $1.70 is distributed in respect of the specific article under con- sideration, and that if the effective demand exists at all in a form suitable for the 58 ECONOMIC DEMOCRACY liquidation of this charge, it must reside in the banks. But we know that the total increase in the personal cash accounts in the banks in normal times is under 3 per cent, of the wages, salaries and dividends distributed, consequently it is not to these accounts that we must look for effec- tive demand. There are two sources remain- ing: loan-credit, that is to say, purchasing power created by the banks on principles which are directed solely to the production of a posi- tive financial result; and foreign or export de- mand. Now loan-credit is never available to the consumer as such, because consumption as such has no commercial value. In consequence loan-credit has become the great stimulus either to manufacture or to any financial or commer- cial operation which will result in a profit, that is to say, an inflation of figures. An additional factor also comes into play at this point. All large scale business is settled on a credit basis. In the case of commodities in general retail demand, the price tends to rise above the cost limit, because the sums dis- tributed in advance of the completion of large ECONOMIC DEMOCRACY 59 works become effective in the retail market, while the large works, when completed, are paid for by an expansion of credit. This process in- volves a continuous inflation of currency, a rise in prices, and a consequent dilution in purchas- ing power. The reason that the decrease in the con- sumer's purchasing power has not been so great as would be suggested by these considera- tions is, of course, largely due to intrinsic cheapening of processes which would, if not de- feated by this dilution of the consumer's pur- chasing power, have brought down prices faster than they have risen. There are thus two processes at work: an intrinsic cheapening of the product by better methods, and an artificial decrease in purchas- ing power due to what is in effect the charging of the cost of all waste and inefficiency to the consumer. And it is clear that under this sys- tem the greater the volume of production the larger will be the absolute value of the waste which the consumer has to pay for, whether he will or no, because as the bank credits are created at the instance of the manufacturer and 60 ECONOMIC DEMOCRACY repaid out of prices each article produced dilutes, by the ratio of its book price to all the credits outstanding, the absolute purchasing power of the money held by any individual. These facts are quite unaffected by the per- fectly sound argument that increased produc- tion means decreased cost per piece, since it is the total production price which has to be liquidated. Already there is not very much left of the argument for the innate desirability of un- limited, unspecified and intensified manufactur- ing under the existing economic system, but more trouble yet is ahead of it. While the ratio of plant charges to total wages and salaries cost is less than 1 : 1 over the whole range of com- modities, a general rise in direct rates of pay may mean a rise (but not a proportionate rise) in the purchasing power of those who obtain their remuneration in this way. But when by the increased application of mechanical methods the average overhead charge passes the ratio of one to one (which it rapidly will, and should do on this basis of calculation) every general increase in rates of pay of " direct" ECONOMIC DEMOCRACY 61 labor may mean an actual decrease in real pay, because the consumer is only interested in ulti- mate products and overhead charges do not represent ultimate products in existence. The whole argument which represents a manufactured article, no matter what its de- scription and utility, as an access of wealth to the country and to every one concerned so long as by any method it can be sold and wages dis- tributed in respect of it, will, therefore, be seen to be a dangerous fallacy based on an entirely wrong conception, which is epitomized in the use of the word "production," and fostered by ignorance of financial processes. Manufactur- ing of any kind whatever, even agriculture in a limited sense, is the conversion of one thing into another, which process is only advantageous to the extent that it subserves a definite require- ment of human evolution. In any case, it shares with all other conversions the character- istic of having only a fractional efficiency, and the waste of effort involved, although being con- tinually reduced by improvements of method, still can only be paid for in one way, by effort on the part of somebody. 62 ECONOMIC DEMOCRACY If this effort is useful effort "useful" in the sense that a definite, healthy and sane human requirement is served the wealth and stand- ard of living of the community may thereby be enhanced. If the effort is aimless or destruc- tive, the money attached to it does not alter the result. The financial process just discussed therefore clearly attaches a concrete money value to an abstract quality not proven, and as this money value must be represented somewhere by equivalent purchasing power in the broadest sense, misdirected effort which appears in cost forms a continuous and increasing diluent to the purchasing value of effort in general. A careful consideration of these factors will lead to the conclusion that loan-credit is the form of effective demand most suitable for stimulating semi-manufactures, plant, inter- mediate products, etc., and that "cash "-credit is required for ultimate products for real per- sonal consumption. We have already seen that the cash-credits provided by the whole of the money distributed by the industrial system, so far as it concerns the wage-earner, are only suf- ECONOMIC DEMOCRACY 63 ficient to provide a small surplus over the cost of the present standard of living, and that only by conditions of employment which the workers repudiate, and rightly repudiate. The core of this problem is the fact that money, which is distributed m respect of ar- ticles which do not come into the buying range of the persons to whom the money is distrib- uted, is not real money it is simply inflation of currency so far as those persons are concerned. The public does not buy machinery, industrial buildings, etc., for personal consumption at all. But it pays the price of them without acquiring control, since they form an overhead cost added to the price of ultimate products. Hence it will be seen that the machinery of remuneration must be modified profoundly, since the sum of the wages, salaries and dividends, distributed in respect of the world's production will buy an ever-decreasing fraction of it, and can never control it. It is one of the most curious phenomena of the existing economic system that a large por- tion of the world's energy, both intellectual and physical, is directed to the artificial stimulation 64 ECONOMIC DEMOCRACY of the desire for luxuries by advertisement and otherwise, in order that the remainder may be absorbed in what is frequently toilsome, dis- agreeable and brutalizing work ; to the end that a device for the distribution of purchasing power may be maintained in existence. The irony of the situation is the greater since the perfecting of the organization to carry on this vicious circle carries with it as we have just seen a complete negation of all real progress. The common factor of the whole situation lies in the simple facts that at any given period the material requirements of the individual are quite definitely limited that any attempt to expand them artificially is an interference with the plain trend of evolution, which is to subordi- nate material to mental and psychological necessity; and that the impulse behind un- bridled industrialism is not progressive but re- actionary because its objective is an obsolete financial control which forms one of the most effective instruments of the will-to-power, whereas the correct objectives of industry are two-fold: the removal of material limitations and the satisfaction of the creative impulse. ECONOMIC DEMOCRACY 65 It is for this reason that while, as we see, the effect of the concrete sum distributed as profit is over-rated in the attacks made on the Capi- talistic system, and is of small and diminishing importance as compared with the delusive ac- counting system which accompanies it, and which acts to reduce consistently the purchas- ing power of effort, it is, nevertheless, of prime importance as furnishing the immediate "in- ducement to produce," which is a false induce- ment in that it claims as " wealth" what may just as probably be waste. If by wealth we mean the original meaning attached to the word: i.e., "well-being," the value in well-being to be attached to production depends entirely on its use for the promotion of well-being (unless a case is made out for the moral value of factory life), and bears no rela- tion whatever to the value obtained by cost accounting. Further, if the interaction between produc- tion for profit and the creation of credit by the finance and banking houses is understood, it will be seen that the root of the evil accruing from the system is in the constant filching of 66 ECONOMIC DEMOCRACY purchasing power from the individual in favor of the financier, rather than in the mere profit itself. Having in view the importance of the issues involved, it may be desirable to summarize the conclusions to be derived from a study of the methods by which the price of production is based on cost under the existing economic ar- rangements. They are as follows : 1. Price cannot normally be less than cost plus profit. 2. Cost includes all expenditure on product. 3. Therefore, cost involves all expenditure on consumption (food, clothes, housing, etc.), paid for out of wages, salary or dividends, as well as all expenditure on factory account, also representing previous consumption. 4. Since it includes this expenditure, the portion of the cost represented by this expendi- ture has already been paid by the recipients of wages, salaries and dividends. 5. These represent the community; there- fore, the only distribution of real purchasing power in respect of production over a unit period of time is the surplus wages, salaries ECONOMIC DEMOCRACY 67 and dividends available after all subsistence, expenditure and cost of materials consumed has been deducted. The surplus production, how- ever, includes all this expenditure in cost, and, consequently, in price. 6. The only effective demand of the con- sumer, therefore, is a few per cent, of the price value of commodities, and is cash-credit. The remainder of the Home effective demand is loan- credit, which is controlled by the banker, the financier, and the industrialist, in the interest of production with a financial objective, not in the interest of the ultimate consumer. It will be necessary to grasp the significance of these considerations, which can hardly be over-rated in its effect on the break-up of the existing economic system, in order to appre- ciate the result of a change in the control of credit and the method of price fixing, with which it is proposed to deal at a later stage. CHAPTER VI Fallacious arguments based on income-returns Importance of loan-credit How it differs from pay and wages Why starvation may exist amidst plenty Economic sabotage Examples The mirage of finance Why it can never deliver the goods. IT will be readily understood that the diffi- culties which are seen to be inherent in the policy of super-production are only an accen- tuation of those with which we were only too familiar prior to the outbreak of war, and it may be contended and, in fact, it frequently is stated, that even with the unemployment statis- tics at their minimum point and the Nation at its maximum activity in Industry, there is still not enough product to go round. Eecently, for instance, Professor Bowley has estimated that the total British income in excess of $800 per head per annum is only $1,250,000,000, which would mean, if distributed to 10,000,000 heads of families, $125 per annum per family, assum- ing that this distribution did not reduce the production of wealth. 