d.A ' 44X802 OF ECONOMIC THEORY By SIMON N. PATTEN, Ph.D. Professor of Political Economy University of Pennsylvania PHILADELPHIA THE AMERICAN ACADEMY OF POLITICAL AND SOCIAL SCIENCE 1912 Copyright, 1912, by THE AMERICAN ACADEMY OF POLITICAL AND SOCIAL SCIENCE All rights reserved CONTENTS PAGE INTRODUCTION 1 I. THE DEVELOPMENT OF AMERICAN THOUGHT 4 II. THE PROBLEM 9 III. THE ORIGIN OF SOCIALISM 13 IV. THE ECONOMIC MARX 19 V. TYPES OF AMERICAN SOCIALISM 26 VI. AN INTERPRETATION OF JOHN STUART MILL 31 VII. THE FAILURE OF THEORIES OF DISTRIBUTION 36 VIII. A RESTATEMENT OF THE THEORY OF DISTRIBUTION 41 IX. PRACTICAL APPLICATIONS OF THE THEORY OF DISTRIBUTION 47 X. BUDGET MAKING 51 XL FAMILY BUDGETS 57 XII. THE HIGH COST OF LIVING 64 XIII. VOLUNTARY SOCIALISM 70 XIV. THE AVOIDANCE OF STATE SOCIALISM 76 XV. THE MEASURE OF PROGRESS 83 XVI. THE OUTLOOK 89 INDEX . . .96 THE RECONSTRUCTION OF ECONOMIC THEORY INTRODUCTION Last spring a fellow economist asked what I expected to write next. I replied "a book on progress." He then expressed regret that I was deserting economic theory and was kind enough to say that I was one of those who had aided the advance of economic thought. To this I said that my last book on economics was a fail- ure, and having realized this I resolved to write no more books on eco- nomic theory until I could see some attainable goal. We discussed this point but parted without agreement. Soon after I met a friend who said, "I am interested in the referendum and the initiative." " I am not," I replied, "the American people should decide what they want to do before they try to settle how to do it. " " What is the use, ' ' he retorted, "of knowing what you want until you know how to get it." While I was thinking over this conundrum I had a conversation- with another friend over the conflict within the Republican party. When our differences became manifest, he said that I was growing conservative while he was becoming more radical. I replied that the real difference was that he was revolutionary while I was evolutionary. These conversations led me to realize that concrete problems are shaping themselves in a way that only better theory can solve. Public opinion is not to-day what it was ten years ago when my "Theory of Prosperity" saw light. There is a new setting to every national problem and a clearer perception of each issue. Out of it must come a thought development that will force a better industrial adjustment. My determination to restate economic theory was strengthened by a realization of the changes in attitude wrought by my recent development. While a student in Germany I became imbued with the German view and came home hoping to help in the transformation of American civilization from an English to a German basis. Like other returning students, I thought the last word on all subjects was in German. This attitude led to a wrong estimate of the contribu- tions of English economists and to a neglect of the antecedents of (i) 2 THE ANNALS OF THE AMERICAN ACADEMY the ideas we were striving to express. It is a German axiom that German thought is the continuous expression of the best in the world's civilization and that in it are to be found the antecedents and basis of a modern development. I was carried away by the brilliancy of this thought and viewed the past as a series of victories of the Ger- manic race. From this concept my best thought has come as well as that of other American economists. But when applied to eco- nomics it leads to a misinterpretation of the facts. Economics is English both in its origin and development. Its ideas are not German either in its recent or earlier development. German econ- omists have followed the natural trend of German thought in seeking economic origins in the race history of which they are a part. This limitation takes from their conclusion the weight American students sought to give them and forces a reconstruction of economic history along other lines. Of what consequence is Marx's development unless he was a leader in the evolution of thought and not merely the interpreter of English economics to the German nation? Assume also that Germany is not ahead of us in development and her 3,000,000 socialists afford no indication that our progress will bring a like development. Are we the pacemakers in economic evolution or is Germany? When this is decided the dependence or independence of American thought settles itself. Aside from a German education the potent influence in shaping my career has been the writings of John Stuart Mill. I have regarded myself as his disciple; and while other heroes of my youthful ardor sank beneath the horizon he remained the one personal influence shaping my thought. In my " Development of English Thought," I looked on him as the high- water mark of Nineteenth Century thinking, and believed that this interesting epoch ended with him. Were I to write the chapter on the "Nineteenth Century" again I should make of him not a goal but a half-way house between the dogmatic ration- alism of the earlier epoch and the rising wave of sentiment and class hatred in the new. Mill goes from logic to sentiment without being conscious of the opposition between them or of the change going on within himself. He is a thinker becoming a socialist without seeing what the change really meant. The Nineteenth Century epoch ends not with the theories of Mill but with the more logical systems of Karl Marx and Henry George. The new epoch in American thought begins with the contrast THE RECONSTRUCTION OF ECONOMIC THEORY 3 of rationalism with pragmatism. To apply pragmatism to economic thought means to test historical epochs by the results that flow from them. Instead of anticipating changes and deducing social conse- quences from them, epochs are to be studied subsequent to their completion. The Nineteenth Century should be judged by the facts of 1912, not by the anticipations of those who took part in its progress. It is not what Mill, Carlyle, Spencer or Marx thought would take place but what has actually happened that should interest us. This means a change from prophecy and deductive laws to facts and statistics. If we can determine the truth of deduced anticipations by present knowledge, a new epoch is opened up and fresh studies in economics are needed to point the way of progress. In this viewpoint I may be right or I may be wrong. It is the final reason why I return to economic theory and seek to restate its premises and doctrines. Others must judge of its success but to me it has been a pleasant task to reopen seemingly settled controversies and to review them in the light of present facts. I. THE DEVELOPMENT OF AMERICAN THOUGHT The difficulty in measuring the development of economics in America is due to a lack of appreciation of the changes that have taken place in the last three decades. From one point of view it seems as if American economists have made no advance. There is no topic not open to disagreement. On the other hand, there never have been thirty years in the history of economics when so many fundamental changes have been wrought. Economists disagree, and rightly, about matters not yet settled, but in these disputes they overlook the changes that are generally admitted. This makes it possible to review the history of American thought and to separate the changes already made from the disputed points that are still unsettled. The beginning of the epoch dates from the formation of the American Economic Association. Its founders had little idea of the development through which economics was to pass. American economics has done everything but what was then expected of it. It was supposed that this new group of thinkers would be historical, but no historical work has been done. The unexpected was the rise of the school of deductive theorists the very thing the formation of the American Economic Association was designed to prevent. I will not, I hope, be regarded as egotistic if I put myself with Pro- fessors Clark and Giddings as an influence in bringing about this change. As one who participated in the movement, I wish to review its history with the idea of pointing out its successes