68 ECONOMIC DEMOCRACY 69 The figures themselves have been criticized; but, in any case, the whole argument is com- pletely fallacious, because it takes no account whatever of loan-credit, which is by far the most important factor in the distribution of production, as we have already seen. What it does show is that the purchasing power of ef- fort is quite insignificant in comparison with its productive power. But it may be advisable to glance at some of the proximate causes operating to reduce the return for effort; and to realize the origin of most of the specific instances, it must be borne in mind that the existing economic system dis- tributes goods and services through the same agency which induces goods and services, i.e., payment for work in progress. In other words, if production stops, distribution stops, and, as a consequence, a clear incentive exists to pro- duce useless or superfluous articles, in order that useful commodities already existing may be distributed. This perfectly simple reason is the explana- tion of the increasing necessity of what has come to be called economic sabotage ; the colos- 70 ECONOMIC DEMOCRACY sal waste of effort which goes on in every walk of life quite unobserved by the majority of people because they are so familiar with it; a waste which yet so over-taxed the ingenuity of society to extend it, that the climax of war only occurred in the moment when a culminating ex- hibition of organized sabotage was necessary to preserve the system from spontaneous com- bustion. The simplest form of this process is that of "making work"; the elaboration of every action in life so as to involve the maximum quantity and the minimum efficiency in human effort. The much-maligned household plumber, who evolves an elaborate organization and eti- quette, probably requiring two assistants, and half a day, in order to "wipe" a damaged water pipe, which could, by methods with which he is perfect familiar, be satisfactorily repaired by a boy in one-third the time; the machinist insisting on a lengthy apprenticeship to an un- skilled process of industry, such as the opera- tion of an automatic machine tool, are simple instances of this. A little higher up the scale of complexity comes the manufacturer who pro- ECONOMIC DEMOCRACY 71 duces a new model of his particular specialty, with the object, express or subconscious, of rendering the old model obsolete before it is worn out. We then begin to touch the immense regions of artificial demand created by adver- tisement; a demand, in many cases, as purely hypnotic in origin as the request of the mes- merized subject for a draught of kerosene. All these are instances which could be multiplied and elaborated to any extent necessary to prove the point. In another class comes the stupendous waste of effort involved in the intricacies of finance and book-keeping; much of which, although necessary to the competitive system, is quite useless in increasing the amenities of life ; there is the burden of armaments and the waste of materials and equipment involved in them even in peace time; the ever-growing bureaucracy largely concerned in elaborating safeguards for a radically defective social system ; and, finally, but by no means least, the cumulative export of the product of labor, largely and increasingly paid for by the raw material which forms the vehicle for the export of further labor. 72 ECONOMIC DEMOCRACY All these, and many other forms of avoidable waste, take their rise in the obsession of wealth defined in terms of money ; an obsession which even the steady fall in the purchasing power of the unit of currency seems powerless to dispel; which obscures the whole object and meaning of scientific progress, and places the worker and the honest man in a permanently disadvantageous position in comparison with the financier and the rogue. It is probable that the device of money is a necessary device in our present civilization; but the establishment of a stable ratio between the use value of effort and its money value is a problem which demands a very early solution, and must clearly result in the abolition of any incentive to the capitaliza- tion of any form of waste. The tawdry " ornament,'* the jerry-built house, the slow and uncomfortable train serv- ice, the unwholesome sweetmeat, are the direct and logical result of an economic system which rewards variety, quite irrespective of quality, and proclaims in the clearest possible manner that it is much better to "do" your neighbor than to do sound and lasting work. ECONOMIC DEMOCRACY 73 The capitalistic wage system based on the current methods of finance, so far from offering maximum distribution, is decreasingly capable of meeting any requirement of society fully. Its very existence depends on a constant in- crease in the variety or product, the stimulation of desire, and in keeping the articles desired in short supply. CHAPTER VII The final struggle approaching The issue Inadequacy of commodity-reward for service Social symptoms Busi- ness system not to blame Real and effective demand Productive system technically adequate Decentralized control The Shop Steward system A means, not an end A labor fallacy. IF the preceding endeavor to marshal into some sort of coherent pattern the facts of the general economic and social situation, as it exists at present, has been to any extent suc- cessful, it will be evident that the real antago- nism which is at the root of the upheaval with which we are faced is one which appears under different forms in every aspect of human life. It is the agelong struggle between freedom and authority, between external compulsion and in- ternal initiative, in which all the command of resources, information, religious dogma, edu- cational system, political opportunity and even, apparently, economic necessity, is ranged on the side of authority; an ultimate authority which is now chiefly exercised through finance. This antagonism does, however, appear at the pres- 74 ECONOMIC DEMOCRACY 75 ent time to have reached a stage in which a definite victory for one side or the other is inevitable it seems perfectly certain that either a pyramidal organization, having at its apex supreme power, and at its base complete subjection, will crystallize out of the centraliz- ing process which is evident in the realms of finance and industry, equally with that of poli- tics, or else a more complete decentralization of initiative than this civilization has ever known, will be substituted for external author- ity. The issue transcends in importance all others : the development of the human race will be radically different as it is decided one way or another; but as far as it is possible to judge, the general advantage of the individual will lie with the retention of a measure of co-ordination in all mechanical organization, combined with the evolution of progressively decentralized initia- tive, largely by the displacement of the power of centralized finance. The implication of this is a challenge (which will become more definite as time goes on) to extant authority, as to its right to adjudicate on the absolute value, expressed in terms of com- 76 ECONOMIC DEMOCRACY modities, of various forms of activity. Even now, the practical difficulty of estimating the relation between material reward and individ- ual effort is becoming almost insuperable, even in the cases where an honest effort is made to arrive at some solution. The various move- ments for the grant of a minimum living wage, the demand for the recognition of the ' ' right to work" (i.e., to draw pay), are all symptoms of the breakdown of the financial "law" of supply and demand in its application to economic problems. Still another significant feature of the inade- quacy of the economic structure is the increase of voluntary unpaid effort and the large amount of energy devoted to games. There is abso- lutely no concrete difference between work and play unless it be in favor of the former no one would contend that it is inherently more inter- esting or pleasurable to endeavor to place a small ball in an inadequate hole with inappro- priate instruments, than to assist in the con- struction of a Quebec Bridge, or the harnessing of Niagara. But for one object men will travel long distances at their own expense, while for ECONOMIC DEMOCRACY 77 the other they require payment and consider- able incentive to remain at work. The whole difference is, of course, psycho- logical ; in the one case there is absolute freedom of choice, not of conditions, but as to whether those conditions are acceptable; there is some voice in control, and there is an avoidance of monotony by the comparatively short period of the game, followed by occupation of an entirely different order. But the efficiency of the per- formance, as compared with the efficiency of the average factory worker, is simply incom- parable any factory which could induce for six months the united and enthusiastic concentra- tion of, say, an amateur football team, would produce quite astonishing results. Now, it may be emphasized here at once, that there is absolutely no future for inefficiency as a cult; the whole promise of a brighter, prob- ably a very bright, future for the world, lies in doing the best possible things in the best pos- sible way. In industrial affairs, the principle of the maximum efficiency of effort per unit of time is so patently unassailable, that its enun- ciation would hardly be necessary, but that the 78 ECONOMIC DEMOCRACY proposition carries with it a very different con- ception of efficiency than the narrow "busi- ness" meaning commonly attached to the word, and in consequence it is the fashion amongst the less progressive elements of society to at- tack any demand for improved conditions as simply an attempt to substitute sloth and in- capacity for energy and capability. While, therefore, a readjustment of system and, above all, a complete reconsideration of objective is necessary, it is probable that the basis of such changes must be economic, with political and financial systems auxiliary rather than defini- tive, and it is certain that a revision of eco- nomic policy, to be stable, must result in higher economic efficiency; even though the very aim of that higher efficiency is to reduce economic problems to a very subordinate position. And the higher psychological efficiency of voluntary effort is clearly a step to this end. We have just seen that merely increased pro- duction under existing conditions will not achieve any economic stability, because there are at least two quite irreconcilable criteria governing the scope of the operations proposed. ECONOMIC DEMOCRACY 79 There is, on the one hand, the adjustment of manufacturing of all sorts to the opportunity of sale (not by any means always profitable sale) ; and this is a purely artificial, and yet all- powerful, consideration under present financial systems, and constitutes the effective demand. And there is, on the other hand, the growing real demand, first for food, clothing and shelter, and then for participation in the wider life which modern progress has made possible, such demand being quite irrespective of capacity to pay in money. And the reconciliation of these two interests means the defeat of the will-to- power by the will-to-freedom, and in this recon- ciliation is involved a modification of economic distribution. Now, if there is any sanity left in the world at all, it should be obvious that the real demand is the proper objective of production, and that it must be met from the bottom upwards, that is to say, there must be first a production of neces- saries sufficient to meet universal require- ments ; and, secondly, an economic system must be devised to insure their practically automatic and universal distribution; this having been 80 ECONOMIC DEMOCRACY achieved it may be followed to whatever extent may prove desirable by the manufacture of articles having a more limited range of useful- ness. All financial questions are quite beside the point; if finance cannot meet this simple proposition then finance fails, and will be re- placed. It has been estimated that two hours per week of the time of every fit adult between the ages of 18 and 45 would provide for a uni- formly high standard of physical welfare under existing conditions, and without endorsing the exact figures, it is perfectly certain that dis- tribution, and not manufacture, is the real eco- nomic problem, and is at present quite intoler- ably unsatisfactory. There is no need to as- sume that the whole machinery of business as we know it must be scrapped ; in fact, the ma- chinery of business, as machinery, is highly ef- ficient ; but it must undoubtedly be adjusted so that no selfish desire for domination can make it possible for any interest to hold up distribu- tion on purely artificial grounds. Since the analysis of existing conditions which we have undertaken, shows that any centralized admin- istrative organization is certain to be captured ECONOMIC DEMOCRACY 81 by some interest antagonistic to the individual, it seems evident that it is in the direction of decentralization of control that we must look for such alteration in the social structure as would be self -protective against capture for in- terested purposes. As we have already seen, alongside the con- centration of political and industrial power a powerful decentralizing force is already begin- ning to show itself in various forms. In con- sidering the manifestation of this force it will be observed that at the moment it is seek- ing expression through organization in new forms, but for the present operating with old sources of energy, chiefly negative in character, such as the strike. To be effective, however, against positive centralization, positive decen- tralization will have to come decentralized economic power is necessary. Among the more important of these forms is the shop steward or rank-and-file movement in industry, and the workmen 's councils in poli- tics, both purely decentralizing in tendency, quite apart from any special policy for the furtherance of which they may be used. The 82 ECONOMIC DEMOCRACY apprehension with which the movements are re- garded by the reactionary capitalist is based far more on a recognition of the difficulties such a scheme of organization offers to successful corruption and capture than to any regard for the specific items in the policy it may for the moment represent; most of which have been previously parried with ease when presented through delegated Trade Union leaders, whose positions of authority have been perforce achieved by exactly the methods best under- stood by those with whom they have to deal. As the Shop Steward movement is the most definite industrial recognition, from the Labor side, of the necessity for decentralization, some examination of the general scheme is of inter- est. The actual details of the organization vary from place to place, trade to trade, and even day to day ; but the essence of the idea consists in the adoption of a decentralized unit of pro- duction such as the "shop" or department, and the substitution of actual workers in consider- able numbers, for the paid Trade Union official as the nucleoli of both industrial and political ECONOMIC DEMOCRACY 83 power (although the political power is not exer- cised through Parliamentary channels). The shop steward is generally " industrial" rather than ''craft" in interest; that is to say, he represents a body of men who produce an article, rather than a section who perform one class of operation for widely different ends ; but there is nothing inherently antagonistic as be- tween the two conceptions of function, Indus- trial Unionism being largely a militant device. He is quite limited in his sphere of executive action, but initiates discussion on the basis of first-hand information, and forms a link be- tween the decentralized industrial unit and other units which may be concerned. The prac- tical effect of the arrangement is that the spokesmen are never out of touch with those for whom they speak, since the normal occupation and remuneration of representatives is similar to that of those they represent ; and should any cleavage occur, a change of representative can be easily secured. The official concerned has, in theory, no executive authority whatever, nor can he take any action not supported by his co- workers, i.e., the direction of policy is from the 84 ECONOMIC DEMOCRACY bottom upwards instead of the top downwards. The individual shop stewards are banded to- gether in a shop stewards' committee, which has again only just as much authority as the individual workers care to delegate to it. It is, of course, obvious that the permanent success of any arrangement of this character depends on a common recognition, amongst the individuals affected by the organization, of cer- tain principles as " confirming standards of reference." In other words, it would be im- possible to administer a complicated manufac- turing concern on any such principles, unless the general body of employees had a general appreciation of the fundamental necessities of the business, inclusive of direction and techni- cal design. In other words, and in a more general sense, all political arrangements of this or any other description simply provide a mechanism for the administration of an agreed system they are not, and cannot in their very nature be, that system in itself. Where, of course, it is clear that there is a confusion of function is, that the shop steward ECONOMIC DEMOCRACY 85 claims control, not only of the conditions of production, but eventually of the terms of dis- tribution. This confusion is quite inevitable at present, but is not necessarily permanent, and is obviously undesirable. It is based on the fallacy that labor, as such, produces all wealth, whereas the simple fact is that production is 95 per cent, a matter of tools and process, which tools and process form the cultural inheritance of the community, not as workers, but as a com- munity, and as such the community is most clearly the proper, though far from being the legal, administrator of it. CHAPTER VIII Economic reconstruction the first necessity Poverty largely artificial Why war has increased apparent prosperity Function and control Medievalism and Ultra-modernism The idea of the Just Price Summary of Analysis of Social Structure The objective of change The time- energy unit Process, the key to progress Production to a program The conditions of economic emancipation The incentive to effort Existing methods Financial manipulation Time-work Piece-work The basis of the Just Price Administration not germane to the idea The community already owns the plant A theoretical solution Definition of capital The credit center The separation of function. A)MITTING, then, that any decentralized scheme of society must first justify it- self economically, it is necessary to grapple with, at any rate, the main features of the radi- cal economic reconstruction necessary, before any attempt can be made to forecast the politi- cal aspect. The starting point is clearly a reason- ably uniform and plentiful distribution of simple necessaries: food, clothes, housing, etc. Now, the actual production of these articles presents no difficulties whatever. Notwith- 86 ECONOMIC DEMOCRACY 87 standing the diversion of the major portion of the world's energy for four years to purposes of destruction, the actual economic want in the world has been almost entirely artificial, i.e., has been confined either to countries effectively blockaded, or else lacking the mechanical fa- cilities for effective distribution. In fact, it is most significant, that while useful (in a peace sense) production has been enormously reduced in Great Britain during the war, the standard of comfort has been more uniformly high than ever before. The explanation of this is simple: The pay- ments made in wages have increased, prices and the production of luxuries have been partly controlled, and sabotage has disposed of useless product, and so kept up wage distribu- tion. The practical problem, then, is to make it certain that commodities are produced under satisfactory conditions, and equally certain that they are distributed according to necessity, and the organization for -these purposes may well determine the social structure, inasmuch as a complete success would be the most power- 88 ECONOMIC DEMOCRACY ful incentive to the adoption of similar methods in less fundamental directions. Profiting by the deduction made from the examination already made, of the results of various types of organization, it may be re- peated that the best results would seem prob- able from a co-ordinated organization for purposes of technique, with the greatest decen- tralization of initiative in the use of the facili- ties so provided. Now, it should be clearly grasped at the out- set that at least two main problems are in- volved in the question at issue, which may be broadly defined as that of the producer, and the consumer ; and not only are these entirely sepa- rate, but, rightly considered, they are on com- pletely different planes of existence. The problem of the consumer is essentially material; he is concerned with quality, va- riety, price, supply; he is concerned with product. On the contrary, the producer is almost en- tirely concerned with psychological issues: fatigue, interest, welfare, hours of labor, all of which, qua producer pure and simple, are ECONOMIC DEMOCRACY 89 broadly summed up in the word "content- ment." The consumer is interested in distribution; the producer is concerned with effort. While the producer and the consumer are frequently combined in the same person, a recognition of these distinctions will make it easier to define the powers which should belong to each. It is particularly necessary to emphasize this distinction, since the existing structure of in- dustry, based on finance, takes it for granted that the possession of large quantities of goods, or their equivalent purchasing power in money, is a good and sufficient reason for the exercise of a preponderating voice in the conditions and processes of production. We say, and it is only now that it is faintly contested, that he who pays the piper calls the tune. The idea that