and its failures. At the beginning of the decade it seemed as if these writers had a common ground, and that from their viewpoint a new school of economics would arise. But fundamental divergencies soon appeared which gave three types of thinking rather than one school. I shall describe these, not in the terms of the discussion at that time familiar, but in a terminology that has developed since that time. Professor James has made two words common property in America one is "pragmatic" and the other, "pluralism." He pointed out, how- ever, that these are not new kinds of thought, but new names for old ways of thinking. Writers have always been rational or pragmatic on the one hand, and monistic or pluralistic on the other. But their differences were not clearly denned until he made the public familiar (4) THE RECONSTRUCTION OF ECONOMIC THEORY 5 with these terms. On the basis of these contrasts it seems plain that Professor Clark is an economic monist, while I am an economic pluralist. Professor Clark has endeavored to clarify the economic thought, to state its principles more cogently and to give the general law r s of the science a new setting . This, as I understand it, is economic monism. On the other hand, I have started from some funda- mental contrast and tried to deduce from each term principles that seem to oppose each other. In my way of thinking static and dynamic are equally fundamental and neither can be derived from the other. In economic discussion we must, therefore, distinguish clearly between dynamic and static principles, and expect that the laws deduced from the one will oppose those derived from the other. A practical illustration of this dualism is the discussion of pro- tection and free trade, neither of which, in my opinion, can claim ultimate superiority. But in the conditions that arise from age to age, the one or the other policy may be the more effective. So, too, in the contrast between a pleasure economy and a pain economy, neither can be derived from the other, but in particular epochs of the world's history, the one or the other has been dominant. In the same way, the laws of consumption are laws of human nature, and consequently must be derived from the feelings and appetites of men, while the laws of production are those of the physical world in which we live. Consumption, therefore, cannot be subordinated to produc- tion, nor production to consumption without disregarding facts to which economists should give attention. Or, to put this dualism in more general form, part of economic science is based on physical nature; from it come laws of universal application which cannot be overthrown by the action of man. On the other hand, many economic laws are expressions of human nature. These are not only capable of modification, but are continually being altered. The one element, therefore, of economics is enduring, the other is temporary. By this I do not mean that human nature is easily altered, but that the features we regard as human are subject to evolutionary modification. In contrast to the attitude of Professor Clark and myself, both of whom accept economic phenomena as fundamental, Professor Giddings views are sociological. The difference between economics and sociology is that the economist regards as fundamental the primary phenomena of his own science, while the sociologist regards economic phenomena as a consequence of more fundamental laws. 6 THE ANNALS OF THE AMERICAN ACADEMY In summing up this discussion, I should say that the differences between Professor Giddings and myself are still unsettled, while the difference between economic monism and economic pluralism has been settled in favor of pluralism. If economic monism is to succeed, somebody must show how the principles of dynamic economics can be derived from the principles of static economics. I do not believe that Professor Clark would claim that he has done this. I think, moreover, that the failure of Professor Clark as well as that of Pro- fessor Marshall is a good indication that it cannot be done. Pro- fessor Marshall, like Professor Clark, promised a second book that would deal with these broader problems, but the promise has not been fulfilled. The Austrian economists, likewise, have hoped to derive from the principles of utility a general scheme of economics, but no such scheme has been developed. It appears, therefore, that the endeavors to create an economic monism in our age have failed as completely as Ricardo and Mill failed to create an economic mon- ism in their age. The best minds of England and America have faced this problem, and have been compelled to give it up. I, there- fore, regard it as settled that there is to be no revival of economic monism in our age. This does not mean, however, that monism as a scheme has disappeared. It is coming forward more prominently than ever before, but it is now sociology, not economics. A second change of this epoch (1890-1900) is the rise of an eco- nomic interpretation of history. As the economic interpretation of history is associated with socialism rather than with economics, it is necessary to speak more fully of the real origin of this type of thinking. The first' person to use the phrase "economic interpreta- tion of history" was Professor Rogers, He used this as a means of getting at the laws which could not be determined from universal principles. The wages problem, instead of being discussed deduc- tively from the principles of nature, is to be studied through the con- crete facts of certain epochs in which the wage problem is prominent. He, therefore, regarded the study of four centuries of English history as giving the clue to a real discussion of the wages. As a follower of Professor Rogers in this field, I extended the thought so as to make the economic interpretation of history the means of getting at the dynamic laws of social change. The difference between dynamic laws and static laws is that static laws can be determined under any group of social conditions. They are always present and can always be THE RECONSTRUCTION OF ECONOMIC THEORY 7 found. But dynamic laws cannot be determined in this way. The dynamic elements become prominent one after another, and the changes they bring must be studied in the epoch in which they are dominant. If one wishes to study changes in consumption, he must study the epochs where alterations in consumption are prominent. Dynamic changes are also brought about by invention. He must, therefore, look to the particular ages where invention has been prominent to discover what its effects are. The economic interpreta- tion of history, then, is the study of the prominent changes which take place in each epoch, and from a series of such studies one can create a general interpretation of genetic growth. This way of thinking marks a change in the method of economic study quite as important as the pluralism that has come from the contrast between static and dynamic economics. It is a matter of slight importance to know the originator of this method of study. It is of prime importance, however, to know the changes in American thought that have been wrought by it. The epoch since 1900 has been important for another reason. The characteristic change has been the increasing influence of social- ism. In 1900 it could be said that socialism occupied so minor a place that it could be overlooked. The literature of the epoch will, I am sure, bear out this statement. In 1912, however, it would be nearer right to say that all thinkers are socialistic. Either as a matter of principle, or by some type of dualism, they admit it as an element in their thought or as a mode of expressing their feelings. The impor- tant book in bringing about this change is Professor Seligman's "Economic Interpretation of History." Without exaggeration it can be said that this book is the Bible of American socialism. Instead of going to the writings of Marx, socialists refer to it as an authority on fundamental topics. This of itself would be a matter of impor- tance but its real influence lies in the fact that it enabled a large group of American thinkers to accept socialism and to express their