it is the hearer who is primarily concerned in the tune, the piper pri- marily in the instrument, and the payment a mere convenience as between the two parties, is so novel to large numbers of unthinking per- sons, that it is only natural to expect violent opposition to the world- wide efforts being made 90 ECONOMIC DEMOCRACY to reconstitute society on these very principles. Bearing these distinctions in mind, it will be recognized that there are two separate lines along which to attack the situation presented by the dissatisfaction of the worker with his conditions of work, and the not less serious dis- content of the consumer with the machinery of distribution, and these may be called mediaeval- ism and ultra-modernism. Medigevalism seems to claim that all me- chanical progress is unsound and inherently de- lusive ; that mankind is by his very constitution compelled, under penalty of decadence, to sup- port himself by unaided skill of hand and eye. In support of its contentions, it points to the Golden Age of the fourteenth century in Eng- land, for example, when real want was com- paratively unknown, and green woods stood, and clear rivers ran, where the slag-heaps and chemical works of Widnes or Wednesbury now offend the eye and pollute the air;- when arts and crafts made industry almost a sacrament, and faulty execution a social, and even a legal offense; when the medium of exchange was the Just Price, and the idea of buying in the ECONOMIC DEMOCRACY 91 cheapest and selling in the dearest market, if it existed, was classed with usury and punished by heavy penalties. While appreciating the temptation to com- pare the two periods, to the very great disad- vantage of the present, it does not seem pos- sible to agree with the conclusion of the Me- dievalist that we are in a cul-de-sac from which the only exit is backwards; and it is proposed to make an endeavor to show that there is a way through, and that we may in time regain the best of the advantages on which the Medievalist rightly sets such store, retaining in addition a command over environment, which he would be the first to recognize as a real ad- vance; a solution which may be described as Ultra-Modernist. In order to do this, certain somewhat abstract assumptions are necessary, and it has been the object of the preceding pages to present as far as possible the data on which these assumptions are made. They are as follows : (1) The existing difficulties are the im- mediate result of a social structure framed to concentrate personal power over other 92 ECONOMIC DEMOCRACY persons, a structure which must take the form of a pyramid. Economics is the material key to this modern riddle of the sphinx, because power over food, clothes, and housing is ultimately power over life. (2) So long as the structure of Society persists, personality simply reacts against it. Personality has nothing to do with the effect of the structure; it simply governs the response of the individual to conditions he cannot control, except by altering the structure. (3) It follows that general improvement of conditions based on personality is a confusion of ideas. Changed personality will only become effective through changed social structure. (4) The pyramidal structure of Society gives environment the maximum control over individuality. The correct objective of any change is to give individuality max- imum control over environment. If these premises are accepted it seems clear that the first and probably most important step is to give the individual control of the neces- ECONOMIC DEMOCRACY 93 saries of life on the cheapest terms possible. What are these terms? What is the funda- mental currency in which the individual does in the last analysis liquidate his debts ? A little consideration must make it clear that there can be only one reply; that the individual only possesses inalienable property of the one de- scription ; potential effort over a definite period ol time. If this be admitted, and it is incon- ceivable that any one would seriously deny it, it follows that the real unit of the world's cur- rency is effort into time what we may call the time- energy unit. Now, time is an easily measurable factor, and although we cannot measure human poten- tial, because we have at present no standard, it is nevertheless true that, for a given process, the number of human time-energy units re- quired for a given output is quite definite, and therefore, the cheapest terms on which the in- dividual can liquidate his debt to nature in respect of food, clothes, and shelter, is clearly dependent on process; and by getting free of this debt with the minimum expenditure of time-energy units, of which his individual sup- 94 ECONOMIC DEMOCRACY ply varies, but is, nevertheless, quite definite at any given time, he clearly is so much the richer in the most real sense, in that he can control the use to be made of his remaining stock. But, and it is vital to the whole argument, improved process must be made the servant of this objective, that is to say, a process which is improved must, by the operation of a suitable economic system, decrease the time-energy units demanded from the community, or to put the matter another way, all improvements in proc- ess should be made to pay a dividend to the community. (It will be noted that an admis- sion of the theorem is a complete condemnation of payment by results, as commonly under- stood; that is to say, an arrangement of re- muneration designed to foster an increasing use of time-energy units.) The primary neces- saries of life as above defined, i.e., food, clothes and shelter, have an important characteristic which differentiates them from what we may call conveniences and luxuries; they are quite approximately constant in quantity per head of the population; in other words, the average human being requires as a groundwork for his ECONOMIC DEMOCRACY 95 daily life a definite number of heat units in the form of suitable food, a definite minimum quan- tity of clothing and a definite minimum space in which to sleep and work, and the variation between the minimum and the maximum quan- tity of each that he can utilize with advantage to himself is not, broadly speaking, very great. This fact renders it perfectly feasible (it has already very largely been accomplished) to estimate the absolute production of foodstuffs required by the world's population; the time- energy units required at the present stage of mechanical and scientific development to pro- duce those foodstuffs; and the time-energy units approximately available. Accuracy in these estimates is unnecessary, since there is not the very smallest doubt that the margins are so large that it is only the failure of "ef- fective demand" under existing circumstances which has prevented over-production. The most superficial consideration of the earnings of agriculture before the war must make this obvious. There is good ground for stating that the 96 ECONOMIC DEMOCRACY subsistence basis of the civilized world stated thus in time-energy units represents a few minutes' work per day for all adults between the ages of. 18 and 40. Exactly the same principle is applicable to the provision of clothing and housing, and the "maintenance rate" in respect of these staple commodities, as distinct from the " exploitation effort" necessary to put the world on a satis- factory basis, does not again exceed a few min- utes per day per head, on the assumption that the fullest use is made of natural sources of energy, and that all the human effort specifi- cally connected with the system of production for profit is eliminated. The exact figures are beside the point, but something over three hours' work per head per day is ample for the purpose of meeting consumption and deprecia- tion of all the factors of modern life under nor- mal conditions and proper direction. Now, such a line of policy is clearly based on co-ordination of design, but it evolves under certain conditions radical decentralization of initiative. These conditions are, firstly, definite pro- ECONOMIC DEMOCRACY 97 ductions of ultimate products to a program, and consequent limitation of output to that pro- gram; and, secondly, the provision of an in- centive to produce, which shall insure the dis- tribution of the article produced. The basis of the first condition has just been indicated briefly; the provision of an incentive requires more extended analysis. There is a disposition on the part of certain idealistic people, and, in particular, in quarters obsessed by the magic of the State idea, to de- cry the necessity of any organized incentive in industry at all. They seem to suggest either that the problem is merely one of designing a huge machine of such irresistible power that no incentive is necessary because no resistance is possible, or, alternatively, that the mere crea- tive impulse ought to be sufficient to induce every individual to give of his best without any thought of personal benefit. In regard to the former idea, it may be said that, quite apart from its fundamental objection, it is quite im- practicable ; and in regard to the latter that it is not yet, nor for a very considerable time likely to be, practicable to satisfy the creative 98 ECONOMIC DEMOCRACY impulse through the same channels as those used for the economic business of the world. Under existing conditions, there is much necessary work to be done which cannot fail to be largely of a routine nature, and the pro- vision of an incentive external to the perform- ance of the immediate task seems both prac- tically and morally sound. First of all, sonie consideration of the defects of existing incentives is necessary in order to meet the difficulties so exposed. Broadly, remuneration, or the system by which the amenities of civilization are placed at the disposal of the individual, is of three varieties: payment by financial manipulation (profit), payment by time (salaries and time- rate wages), and payment by results (piece- work in all its forms), and it should be noticed that only the first of these combines possession of the amenities with opportunities for their fullest use. Payment by financial manipulation, whether through the agency of profit (other than that earned by personal endeavor), stock manipula- tion or otherwise, is quite definitely anti-social. ECONOMIC DEMOCRACY 99 It operates to neutralize all progress towards real efficiency, by diluting the medium of ex- change, and by this process it will quite cer- tainly bring about the downfall of the social order to which it belongs, largely through the operation of the factory economic system al- ready discussed. Payment by time fails for two practical reasons : it is based on the operation of the fal- lacy that the value of a thing bears any relation to the demand for it, and the assumption that money has a fixed value. Because of the first reason it clearly penalizes genuine initiative (because there is no demand for the unknown), and because of the second, it fosters aggression. The policy of Trade Unions in regard to time rates of pay has simply been successful to the extent that it has used its organized power for aggressive action ; and while such a policy may be sound and justifiable under existing condi- tions, it clearly offers no promise of social peace. Payment by results or piece-work may be considered as the final effort of an outworn system to justify itself. Superficially, it seems 100 ECONOMIC DEMOCRACY fair and reasonable in almost any of its many forms ; actually