ideas in its terms. Karl Marx found the English field occupied by what were termed sentimental socialists. His great work was the transformation of socialism from a sentimental to a scientific basis. This change had a marked influence on the Continent of Europe, but the sentimental socialists remained in England and America practically as they were. The keynote to their sentimental attitude is a repugnance towards anything materialistic. Consequently 8 THE ANNALS OF THE AMERICAN ACADEMY so long as socialism was put in materialistic terms, they would not accept it. When, however, Professor Seligman stripped Marxian doctrines of their materialistic interpretation, and gave them a senti- mental setting, this group were readily converted into modern socialists. American socialists are not scientific socialists of the type Marx sought to create. Every leading socialistic writer is clearly idealistic in his attitude, and would repudiate socialism if it were put in a materialistic shape. Sentimental socialism to-day is a new form of expressing idealistic concepts. That writers with literary tradi- tions should accept an economic interpretation of history is a vic- tory. From now on, they are not enemies but friends. Whatever may be the ultimate decision as to particular doctrines, economic evidence will for both groups be fundamental. II. THE PROBLEM It is plain that American thought has made considerable advance and has attained some degree of originality. From this it does not follow that all theoretical problems have been settled. On the contrary, it is evident that fundamental concepts are still open to discussion, and that the movement in American thought has not yet terminated. Two victories, however, seem to have been won. In the first place, American thought has been made independent of European thought. We are no longer under the tutelage either of England or Germany. The second victory is that economic pluralism has won as against economic monism. By this I do not mean that pluralism has gained a victory over monism. That would be claiming too much. But economic monists must become sociologists, and as such they will be unable to carry on the struggle within the economic field that they have in the past been able to do. As a consequence of this change has come an advance in the economic interpretation of history. The discussion of the past in the light of the present is on a par with a discussion of the pre- sent in the light of the past. Without meaning to prejudice the conclusions from these contrasted viewpoints, it seems clear that a sociological interpretation has displaced the old historical inter- pretation. As a whole, this sociological interpretation is based on a material interpretation. If any one asserts that the sciences have an order of development, and that the physical sciences are fundamental, no escape is possible from the conclusion that the prem- ises of these sciences are also the premises of social science. This means a material interpretation of social development. There is another way of putting this contrast that bases it on the difference between pluralism and monism. If the sociological view-point is correct, the primitive history of man is fundamental to an interpre- tation of the present social life, and discussions of social affairs must begin with a study of the origins of man. If, however, there are two economies, a pain economy, based on struggle, and a pleasure economy, in which harmony prevails, neither the history of man in this pain economy nor the struggles then important are fundamental to present discussions. The approach to the social life of man must be through his present economic activities. (9) 10 This gives us one way of stating the problem now confronting American thought. The standpoint of cosmology gives another way of stating it. In the past, two cosmologies have stood opposed to one another. One has been a theological cosmology at the basis of religious thought, and the other, the material cosmology, popular with students of physical science. Both of these cosmologies are monistic, one having at its basis the thought of a spiritual origin of the universe while the other emphasizes a material origin. The economists have not taken sides in the contest between the theologi- cal and material cosmologies. Every economist has admitted phys- ical premises. No economist has denied what in terms of religion are called theological premises. It should be remembered that the early economists were theologians, and that the basis on their thought was known as natural theology. Since then there has been a shift- ing in the position of economists, sometimes towards a more material, and sometimes towards a more spiritual standpoint, but economic cosmology has usually been pluralistic, and thus has accepted prem- ises that must be regarded as antagonistic. There are many ways of expressing the essentials of an economic cosmology, no one of which is fundamental, nor generally accepted. I shall, therefore, put in two columns some familiar contrasts with the idea of bringing out the fundamental opposition that exists between them. In the first column will be found those terms that imply a spiritual or genetic attitude, while in the other are placed those which are material or structural in their implications. I II Genetic Structural Sentiment Logic Dynamic Static Passion Intellect Invention Habit Observation Deduction Intuitive Statistical Religion Science If the logical or monistic expression of thought is correct, all of the ideas in column I are derived from those in column II. If, on the contrary, they cannot be derived from the ideas in column II, THE RECONSTRUCTION OF ECONOMIC THEORY 11 the two groups must be put in a fundamental contrast with one another and as a result an economic pluralism is created. This gives our problem stated in its second form. If economic pluralism be correct, sentiment must be treated as a fundamental fact, and not as a social derivative. Both democracy and socialism are emotions arising from economic relations which must be accepted as fundamental in any economic interpretation. Democracy is an emotional reaction against the privileges of the strong, and socialism is an emotional reaction against the exploita- tion of the weak. If one has no emotional reaction against privilege, he lacks an element that modern civilization should have given him. If, likewise, the exploitation of the weak has no concern for him, he must be looked upon not as a superman, but as subnormal. A man may be democratic, that is, have strong emotional reactions against privilege, and at the same time have no emotional reactions against exploitation. The opposite defect of having an emotional reaction against exploitation without a corresponding reaction against privilege is not so common, yet it is real. Both attitudes should be regarded as evidence of incomplete social development. If a change is made from sentiment to policy, a corresponding contrast presents itself. When men emotionally react against priv- ilege, the economic basis of this reaction is the unequal distribution of profits. The social democrat, therefore, seeks to equalize profits, and opposes any centralization giving one man a greater share than an- other. The socialistic program demands not merely an equalization of profits but also an equalization of income. This program makes more fundamental changes than would be demanded by a democratic program. To put the contrast in another way, the equalization of profits does not demand any change in the capitalistic system nor in the prevailing system of private property. Both these institu- tions could be kept in their present form if the emotions of society are aroused against the centralization of profits rather than against the inequality of income. The essence of capitalistic industry is profit. Every industrial change that raises profits strengthens capitalism. It grows in power as the rate of profit rises, and would fall if the rate of profit were taken away. Such are the facts which create the present problems of Ameri- can thought. Do invention and economy create wealth or is it the result of toil and sacrifice? This is the problem of production. 12 THE ANNALS OF THE AMERICAN ACADEMY Are wages and interest determined by concurrent events or by pre- established laws? This is the problem of distribution. Does social law arise from cooperative assent or is it the coercive result of state action ? This is the problem of social control. Is the basis of thought pragmatic and hence economic, or is it dogmatic and thus sociologi- cal ? This is the problem of method. Are cooperation and compro- mise stronger motives than discord and struggle ? This is the problem of progress. All these are in reality one problem the solution of which demands a unified treatment. In the past economists have striven to build a purely rational system that would be a monistic expression of progress. Their failures have created the present situation and awakened a demand for the reconstruction of economic theory. Economic thought should be based on industrial changes already made and on social reorganizations plainly manifest. It will thus become pragmatic and incorporate in itself all the elements making for the improvement of mankind. III. THE ORIGIN OF SOCIALISM The American public has recently been aroused by the develop- ment of a group of socialists with a philosophy that would revolu- tionize American life. The cause of this does not lie in the arguments presented so much as in the thought that socialism has a unity which puts it in direct contrast to conventional views. It seems as though we were facing a revolution, and that public opinion must be radically modified so as to eliminate capitalism. Those who present this view emphasize three things : the unity of socialism, the logic of socialism, and the hero of socialism. If socialism is a unit; if it has a hero and a logic, a revolution seems inevitable. This view- point was first brought to the attention of the American public by Professor Seligman's "Economic Interpretation of History." Later writers have been even more eulogistic; in its present form the Marxian tradition can be found in an article by Professor Small on "Socialism in the Light of Social Science." 1 The difference in the two viewpoints consists in the fact that Professor Seligman emphasizes the importance of the economic interpretation of history. Professor Small not only accepts the position taken by Professor Seligman, but lauding Marx as the Galileo of social science, enunciates the economic doctrines of which Marx was the orig- inator. To appreciate this issue the double origin of American economics must be made evident. One basis lies in the Ricardian economics best expressed by Mill in his political economy; the other, in the German historical school in which the present generation of American econ- omists has been educated. If Mill is wrong in his history and the German historical economists in their statements of facts, there are errors in the reasoning of American economists hidden under the prestige of these two groups of thinkers. In the first place, did Mill misrepresent English economic thought ? Secondly, did the national prejudices of the German economists prevent them from recognizing doctrines as English that were really so, and in this way misled the American economists who have been educated under their influence ? Why did Mill neglect the real creators of English economics? ^American Journal of Sociology, May, 1912. (13) 14 THE ANNALS OF THE AMERICAN ACADEMY In the first place, English writers expressed their ideas in theological terms, while Mill was opposed to natural theology. In the second place, the traditions of the group to which Mill belonged were opposed to sentiment as a force in social life. They tried to bring everything to a logical basis, and in so doing overlooked the power of the emotions to shape the lives of men and the history of nations. The work of any thinker who emphasized sentiment was disregarded. This shut out those economists who felt a natural resentment against the industrial system then in vogue. These are some of the reasons why Mill did not give credit to his opponents. Why did he emphasize Ricardo? Because Ricardo gave special attention to the importance of profits in English industry. He also emphasized the evils of over-population, and sought to estab- lish a definite relation between wages and the cost of living. These doctrines favored by Mill were opposed by many economists in his time. He was forced, therefore, to make Ricardo represent not only his own doctrines but many others advocated by opposing economists that could not be credited to them without weakening Mill's position. Mill, more than any one else, was the originator of what is called eco- nomic orthodoxy. He would not recognize English writers who took opposing views. When he wished to make use of the doctrines they held he went to the French writers for them. A sample of this is his treatment of socialism. He had been reading foreign books on socialistic literature, and these he utilized in his statement of socialistic doctrine. The German historical economists are an important element in the new situation because their views have had so great an influence in shaping American economic thought. English political and eco- nomic theory had been introduced into Germany during the first part of the nineteenth century, but it was opposed by the rising national sentiment which sought to free Germany from foreign domination. This sentiment is the basis on which recent German progress has taken place and with it no one can find fault. But the general antag- onism which it generated towards England resulted in the displace- ment of English ideas both political and economic. The German historical school went to the side of Bismarck and opposed the social movements having an English origin. This opposition to English ideas, reflected both in history and economics, is one of the striking facts with which Americans studying in Germany came in contact. THE RECONSTRUCTION OF ECONOMIC THEORY 15 The result has been that modern economic theory has finally worked its way into Germany as socialism. Marx Germanized English economics. This is his virtue and service. Every proposition that he advances, both true and false, had been fully stated in England. But for the prejudices of the German economists, these ideas would have become commonplaces in Germany, 2 and thus would have pre- vented Marx from gaining position by utilizing them. Of this the doctrine of surplus value is an example. In seeking the origin of economic ideas, it is erroneous to follow the history of words rather than of ideas. Telling expressions are invented not at the start but only after a long period of obscure development. If the question is asked, who first used the term "surplus value," the answer is that while the term had been used by economists before Marx's time, it is also true that they made little use of it. The real question is, did Marx when he translated into German the term "surplus value" have in mind the older idea of profits? If under the head of profits the origin of surplus value is sought, we find it to be one of the oldest concepts of English thought. Who originated the idea that there was a surplus value in industry, or, in other words, who found that after accounting for all of the expenses of production, there was still a profit left over? The reply to this must be that when commercial bookkeeping came into gen- eral use, the fact became known that after accounting for every expense, a large surplus remained. To illustrate this, I will give three examples of bank statements taken from a current financial journal : I Liabilities Capital $47,000,000 Surplus 26,000,000 Dividends for the last ten years. . . 