it operates to increase the indi- vidual time-energy units expended while de- creasing, through diluted currency, the ex- change value of each time-energy unit, and crediting to the banker and the financier nearly the whole value of increased efficiency. If this contention is questioned, a reference to the much greater purchasing power of labor in the Middle Ages, admitted in such books as "The Six-Hour Day," 1 must surely con- firm it. In actual practice, piece-work neither does nor can take into consideration that, just as there is no limit to progress either of method or dexterity, so is there no fundamental rela- tion between money and value as at present understood. Consequently, all piece-work systems pro- duce in varying degree one of three conditions, either (1) Large classes of workers earn con- tinuously increasing sums of money which i " The Six-Hour Day and other Industrial Problems." Lord Leverhulme. ECONOMIC DEMOCRACY 101 bear no ratio to equally meritorious efforts on other bases of payment. If any effort is made to unify the basis on a large scale the purchasing power of money becomes completely unstable. or (2) A piece rate is " nursed" to avoid any urgent incentive to change of method as an excuse for cutting the rate and earn- ings, with the result that output is re- stricted to a locally agreed basis, having no relation to either real or effective demand. or (3) The price will be cut periodically by dubious management, a constant state of friction engendered, and the whole affair surrounded with an atmosphere of sus- picion. These results are logical, and to blame any special interest for any of them is beside the point. The use-value of the product, short time, unemployment, to say nothing of the ele- mental facts of industrial psychology and eco- nomics, are not considered at all in such sys- tems ; with the result that the victims make, so far as Trade Unions on the one hand, and Em- ployers ' Federations on the other, can assist 102 ECONOMIC DEMOCRACY them, their own arrangements for protection against the more dire consequences of crude forms of scientific management, or lukewarm service. We have now arrived at this position: we desire to produce a definite program of neces- saries with a minimum expenditure of time- energy units. We agree that the substitution of human effort by natural forces through the agency of machinery is the clear path to this end ; and we require to co-relate to this a system which will arrange for the equitable distribu- tion of the whole product while, at the same time, providing the most powerful incentive to efficiency possible. The general answer to this problem may be stated in the four following propositions, which represent an effort to arrive at the Just Price : (1) Natural resources are common property, and the means for their exploita- tion should also be common property. (2) The payment to be made to the worker, no matter what the unit adopted, is the sum necessary to enable him to buy ECONOMIC DEMOCRACY 103 a definite share of ultimate products, irre- spective of the time taken to produce them. (3) The payment to be made to the im- prover of process, including direction, is to be based on the rate of decrease of human time-energy units resulting from the improvement, and is to take the form of an extension of facilities for further improvement in the same or other proc- esses. (4) Labor is not exchangeable; prod- uct is. No attempt will be made to prove these propositions, since their validity rests on equity. It should be noted particularly, that none of these points has any relation to systems of ad- ministration, although a recognition of them would radically affect the distribution of per- sonnel in any system of administration. While the distribution of the product of in- dustry is fundamentally involved, and the in- ducements to vary the articles produced are clearly modified to a degree which would pro- 104 ECONOMIC DEMOCRACY f oundly alter the industrial situation, no exten- sion of bureaucracy in the accepted sense is im- plied or induced. It may he argued that these principles are not susceptible of immediate embodiment; but it is, nevertheless, well to bear in mind the im- minence of an economic breakdown (as a direct result of the inflation of currency by the capi- talization of negative values) already dis- cussed, and the probability that a new economic system, having as its basis the principles of the law of the conservation of energy, will re- place it. It may be said in regard to proposition (1) that it involves a confiscation of plant which is clearly an injustice to the present owners. But is it I A reference to the accounting process al- ready described will make it clear that the com- munity has already bought and paid for, many times over, the whole of the plant used for manufacturing processes, the purchase price being included in the selling price of the articles produced, and representing, in the ultimate, effort of some sort, but immediately, a rise in ECONOMIC DEMOCRACY 105 the cost of living. If the community can use the plant, it is clearly entitled to it, quite apart from the fact that under proper conditions there is no reason why every reasonable re- quirement of its present owners should not be met under the changed conditions. Before allowing the methods of compromise, which may or may not be desirable in the prac- ticable evolution of a better conception of the community, based on these propositions, to obscure the objective, a purely idealistic inter- pretation of them may be worth consideration, as a basis from which to deduce a practical policy. Let us imagine the theories of rent and wages to be swept away and discredited, the existing industrial plant to be the property of the com- munity and to be operating with technical ef- ficiency. We are in possession of a census of the material requirements of the community, and are producing to a program either based on those requirements or on the indirect achievement of them by the processes of barter with similar communities. Since no extension or alteration of this pro- 106 ECONOMIC DEMOCRACY gram is possible without affecting the whole community, the administration of real capital, i.e., the power to draw on the collective poten- tial capacity to do work, is clearly subject to the control of its real owners through the agency of credit. Let us imagine this collective credit organi- zation, which might preferably not be the State, to be provided with the necessary organization to fit it to pass upon, and if desirable to sanc- tion, any private enterprise deemed to be in the interest of the community represented, the necessary capitalization being secured by the general credit. It is clear that such an arrange- ment involves an appraisal of values both in respect to persons and materials, but it does not necessarily involve any control of policy what- ever in respect of the internal administration of any undertaking once originated. Under these conditions the community can be regarded as a single undertaking (decentral- ized as to administration to any extent neces- sary) and every individual comprised within it is in the position of an equal Bondholder en- titled to an equal share of product. The dis- ECONOMIC DEMOCRACY 107 tribution of the product is simply a problem of the arbitrary adjustment of prices to fit the dimensions of a periodical order to pay, issued to each bondholder, and we shall see that such prices will normally be less than cost, as meas- ured by existing methods. Let this annual order to pay be inalienable, but carrying the assumption that a definite per- centage of the individual's stock of time-energy units is freely placed at the disposal of the community. Let these time-energy units be graded, so that the lowest grade represents the poorest capacity multiplied by the time-factor, and let all adults on entering productive in- dustry be so graded, and let the least attractive work be done by the agency of these time- energy units. Let an improvement of grade be based on the proposal by the individual of methods, processes or organization resulting in a diminution of the total time-energy units re- quired for the program of production, and the success of the proposals. (It will be noticed that the strongest incentive to right judgment as regards facilities for trial exists here.) Let the possession of a definite ''grade" of time- 108 ECONOMIC DEMOCRACY energy units be the absolute qualification for each class of employment ; that is to say, proved ability to render special service will be the qualification for facilities to render service, but will not affect the division of product. Now, it will be noticed that we have under these conditions absolute equity, both personal and social. All improvement in process is to the general benefit, while, at the same time, the psychological reward of specific ability is exactly that which common experience shows to be the most perfectly satisfactory. No ques- tions of material remuneration enter into the problem of administration at all ; and increased complexity of manufactured product is either bought by increased efficiency or longer work- ing hours; while simplicity of life provides greater opportunities for the use of the product and other activities. A system not dissimilar from the existing Shop Steward system, but with its members acting in the role of Citizens, and not as Artisans, might control policy abso- lutely, i.e., increase or decrease programs of production and efficiency, etc., without interfer- ing, or having any possible incentive to inter- ECONOMIC DEMOCRACY 109 fere, in direction or function. Economic in- centive to competition other than in efficiency would disappear completely, and with it the primary cause of war. CHAPTER IX Necessity of dealing with Society as it is More purchasing power wanted Futility of general wage increases And of excess profits taxation Vital importance of loan- credit Definition of real credit Credit derives from the community Should be accounted for to the community The nature of the War Debt The State a creditor, not a debtor How to realize it Time-saving as an incentive Results of projected policy Freedom. WHILE a much higher development, not only of civic sense, but of material progress, is necessary to a realization of a scheme of society based on anything approxi- mating to the foregoing sketch, it is quite prob- able that eventually such an arrangement might be the only solution having inherent stability. But a transition period is highly desirable, and as the present structure is susceptible of change by metabolism, it may be well to con- sider one of the numerous expedients avail- able to that end. Since an immediate leveling up of real pur- chasing power is absolutely essential if indus- try is to be kept going at all, the first point on which to be perfectly clear is that increasing no ECONOMIC DEMOCRACY 111 wages on the grand scale is simply childish. Given a minimum percentage of profit, and a fixed process, under the existing economic sys- tem the real wage, in the sense of a proportion of product, is steadily decreasing; and nothing will alter that fact except change of process (temporarily) and change of economic system (permanently). Even taxation of profits is quite incapable of providing any real remedy, because, as we have seen, the sum of the wages, salaries and dividends distributed in respect of the world's production, even if evenly dis- tributed, would not buy it, since the