11, 11, 12, 12, 12, 12, 12, \2\, 12^, 12 percent 2 "There is no socialistic doctrine of essential significance, no socialistic theory of general industry, of historical development, of the state, of law, which had not already been spoken out at the middle of the nineteenth century, and had not been applied in criticism of the existing societary and industrial order; yet German national economic science did not regard it as necessary to reach an understanding with these doctrines. . . . German national economy passed by the signs of the times without attention. The noise of the street, the strokes of the scourge of the agitating publicists, the historical and philosophical observations of the critics of society affected it as little as they would the astronomers who trace out in the orbits of the stars the eternal laws of nature." Quoted from "The Infusion of Socio-Political Ideas into the Literature of German Economics," by Eugen von Philippovich, in the American Journal of Sociology, September, 1912, pp. 147, 149. 16 THE ANNALS OF THE AMERICAN ACADEMY II Liabilities Capital stock paid in $10,000,000 Surplus fund 15,000,000 Undivided profits 6,500,000 III Liabilities Capital stock paid in $3,000,000 Surplus fund 12,500,000 Undivided profits 800,000 In the first instance, the capital is $47,000,000 and the accumu- lated surplus is $26,000,000. This surplus is not interest because the same advertisement tells us that the rate of interest for the last ten years has been from 11 to \2\ per cent. It is, therefore, a natural question to ask, to whom does the $26,000,000 of surplus belong? The second statement shows a surplus much greater than the paid- up capital. Can we wonder that people should ask the question, why is this $15,000,000 withheld when thousands of people are work- ing for five dollars a week? In the third statement the accumulated surplus is more than four times the paid-up capital. These are not exceptional statements nor are they new. English banks have given such statements for two hundred years. English financial development also gives the basis for the doctrine that industrial capital is accumulated or undistributed profits. The orthodox economists claim that capital is the result of saving. This doctrine however, has never been popular with English and American pro- moters. Every financial heresy has been based on the thought that industry can be started by other means than saving. Issue, say, $100,000 of paper money and use it to start an industrial establish- ment. Enlarge the plant from the accumulated profits and live off the proceeds. Capital can thus be created without work; profits can accumulate so as to make not only individuals but the whole nation wealthy. All this may be false, but it is not new. In its origin, it preceded socialism by a hundred years. Instead of being the claim of obscure thinkers, there is scarcely a town in this country that has not tried to increase its wealth by this means. It is the most popular fallacy that economists have had to oppose. How do these theories become socialism? The reply is that English sentiment has always been opposed to the exploitation of the THE RECONSTRUCTION OF ECONOMIC THEORY 17 poor. After the facts of industrial development became known, it was not possible to keep people from asking, what right have employers to profits? For this reason a popular agitation began having as its basis the thought that this fund should go to the labor- ing population in whole or in part. In this way English opinion became steadily socialistic in sentiment. There were more complaints about the evils that industrial life brought, and less about the evils connected with nature. The theological viewpoint was replaced by the economic, and reformers were compelled to find some new origin for the evils about them. Is it any wonder that they viewed the industrial system as the source and cause of social injustice? Their sentiments, however, led them to favor two doctrines out of harmony with each other. One was that labor is the source of wealth ; the other, that surplus profits should go to the laborers in whole or in part. If the socialists accepted economic optimism and admitted that labor was not the source of wealth, they would have no basis for their sentiment. If labor does not produce wealth, then why feel a strong interest in the oppressed laborer? On the other hand, if there is no surplus, as the pessimists claim, there is no basis for sentiment. The doctrine that capital is produced by labor and that capital is undivided profits cannot be brought into logical harmony. The result is an inherent contradiction that the early English socialists could not overcome, and hence they failed to impress themselves on national thought. The successful thinkers and actors of the following epoch were men who appealed to class consciousness and to local sentiment, and thus by gaining for themselves a definite constituency, have been lauded as thinkers far above their real merit. Cobden's influence is not due to his appeal to universal principles but to the fact that his ideas favored the commercial classes of England. He thus paved the way for economic orthodoxy. Carlyle's appeal is not to commercial England but to aristocratic England. Bismarck appealed- to race hatred as plainly as Marx appealed to class hatred. Carey was also a good fighter, who denounced English industrial development as vividly as did Marx. The difference between the two lies in the fact that Carey was optimistic, where Marx was pessimistic. The economic harmonies of Carey have as clear an eco- nomic basis as the pessimistic dogmas of Marx. If one is an economic interpretation of history, the other is also. 18 THE ANNALS OF THE AMERICAN ACADEMY All these views are a part of one general change. Modern indus- try had disturbed the relations existing between European races and industrial classes. A struggle for a new adjustment was inevitable and has been going on for sixty years with unabated vigor, for in such an epoch the mild optimists of the earlier epoch were out of place. We are so used to the new methods that we smile when peace, harmony and cooperation are spoken of. The childlike faith of the following passage seems unreal. Yet it was once the belief of a group with broad interests and high hopes. It shows the gulf between them and Marx better than a volume of words. "But let no one imagine that so desirable a condition can be attained, except by a complete revolution in the principles and practices of society; to be effected, however, in peace and order, and with the entire concurrence of all parties concerned; for violence is utterly opposed to the spirit of the new system, by which, in future, it is proposed to carry on the affairs of life. "The Social Reformer, strong in his conviction of the everlasting, saving truth, that the character of man, in all countries and climes, and under all conditions, is, at every period of his life, the result of his original organization, and of the influence of external circumstances (mostly from under his con- trol), acting upon that organization, has the most unbounded charity for the convictions, feelings, and (necessary) conduct of all men; and his constant and unceasing endeavor therefore is, peacefully to withdraw all those circumstances which are known to produce evil, and to replace them by those only which are known to produce good to the human race. He discards all force and delusion, for these will not serve his holy cause. Clothed in the panoply of truth, he goes forth to do battle with error, relying on the powers of moral suasion and kindness alone, as the only agents capable of effecting a revolution so glorious and so God-like." 3 Distribution of Wealth, William Thompson, pp. xii-xiii. IV. THE ECONOMIC MARX The preceding chapter pictures the state of economic thought when Marx arrived in England. We thus get the background from which Marx developed and a method by which his contributions can be separated from the tendencies of the age and from the achieve- ments of his contemporaries. Marx is a German reared in the atmos- phere of political revolution, and then immersed in an English environment where the struggle of classes had displaced the older race struggles still dominant on the Continent. It is interesting to see how quickly Marx seized on the salient points of the new situation and converted a philosophy designed to settle English industrial problems into a mechanism to promote a revolution in Germany. In this change two initial steps were needed. The basis of English thought in national theology must be