price in- cludes non-existent values. There is no doubt whatever that the first step towards dealing with the problem is the recognition of the fact that what is commonly called credit by the banker is administered by him primarily for the purpose of private profit, whereas it is most definitely communal property. In its essence it is the estimated value of the only real capital it is the estimate of the potential capacity u/nder a given set of conditions, including plant, etc., of a Society to do work. The banking system has been allowed to become the administrator 112 ECONOMIC DEMOCRACY of this credit and its financial derivatives, with the result that the creative energy of mankind has been subjected to fetters which have no relation whatever to the real demands of exist- ence, and the allocation of tasks has been placed in unsuitable hands. Now, it cannot be too clearly emphasized that real credit is a measure of the effective reserve of energy belonging to a community, and, in con- sequence, drafts on this reserve should be ac- counted for by a financial system which reflects that fact. If this be borne in mind, together with the conception of "Production" as a conversion ab- sorbing energy, it will be seen that the individ- ual should receive something representing the diminution of the communal credit-capital in respect of each unit of converted material. It remains to consider how these abstract propositions can be given concrete form. So far as Great Britain is concerned, the in- strument which comes most easily to the hand to deal with the matter is the National Debt, which for practical purposes may be considered to be the War Debt in all its forms, although ECONOMIC DEMOCRACY 113 it should be clearly understood that all appro- priations of credit can be considered as equally concerned. Some consideration of the real nature of the debt is necessary in order to understand the basis of this proposal. The $40,000,000,000 in round numbers which has been subscribed for war purposes repre- sents as to its major portion (apart from about $7,500,000,000 re-lent) services which have been rendered and paid for, and in particular the sums paid for munitions of all kinds, payment of troops and sums distributed in pensions and other doles. Now, the services have been ren- dered and the munitions expended, conse- quently the loan represents a lien with interest on the future activities of the community, in favor of the holders of the loan, that is to say, the community guarantees the holders to work for them without payment, for an indefinite period, in return for services rendered by the subscribers to the Loan. What are those services? Disregarding holdings under $5,000 and re- investment of pre-war assets, the great bulk 114- ECONOMIC DEMOCRACY of the loan represents purchases by large in- dustrial and financial undertakings who ob- tained the money to buy by means of the crea- tion and appropriation of credits at the expense of the community through the agency of indus- trial accounting and bank finance. It is not necessary to elaborate this conten- tion at any great length because it is quite ob- viously true. Eventually, to have any meaning, the loan must be paid off in purchasing power over goods not yet produced, and is, therefore, simply a portion of the estimated capacity of the nation to do work which has been hypothe- cated. Whatever may be said of subscriptions out of wages and salaries, therefore, there is not the slightest question that in so far as the loan represents the capitalization of the processes already described, its owners have no right in equity to it it simply represents communal credit transferred to private account. To put the matter another way: For every shell made and afterwards fired and destroyed ; for every aeroplane built and crashed; for all the stores lost, stolen or spoilt; the Capitalist ECONOMIC DEMOCRACY 115 has an entry in his books which he calls wealth, and on which he proposes to draw interest at 5 per cent., whereas that entry represents loss not gain, debit not credit, to the community, and, consequently, is only realizable by regard- ing the interest of the Capitalist as directly op- posite to that of the community. Now, it must be perfectly obvious to any one who seriously considers the matter, that the State should lend, not borrow, and that in this respect, as in others, the Capitalist usurps the function of the State. But, however the matter be considered, the National Debt as it stands is simply a state- ment that an indefinite amount of goods and services (indefinite because of the variable pur- chasing power of money) are to be rendered in the future to the holders of the loan, i.e., it is clearly a distributing agent. Now, instead of the levy on capital, which is widely discussed, let it be recognized that credit is a communal, not a bankers' possession; let the loan be redistributed by the same methods suggested in respect of a capital levy so that no holding of over $5,000 is permitted; to the end 116 ECONOMIC DEMOCRACY that, say, 8,000,000 heads of families are cred- ited with $250 per annum of additional purchas- ing power. And further, let all production be costed on a uniform system open to inspection, the factory cost being easily ascertained by making all payments through a credit center; the manner of procedure to this end is described hereafter. Let all payments for materials and plant be made through the Credit Center and let plant increases be a running addition to the existing National Debt, and let the yearly increase in the debt be equally distributed after proper depreciation. Let the selling price of the prod- uct be adjusted in reference to the effective de- mand, by means of a depreciation rate fixed on the principle described subsequently, and let all manufacturing and agriculture be done, with broad limits, to a program. Payment for in- dustrial service rendered should be made some- what on the following lines : Let it be assumed that a given production center has a curve of efficiency, varying with output, which is a correct statement for a given process worked at normal intensity. The ECONOMIC DEMOCRACY 117 center would be rated as responsible for a pro- gram, over a given time, such that this efficiency would be a maximum when considered with reference to, say, a standard six-hour day. On this rating, it is clear that the amount of money available for distribution in respect of labor and staff charges can be estimated by methods familiar to every manufacturer. Now, let this sum be allocated in any suit- able proportion between the various grades of effort involved in the undertaking, and let a considerable bonus, together with a recognized claim to promotion, be assured to any individ- ual who, by the suggestion of improved methods or otherwise, can, for the specified program, reduce the hours worked by the fac- tory or department in which he is engaged. Now, consider the effect of these measures: Firstly, there is an immediate fall in prices which is cumulative, and, consequently, a rise in the purchasing power of money. Secondly, there is a widening of effective demand of all kinds by the wider basis of financial distribu- tion. There is a sufficient incentive to produce, but there is communal control of undesirable 118 ECONOMIC DEMOCRACY production through the agency of credit; and there is incentive to efficiency. There is the mechanism by which the most suitable technical ability would be employed where it would be most useful, while the separation of a sufficient portion of the machinery of economic distribu- tion from the processes of production would restore individual initiative, and, under proper conditions, minimize the effects of bureaucracy. This rapid survey of the possibilities of a modified economic system will, therefore, prob- ably justify a somewhat more detailed examina- tion of certain features of the proposed struc- ture, and clearly the control and use of credit is of primary importance. It should be par- ticularly noted at this point, however, that every suggestion made in this connection has in view the maximum expansion in the personal control of initiative and the minimizing, and final elimination, of economic domination, either personal or through the agency of the State. CHAPTER X The relation of semi-manufactures to credit The Clearing- house How to " clear " overhead charges Exact state- ment of the Just Price How to meet the War Debt The dawn of real co-operation. IN considering the inadequacy of a mere ex- tension of manufacturing production, unac- companied by a modification of the distributing system, it was seen that, in any manufacturing process, there enters into the cost, and re- appears in the price, a charge for certain items which are really rendered useless, but which form a step towards the final product. These items may be conveniently grouped under the heading of semi-manufactures when considered in relation to a more complex product, although in many cases they may in themselves, for other purposes, represent a final product. For in- stance, electric power, if used for lighting, is a final product, and ministers directly to a human need, but the same energy, if used to drive a cotton mill, is, in the sense in which the term is here used, a semi-manufacture. 119 120 ECONOMIC DEMOCRACY Now, it should be obvious that a semi-manu- facture, in this sense, is of no use to a con- sumer if it is used as an ultimate product, it ceases to come under the heading of a semi- manufacture. Therefore, a semi-manufacture must be an asset to be counted into an estimate of the potential capacity to produce ultimate products (which is the whole object of manufacture from a human point of view) , and, with certain reser- vations, represents an increase of credit-capi- tal, but not of wealth. This conception is of the most fundamental importance. If we concede its validity, a transfer of value in respect of semi-manufactures as between one undertaking and another is measured by a transfer of real credit, and, like a financial credit transfer, is most suitably dealt with through the agency of a Clearing-house. Let us imagine such a Clearing-house to exist, and endeavor to analyze its operations in respect to Messrs. Jones and Company who tan leather, Messrs. Brown and Company who make boots, and Messrs. Eobinson who sell them, and let us imagine that all these under- ECONOMIC DEMOCRACY 121 takings are run on the basis of a commission or profit on all labor and salary costs, an arrange- ment which is, however, quite immaterial to the main issue. Messrs. Jones receive raw hides of the datum value of $500 which require semi-manu- factures, value $2,500, to turn out as leather, together with the expenditure of $2,500 in wages and salaries. Messrs. Jones order the hides and the semi-manufactures by the usual methods from any source which seems to them desirable, and on receipt of the invoices, turn these into the Clearing-house, which issues a check in favor of Messrs. Jones for the total amount, $3,000; by means of which Messrs. Jones deal with their accounts for supplies. The Clearing-house writes up its capital ac- count by this sum, and by all sums issued by it. The out-of-pocket cost to Messrs. Jones of their finished product is, therefore, $2,500. Let us allow them 10 per cent, profit on this, and the cost, plus profit, at the factory under these con- ditions is $2,750, and a sum of $3,000 is owing to the Clearing-house. Messrs. Brown, who require these