replaced by the material view then prevalent in Germany. Sentiment and theology were to be excluded and a social philosophy developed that would stand the test of modern criticism. This is what Marx means by scientific socialism. The second change was in the opposite direction. The early socialists had made their appeal solely to reason. They expected to convince employers that better conditions and higher wages were industrially advantageous and thus make a transition to socialism with the assent of all industrial groups. This harmony of interests Marx replaced by the theory of class struggle. Revolution was to do what th'e slow working of economic law had failed to accomplish. In the first of these doctrines there is little unique in Marx's position. Materialistic thought had already made great headway and was promoted by several strong thinkers. The second also was in harmony with the trend of events. The industrial revolution had made so many alterations in the position of races and classes that a new equilibrium could be reached if at all only after a painful struggle. It was useless to ask a race in a new position of economic advantage to forego its benefits and equally futile to expect an old established class to accept tamely the loss of political power and of social position. A new control in the political and economic world had to be established by a struggle that was to last for fifty years. (19) 20 THE ANNALS OF THE AMERICAN ACADEMY Marx saw the nature of the coming conflict more plainly than his contemporaries and by his emphasis of class struggle did much to change the center of thought from the political struggles of the past to the economic struggles of the present. What nation should sur- vive was an old problem. What class had the power of survival was a new way of stating the opposition of interests which all felt but no one before Marx had fully expressed. It is difficult to follow Marx's development because his early statements are meager and the later ones are more tradition than fact. His earlier thought, as I interpret it, was sociological in char- acter while his later thought was economic and revolutionary. This means that he first put an emphasis on a material interpretation of history and hoped to show that the laborers were the surviving class into whose hands society was to come. Such a transition of thought would be easy to make and that he did make it is borne out by many contemporary facts. This position, however, became untenable through the rise of the theory of evolution. Darwinism does not prove that the world belongs to rabbits. It proves that rabbits belong to foxes. Such an evolution could not take industry out of the hands of the capitalists; it would put the laborers more completely at their mercy. Had Marx not seen this he would have spent his time on some book emphasizing the material concept of history and thus would have ended not as an economist but as a rival to Buckle. Events, however, went too rapidly for so slow a movement of thought. Revolution was in the air. It never seemed so strong nor so widespread as in 1848. Every one feared another French Revolution and believed a clash was at hand that would settle whether conservative or radical was to control the destinies of Eng- land. If the political control of a long-established aristocracy could be wrested from them, why could not the economic control of the capitalists be likewise overthrown? To create the basis for this change demanded a new economics. Sentiment might be a force in an upheaval but it could not bring on an industrial reorgan- ization helpful to the workers. That Marx had such a thought is shown by his long continued attempt to reconstruct economic theory in harmony with revolu- tionary concepts. His ' ' Capital " is a monumental endeavor to reduce to harmony a group of conflicting doctrines that did not thrive in THE RECONSTRUCTION OF ECONOMIC THEORY 21 English atmosphere. The theory of progress through capitalistic control had gained an ascendancy and a unity hard to break. Revo- lutionary economics must seek its basis in some other quarter. To this new position three doctrines are necessary: that there is an undistributed surplus; that this belongs to the laborers, and that in some way capitalism will break down, thus enabling the laborers to come to their own. The antinomy of socialism lies in the opposi- tion of the first two propositions. If there is a large undistributed surplus, its origin has some other source than labor. If wealth is not the result of toil, the workers have no superior claim to it. Sym- pathy for the laborers can arise only when toil is the source of the produce annually distributed by the economic process. Deny the existence of a surplus and there is nothing to contend for. Make it emphatic and the weakness of the workers in an economic struggle becomes apparent. Such is the problem of Marx as I see it. His admirers would put it in another way. They fail to distinguish between what Marx did and what had been done for him by the earlier progress of eco- nomic thought. Professor Seligman bases his claim of Marx's origi- nality solely on his presentation of an economic interpretation of history. Professor Small is more enthusiastic. He calls Marx the Galileo of social science. This estimate is interesting because ten years ago Dr. Small would doubtless have named Auguste Comte as the hero of social science. Sociology has undergone a trans- formation during the last decade by which it has ceased to be a his- tory of civilization of the type Comte originated and has now become a theory of race and class struggle. "No one," Dr. Small tells us, "gets through a primer of social science to-day without learning that class conflict is to the social process what friction is to mechan- ics." This brings sociology and socialism into harmony and creates a common basis and a common faith. It is one thing, however, to assert the importance of Marx to sociology, and another to attribute to him a like originality in economics. If Dr. Small connected the history of the theory of profits with that of surplus value, he would not have called the earlier economic statements of surplus value "rudimentary." If he had taken Mill's Political Economy into account, he would not have found Marx original in asserting that laborers and capitalists are "sharply distinguished and precisely divided classes," Every theory of distribution from Adam Smith's 22 THE ANNALS OF THE AMERICAN ACADEMY time had stated this assumed differentiation based on the presence of three industrial classes in England. The originality of Marx may be brought to the test in another way. Dr. Small asserts that socialism is ninety per cent Karl Marx and ten per cent his followers, thus leaving no place for his predecessors. Then Dr. Small goes on to say, speaking for the present age: "We assert the universal fact of class conflict as strongly as he did. We assert the universal fact of cooperation more strongly than he did." This implies that class conflict is the older doctrine and that the belief in cooperation has its origin in later times. But why not give credit to the earlier socialists who did so much to promote cooperation? Do we assert the universal fact of cooperation more strongly than Robert Owen did? If Dr. Small had stated the real order of the prog- ress of thought as from cooperation to class struggle, and not from class struggle to cooperation, it would have been apparent that the Galileo claim was not tenable. From struggle to cooperation is progress; from cooperation to struggle is a backward movement. To see through a glass dimly may be a virtue but to shut one's eyes to the light is a crime. Did Marx have before him the benefits of cooperation and consciously ignore them? Is the man who under these conditions resorts to conflict a hero or a demagogue? As we decide these questions we settle the claims of Marx to priority and to immortality. A more valid statement of Marx's claims may be found in Cross's "Essentials of Socialism." He bases scientific socialism on nine doc- trines: (a) The evolution of society; (b) the economic interpreta- tion of history and the doctrine of class struggle; (c) the Marxian labor theory of value; (d) the Marxian theory of surplus value; (e) the socialistic explanation of crises; (/) the right of labor to its full product ; (g) the theory of the increasing concentration of indus- try; (k) the theory of increasing misery; and (i) the catastrophe theory. From these we get a glimpse of the real problems with which Marx dealt in his book on "Capital." These doctrines are not mere commonplaces. They are matters of long standing dispute and are still open to discussion. The real difficulty of founding a revolutionary economics to displace the harmonies so much amplified by early economists is made even clearer by an additional list of discarded economic doc- THE RECONSTRUCTION OF ECONOMIC THEORY 23 trines. They show the difficult position in which Marx found him- self when he sought to revolutionize economic thought. The doctrine of overproduction. The transformation of money into capital. Labor checks in the place of money. Labor as the source of wealth. The elimination of small producers. The growth of landed estates. The fall of wages. The failure of cooperation. The crushing of trade unions. The increasing severity of industrial crises. \ The increase of unemployment. The rapid growth of population. The relative increase in numbers of the proletariat. The abolition of interest. The passing of competition. The right to work. I have not stated these propositions to discuss or to refute. They show the task that Marx undertook when he attempted to reconstruct economic theory. Can they be blended into a coherent scheme or are they a series of contradictory propositions that no thinker can harmonize ? They readily fall into two groups. The one turns on the theory of class conflict and its force in creating social progress. Such propositions are sociological in character and since Marx's time have been incorporated in the science of sociology. I shall not discuss them because they lie in a disputed realm where differences of opinion are allowable. Sociology and economics have yet to wrestle for the supremacy and in the meantime Marx should have what credit comes from the fact that he anticipated the trend of events that gives sociology its present place. But this does not give him standing as an economist. To show that progress comes through race and class struggle is one thing; it is quite another to show that wealth grows through the exploitation of labor, or that its source is to be found in the toil of the proletariat. Has he proved that money can be transformed into capital, or that competition is decreas- ing ? Have the trade unions been crushed and is voluntary coopera- 24 THE ANNALS OF THE AMERICAN ACADEMY tion a failure? Have landed estates grown in size and have wages fallen ? It is with these problems that Marx wrestles in his ' ' Capital ' ' and he failed to solve them just as other would-be economists before and since his time have failed. These propositions are not new to the American public. They have been up for discussion in a dozen presidential campaigns and they will doubtless reappear until a sound public opinion replaces the confusion now prevalent. The difference between Marx and the American radical does not lie in the positions taken but in the rem- edies to be applied. All of the elements of the catas trophy doctrine have been frequently amplified in the discussions of paper money and in the literature of protectionism. The catastrophe of hard times can be remedied by a free use of paper money, said the one group, while the other said that protection was the cure of low wages. Marx has another remedy but no new arguments, nor did he discover any new defects in capitalism not found by his predecessors. From the arguments used in a campaign for state socialism, a returning ancestor might imagine that the dispute was about paper money. Put "capital" in the place of the "money power" and the fervent orations of to-day would have been understood forty years ago. Our ancestors would be familiar with all of them; they would be puzzled only about our remedy. Had Marx succeeded as an economist, the position of the con- tending groups would be radically altered. As it is, every doctrine claiming that progress comes by slow evolution has gained ground. Many theorems can now be proved that were mere matters of con- jecture and prophecy in 1848. The change from the meager data of that age to present attested facts shows that Marx was a bad theorist and a worse prophet. Socialism is either sociology or economics. As thinkers, socialists must get into the one group or the other and as they choose they must accept the premises, the logic and the conclusions of the group they join. The compromise between sentiment and thought is in the future, and the credit for the new harmony belongs to some still unborn thinker. As there is no defi- nite socialistic thought apart from its sociological postulates so there is no socialistic program. Each new wave of socialistic sentiment sets up some new goal or suggests some new compromise with capi- talism. There are as many of these as there are fluctuations in the industrial situation that produces them. As an arouser of emotion, THE RECONSTRUCTION OF ECONOMIC THEORY 25 socialism is a success, but in the formulation of thought, it is failing exactly as Marx failed. In the meantime capitalistic production has increased the stability of industry and reduced the suffering coming from famine, contagious disease and the lack of employment. It has shown the power of voluntary social organization and has justified the hopes of Adam Smith and Robert Owen that coopera- tion could gain a victory over national, local or class interests. V. TYPES OF AMERICAN SOCIALISM During the last century socialism presented itself in two radi- cally different forms. One of these, represented by the early English writers, is called sentimental socialism because of its opposition to misery, or voluntary socialism because it appealed to voluntary organizations rather than to the coercive power of the state. In contrast to this is the Marxian socialism appealing not to the co- operative spirit, but to fear, coercion, class and race hatred. Revo- tionary ideas were never so widespread nor seemingly so dangerous as when Marx began his agitation in favor of the toilers. Since 1848 evolution has replaced revolution and thus caused a radical alteration of social methods and programs. We have now had sixty years of this newer development and we should base our judg- ments of it on current facts, not on antiquated history. We can thus measure the successes and failures of the several types of social- ism now influencing American opinion. In its early history, state socialism represented the demands for the nationalization of industry on the one hand, and an equality of wages on the other. Neither of these ends has been attained, nor are we any nearer their attainment than we were sixty years ago. State ownership now means not the abolition of capitalism but the equalization of profits. State railways mean small profits on trans- portation and larger profits to the transporters. An increase of profits has gone along with this movement and in no way has the development of capitalism been interfered with. There is, however, another form of socialism not yet harmonized with capitalism. I will call this movement street socialism because it represents the attitude of the toilers who feel their interests opposed by present tendencies. It is the emotional reaction of the oppressed classes, and is bound to take more vivid and forceful forms until it either succeeds or fails. I do not venture to predict the outcome, but it is apparent that the group is divided into two antagonistic classes, one demanding state action, and the other, direct action. Between the two are irreconcilable differences which are bound to express themselves in the conflicts of the future. But even if the two groups remain united, they can represent but a minority of the American people. From them, there is no danger of social revolu- (26) THE RECONSTRUCTION OF ECONOMIC THEORY 27 tion. They must either