hides for 122 ECONOMIC DEMOCRACY boot-making, order them from Messrs. Jones, and other supplies from elsewhere amounting to $2,500, and similarly transmit Messrs. Jones' invoices (which include the sums paid by the Clearing-house), with the rest, to the Clearing- house, which issues a check for $8,250 to Messrs. Brown, who pay Messrs. Jones; who, in turn, retain $2,750 and pay back $-3,000 to the Clearing-house. Messrs. Jones are now dis- posed of. They have made their own arrange- ments in respect of quantity of labor, etc., and have made a profit of 10 per cent, on the cost of this labor. Messrs. Brown now make the leather into boots, expending a further $2,500 in salaries and wages, and making 10 per cent, profit on this. They receive an order from Messrs. Robinson for these boots: and Messrs. Robin- son's own out-of-pocket cost, with their com- mission, is $1,500, paid by a check from the Clearing-house for $11,000 + $1,500, $11,000 of which goes to Messrs. Brown, who pay off their debt of $8,250 and retain the remainder. Now, let us notice that the purchasing power released externally in these transactions is that ECONOMIC DEMOCRACY 123 represented by wages, salaries and a commis- sion on them, and that no goods have been, so far, released to consumers against this pur- chasing power. These sums thus distributed will be largely expended by the recipients in various forms of consumption, and it is only their joint surplus which will assist in provid- ing an effective demand for Messrs. Robinson's stock. The price of this stock then requires adjustment. Let us now introduce into the transactions a document we may call a retail clearing in- voice, which might form, in its description of the goods, a duplicate of the bill paid by the purchaser of an article for the purpose of ulti- mate consumption ; and let it be understood that a properly executed retail clearing invoice is accepted by the Clearing-house as evidence of the transfer of goods to an actual consumer. It will be seen that, by the process previously ex- plained, we have distributed the means of pur- chase, and are left in a position to fix the price without reference to the individual interests of Messrs. Brown, Jones or Robinson, as so far the cost is charged to capital account. The 124 ECONOMIC DEMOCRACY question is what should the price be? The answer to this is a statement of the average de- preciation of the capital assets of the commu- nity, stated, m terms of money released over an equal period of time, and the correct price is the money value of this depreciation in terms of the cost of the article. In other words, the Just Price of an article, which is the price at which it can be effectively distributed in the community producing, bears the same ratio to the cost of production that the total consump- tion and depreciation of the community bears to the total capital production. Let us now apply this to our example of such a staple as the supply of boots. Let us assume that in a given credit area the sum involved in the delivery of boots to the user per month amounts to $12,500, that is to say, the cost fig- ures of the retail invoices turned into the Clear- ing-house per month total that sum. This means that services have been rendered and re- munerated by the payment over an indefinite period of the token value of $12,500, and the product of these services distributed in one month. But the token value has a general pur- ECONOMIC DEMOCRACY 125 chasing power, consequently it should be set against a general value. The general value is equal to the general rate of depreciation, or if it be preferred, consumption, of the whole of the goods which can be bought with the token value. Let us assume this to be 40 per cent., that is to say, let us imagine that of the total work of the community for one month 60 per cent, remains for use during a subsequent period. Then the selling price of a pair of boots would be equal to 40 per cent, of $12,500 divided by the total number of pairs of boots distributed (not pairs produced) ; or would be two-fifths of commercial cost. Messrs. Robin- son, therefore, in respect of $12,500 of retail invoices turned in by them (which would in- clude their own labor and commission) would be credited with 60 per cent, of that sum against the check originally sent them (out of which they paid Messrs. Brown), recovering the re- maining 40 per cent, from the actual purchasers of the boots, and reimbursing the Clearing- house; who, after balancing Messrs. Robinson's account, would write down their own credits by that amount. This would leave the credit-capi- 126 ECONOMIC DEMOCRACY tal of the community that is to say, the finan- cial estimate of potential capacity to deliver goods written up by 60 per cent, of $12,500, which is an accounting reflection of the actual situation. From this point of view, all semi-manufac- tures become simply a form of tool power, and are subject to the same treatment as manu- facturing plant; they are a form of capital assets to be depreciated and written down from time to time. There is absolutely no difference in principle between the treatment in this man- ner of a tool which wears out in five years ' time and a unit of energy which is dissipated in a few minutes in driving the tool. We arrive, then, at a conception of credit em- ployment, by which all semi-manufactures are treated as additions to communal capital ac- count; subject to writing down as they are ac- tually consumed as ultimate products. In order to be effective the writing down must take the form of a cancellation of credit-capital, a process which is done quite simply and auto- matically by the application to the capital ac- count of retail clearing invoices in the manner ECONOMIC DEMOCRACY 127 roughly outlined, or by any other device which is based on the dynamic conception of industry. Exactly the same treatment is applicable to the installation of fresh tools, buildings, etc., although for convenience, no doubt, separate accounts for such assets would be desirable, since the writing down would be done at some- what longer intervals. We have now clearly arrived at a point where there is a direct relation between effective de- mand and prices, as distinct from the relation between costs and prices. Let us now imagine a single adjustable tax applied to all produc- tion, of such magnitude as to bring prices from those fixed by the foregoing method to the suit- able international exchange level. In existing circumstances, without affecting present prices, such a tax would pay the interest on the War Loan many times over. Let such a tax be ap- plied to this purpose, the War Loan being dis- tributed in the manner described and possibly increased by additions from Clearing-house transfers. It is clear that a rise in external prices would be met by an increased distribu- tion, while a greater internal efficiency would 128 ECONOMIC DEMOCRACY have a similar result. Such an arrangement would make it possible to effect, in fact, would certainly induce, a transition from a purely competitive world system to one exhibiting in concrete form the demand for co-operation without regimentation, which, beyond all ques- tion, underlies the so-called proletarian revolt. It may, perhaps, at this juncture, be desir- able to emphasize the obvious, to the extent of pointing out that no financial system by itself affects concrete facts; that the object of meas- ures of the character indicated is the provision of the right incentive to effort, and the removal of any possible incentive to waste ; and only to the extent that these are achieved, is the eco- nomic emancipation of the individual brought nearer to reality. Had the principles under- lying these suggestions been generally under- stood and accepted during the war, we should have experienced a steady decrease of purchas- ing power by every individual, which would have enabled us to resume the general improve- ment in social conditions at its close, without that misunderstanding of facts which now threatens catastrophe. The depreciation rate ECONOMIC DEMOCRACY 129 would, in a manner quite similar to that with which we are familiar in the case of the Bank rate, have been raised at suitable intervals to represent the excess of destruction over pro- duction ; the necessity of increased effort would have been brought home to every individual by decreased distribution in respect of National Capital assets, and the general atmosphere of distrust and recrimination, from which we suffer as a result of confusion of thought, would probably not have arisen. CHAPTER XI The League of Nations Its form dependent on economic system "-Ultimate defeat of Centralist Policy certain How a League of Free Peoples can come. THE awful tragedy of waste and misery through which the world has passed dur- ing the years 1914-19 has brought about a widespread determination that the best efforts of which mankind is capable are not too much to devote to the construction of a fabric of so- ciety within which a repetition of the disaster would be, if not impossible, unlikely; and the major focus of this determination has found a vehicle in the project commonly known as the League of Nations. The immense appeal which the phrase has made to the popular and honest mind has made it dangerous to fail in rendering lip service to it; but it is fairly certain that, under cover of the same form of words, one of the most gi- gantic and momentous struggles in history is waged for the embodiment of either of the op- posing policies already discussed. 130 ECONOMIC DEMOCRACY 131 The success of an attempt to impose an eco- nomic and political system on the world by means of armed force would mean the culmina- tion of the policy of centralized control, and the certainty that all the evils, which increasing centralization of administrative power has shown to be inherent in a power basis of so- ciety, would reach in that event their final tri- umphant climax. But there is no final and inevitable relation between the project of international unity and the policy of centralized control. Just as in the microcosm of the industrial organization there is no difficulty in conceiving a condition of in- dividual control of policy in the common inter- est, so in the larger world of international in- terest the character and effect of a League of Free Peoples is entirely dependent on the struc- ture by which those interests, which individuals have in common, can be made effective in action. Now, unless the earlier portions of this book have been written in vain, it has been shown that the basis of power in the world to-day is economic, and that the economic system with 132 ECONOMIC DEMOCRACY which we are familiar is expressly designed to concentrate power. It follows inevitably from a consideration of this proposition, that a League of Nations involving centralized mili- tary force is entirely interdependent upon the final survival of the Capitalistic system in the form in which we know it, and conversely that the fall of this system would involve a totally different international organization. A super- ficial survey of the position would no doubt suggest that the triumph of central control was certain; that the power of the machine was never so great; and that, whether by the aid of the machine-gun or mere economic elimina- tion, the scattered opponents to the united and coherent focus of financial and military power would within a measurable period be reduced to complete impotence and would finally dis- appear. But a closer examination of the details tends to modify that view, and to confirm the state- ment already made, that a pyramidal adminis- trative organization, though the strongest against external pressure, is of all forms the most vulnerable to disruption from within. ECONOMIC DEMOCRACY 133 We have already seen that a feature of the industrial economic organization at present is the illusion of international competition, aris- ing out of the failure of internal effective de- mand as an instrument by means of which pro- duction is distributed. This failure involves the necessity of an increasing export of manu- factured goods to undeveloped countries, and this forced export, which is common to all highly developed capitalistic States, has to be paid for almost entirely by the raw material of further exports. Now, it is fairly clear that under a system of centralized control of finance such as that we are now considering, this forced competitive export becomes impossible; while at the same time the share of product consumed inside the League becomes increasingly de- pendent on a frenzied acceleration of the process. The increasing use of mechanical appliances, with its capitalization of overhead charges into prices, renders the distribution of purchasing power, through the medium of wages in par- ticular, more and more ineffective; and as a result individual discontent becomes daily a 134 ECONOMIC DEMOCRACY more formidable menace to the system. It must be evident, therefore, that an economic system involving forced extrusion of product from the community producing, as an integral component of the machinery for the distribu- tion of purchasing power, is entirely incom- patible with any effective League of Nations, because the logical and inevitable end of eco- nomic competition is war. Conversely, an ef- fective League of Free Peoples postulates the abolition of the competitive basis of society, and, by the installation of the co-operative com- monwealth in its place, makes of war not only a crime, but a blunder. Under such a modification of world policy, interchange of commodities would take place with immeasurably greater freedom than at present, but on principles exactly opposite to those which now govern Trade. The manufac- turing community now struggles for the privi- lege of converting raw material into manufac- tured goods for export to less developed coun- tries. Non-competitive industry would largely leave the trading initiative to the supplier of raw material. Since any material received in ECONOMIC DEMOCRACY 135 payment of exported goods would find a dis- tributed effective demand waiting for it, im- ports would tend to consist of a much larger proportion of ultimate products for immediate consumption than is now the case ; thus forcing on the more primitive countries the necessity of exerting native initiative in the provision of distinctive production. Again, International legislation in regard to labor conditions, under a competitive system, must always fail at the point at which it ceases to be merely negative, because it has ultimately to consider employment as an agency of dis- tribution, and, rightly considered, distribution should be a function of work accomplished, not of work in progress, i.e., employment. As a consequence, this most important field of con- structive effort resolves itself into a battle- ground of opposing interests, both of which are merely concerned with an effort to get some- thing for nothing. The inevitable compromise can be in no sense a settlement of such ques- tions, any more than the succession of strikes for higher pay and shorter hours, which are based on exactly the same conception, can pos- 136 ECONOMIC DEMOCRACY sibly result in themselves in a stable industrial equilibrium. Examples of the same class of difficulty might be multiplied indefinitely, but enough has probably been said to indicate the disruptive nature of the forces at work. To state whether or not the general confusion and misdirection of opinion will make a period of power control inevitable, in order to unite public opinion against it, would be to venture into a form of prophecy for which there is no present justifi- cation ; but it is safe to say, that whether after the lapse of a few months, or a very few years, the conception of a world governed by the con- centrated power of compulsion of any descrip- tion whatever will be finally discredited and the instruments of its policy reduced to im- potence. CHAPTER XH Concentrated economic power must be dissipated The eco- nomic basis of sentiment Education and propaganda Democratic control of the Press The roots of Economic Democracy The End. AS a result of the survey of the wide field ./jL of unrest and the attempt to analyze, and as far as possible to simplify, the common ele- ments which are its prime movers, it appears probable that the concentration of economic power through the agency of the capitalistic system of price fixing, and the control of finance and credit, is of all causes by far the most im- mediately important; and therefore, that the distribution of economic power back to the in- dividual is a fundamental postulate of any radi- cal improvement. While this, it would seem, is indisputable, it must not be assumed that by the attainment of individual economic independ- ence, the social problems which are so menac- ing would immediately disappear. The re- proach is frequently leveled at those who insist on the economic basis of society, that in 137 138 ECONOMIC DEMOCRACY them materialism is rampant, and in conse- quence the bearing of sentiment on these mat- ters is overlooked, and the immense and de- cisive influence on events which is exerted by such factors is very apt to be ignored. There is a germ of truth in this; but if such critics will consider the origin of popular sentiment, the influence of economic power will be seen to predominate in this matter also, whether con- sidered merely as the tool of a policy, or as an isolated phenomenon. It is claimed, and more particularly by those who utilize it, that " public opinion" is the de- cisive power in public affairs. Assuming that in some sense this may be true, it becomes of interest to consider the nature of this public opinion, and the basis from which it proceeds, and it will be agreed that the chief factors are education and propaganda. Now, the bearing of economic power on edu- cation hardly requires emphasis. In England the Public School tradition, and in America to a less, but appreciable, extent the College sys- tem, with all their admirable features, are nevertheless an open and unashamed claim to ECONOMIC DEMOCRACY 139 special privilege, based on purchasing power and on nothing else ; and with a sufficient num- ber of exceptions, their product is pre-emi- nently efficient in its own interest, as distinct from that of the community. It is one of the most hopeful and cheering features of the pres- ent day that this feature is increasingly recog- nized by all the best elements comprised within the system; and the danger of reaction in the future is to that extent reduced. But by far the most important instrument used in the molding of public opinion is that of organized propaganda either through the Public Press, the orator, the picture, moving or otherwise, or the making of speeches ; and in all these the mobilizing capacity of economic power is without doubt immensely, if not pre- ponderatingly, important. When it is considered that the expression of opinion inimical to ''vested interests" has in the majority of cases to be done at the cost of financial loss, and in the face of tremendous difficulty, while a platform can always be found or provided for advocates of an extension of economic privilege, the fundamental necessity 140 ECONOMIC DEMOCRACY of dealing first with the economic basis of so- ciety must surely be, and in fact now is, recog- nized, and this having been established in con- formity with a considered policy, the powers of education and propaganda will be freed from the improper influences which operate to dis- tort their immense capacity for good. The policy suggested in the foregoing pages is essentially and consciously aimed at point- ing the way, in so far as it is possible at this time, to a society based on the unfettered free- dom of the individual to co-operate in a state of affairs in which community of interest and individual interest are merely different aspects of the same thing. It is believed that the ma- terial basis of such a society involves the ad- ministration of credit ~by a decentralized local authority; the placing of the control of process entirely in the hands of the organized producer (and this in the broadest sense of the evolution of goods and services) and the fixing of prices on the broad principles of use-value, by the community as a whole, operating by the most flexible representation possible. On such a basis, the control of the sources of ECONOMIC DEMOCRACY 141 information in the interests of any small sec- tion of the community becomes an anomaly without a specific meaning ; and prostitution of the Press and of similar organs of publicity would no doubt within a measurable time dis- appear because it would lack objective. But there would still remain the task of eradicating the hypnotic influence of a persistent presenta- tion of distorted information, at any rate so far as this generation of humanity is concerned, and it seems clear that a radical and democratic basis of Publicity control is an integral factor in the production of the better society on which the Plain People have quite certainly deter- mined. Thus, out of threatened chaos, might the Dawn break; a Dawn which at the best must show the ravages of storm, but which holds clear for all to see the promise of a better Day. INDEX Administration, not the key, 19, 103 military, 45 functional, 48 centralized, 11, 36, 47, 80, 92 American Declaration of Inde- pendence, 4 Analysis, of Production Eco- nomics, 54, 63, 66 of Social Structure, 91 of Capitalism, 27 Business system, efficiency of, 75 Ca'canny, 32, 101 Capital direction, 25 definition of real, 106, 111 Capitalism, its merits, 20 basis of, 27 and Centralism, 24, 132 and Militarism, 35, 132 Cash-credits, 58, 67 Centralism, 11, 17, 30, 47, 92, 131 Cost, the basis of price, 52 definition of, 53 factory, 54, 66 Costing, 29, 116 Credit banking, 28, 29, 57, 114, 116 definition of real, 112 center, 116 operation of, 120, 140 Currency, inflation of, 29, 63 Darwinian Theory, abuse of, 8, 27 Debt, War, 113, 138 Debtor, State not a, 107, 115 Democracy, the roots of eco- nomic, 6, 140 Distribution, the great prob- lem, 26, 52, 69, 79, 89 Dollar, the leak in the, 59, 60 Economic basis of Society, 137 Education, influence of, 5, 138 Energy, time-unit, 93, 107 Finance, supremacy of, 28, 41, 42, 47, 89 mirage of, 63, 72 Freedom, basis of, 6, 118 Function, separation of, 88 Golden Age, 90 Industrial organization, 45 Jevonian Economics, 27 Manufactures ( semi- ) , rela- tion to credit, 62 Medievalism, 42, 90 Money, definition of, 28 Nations, League of, 130 et seq. Organization, use of, 9 Pay, 69, 98 Piece-work, 31, 99 Price, and cost, 53, 107 the Just, 91, 102, 124 143 144 INDEX Production, accounting of, 54 super-, 51 to a program, 97 Sabotage, economic, 69 Shop-Steward System, 81, 108 Servile State, 21 Servility, 16, 19 Socialism, 20, 22 State systems, 7 Syndicalism, 24 Trusts, 24 Ultra-Modernism, 91 Unionism, Trades, 82 War, causes, 70, 134 Wealth, 65 A 000 677 925 o