disappear in a hopeless struggle or be trans- formed and incorporated into society. Socialism is, therefore, not an anticipated evil but an intense form of social activity. During the last sixty years the individual has been lost; the group is now everything. While there has been an effective demand for the equalization of profits, there has been no strong movement for the equalization of income. The changes, therefore, mean that the small capitalist has gained an advantage over the large capitalist on the one hand, and the laborer on the other. There has, however, been a steady rise in profits and an increasing socialization of capitalism. There has also been a change of emphasis from wages to the improvement of objective social con- ditions. The non-Marxian attitude has, therefore, won out. Marx may continue a myth and a terror to the uninformed, but the type of thinking he introduced belongs to the past rather than to the present. In spite of the earnest efforts which he and his co-workers have made, a class consciousness has not been aroused. The only nation of which the contrary seems to be true is Germany where the massing of the laborers in one group is due more to political oppres- sion than to economic exploitation. Voluntary socialism, however, has succeeded to a far greater degree than has the Marxian program. In two important respects, it has failed. One of these is agricultural communism. The second failure is that of profit sharing. Some schemes for profit sharing have been moderately successful; it may be true in the coming age that profit sharing will really become important, but as a whole, it must be regarded as a failure. In other fields, however, success has been marked, probably more than elsewhere in what can properly be called municipal trading. Neither of the earlier forms of socialism foresaw the future of cities and consequently did not realize the problems that the growth of cities would bring. Muni- cipal trading must be regarded as voluntary socialism because each community elects what forms of cooperative enterprise it will sup- port. It is also plain that municipal socialism is not opposed to capitalism, but is really an extension of it. It is a scheme for the equalization of profits because it results in an extension of the power of the small capitalist. The earlier socialists thought the field of socialism to lie in schemes for elevating the toilers. Such schemes have failed. 28 THE ANNALS OF THE AMERICAN ACADEMY If they had thought of their projects as a means of socializing the capitalists, they would have been the prophets of a new epoch. The striking fact of recent industrial organization has been the socialization of the groups that control them. The system, the in- terests, the money power, the trusts have bad features, but they represent the socialization of the groups interested in particular fields. The growth of large scale capitalism has resulted in the elimination of the unsocial capitalist and the increasing control of each industry by a socialized group. This group may not represent public interests, but it is a voluntary organization with intense, cooperative spirit. No one to-day can succeed in industry who does not attach himself to some well-defined industrial group. Every city, likewise, has many social groups working for its improve- ment; even the trades unions succeed as voluntary organizations. College spirit is another manifestation of the same tendency and is becoming one of the social forces of the present. Philanthropy, in its constructive forms, is also voluntary and represents the growth of social sentiment. There is no form of self -improvement, of recrea- tion, or amusement, that does not follow the same general lines and appeal through voluntary means for the organization of the people interested in each field. This socializing tendency has produced great changes" and will increase in intensity during the coming epoch. There is no probability, therefore, that voluntary socialism will be displaced, nor is its importance likely to be diminished by any change in state control. With this marked change in the form of cooperative movemeuts has also gone a reorganization of our social sentiments. To-day, sentiment shows itself either as race and class hatred, or as altruistic enthusiasm. At bottom altruistic sentiment is the feeling of a capitalist expressing itself in sympathy for the laborer. This desire of upper class men to improve the conditions of the lower classes is a radically different phenomenon from the pressure exerted by the lower classes for their own betterment. The lower class movement stands for the control of the state by themselves in their own interests. The upper class movement directs itself against the bad environ- mental conditions preventing the expression of character. Every lowering of the standard of life, and every increase in the misery due to objective conditions is seen to mar character or to prevent its expression. THE RECONSTRUCTION OF ECONOMIC THEORY 29 This upper class movement has expressed itself in various ways, none of which is adequate to represent its real force. To call such men Utopists is to misrepresent them. To call them sentimental merely emphasizes one part of the movement. Historically they could be called literary socialists because most of their writings have been put in a literary form. Neither of these terms expresses the current movement because they do not call attention to the great change that is taking place in the college world. Better than any- thing else, this altruistic movement could be called collegiate social- ism because universities and colleges are the centers of its propaga- tion. College life is now emotional rather than rational. Fifty years ago college students argued; to-day they shout and sing. A corre- sponding change has taken place in the teaching. The old economic teacher had a dozen or twenty students in his classes with whom he argued from rational premises. Elementary politics and economics are now taught in large classes. No one can argue with one hun- dred students. My experience is that forty is the upper limit, and it is difficult when the classes go above twenty. This means that the college professor must appeal to the sentiments and emotions of his hearers. He must orate rather than argue. The emotional appeal also demands that he put before them the sentiments most likely to be active in the minds of his pupils. Three words more than any- thing else represent the possibilities of arousing enthusiasm, graft, misery and exploitation. A type of emotional activity is thus devel- oped in college life that is potent in socializing American thought. Its moral program can be summarized as the regeneration of char- acter and its economic program is the abolition of poverty. State socialism has as its political program the square deal and as its economic program, the equalization of profits. These two programs form evolutionary socialism, which is the same as progressive democ- racy.- There is no difference at the present between socialism and democracy. When a progressive democrat maps out a program, it is the same as the program of an evolutionary socialist. The two views are bound to coalesce and from their blending a new political party will arise giving a socialistic trend to American development. The power of socialism is but partially revealed in this move- ment. Distinct from and yet blended with it is a socialism revolu- tionary in character. It may be called sociological socialism because sociological concepts are at its basis. Social thought, we are told, 30 THE ANNALS OF THE AMERICAN ACADEMY is impressed by the action of a dominant class. Any change in social control would then result in a revolution of social traditions, laws and morality. If institutions have been imposed by the wealthy for their own advantage, socialism by overthrowing capitalism would bring a new group of social institutions, displacing the now dominant economic morality. This is the sociological argument for revolu- tion. A new motive for a revolution is thus introduced which is not a part of the collegiate socialism already described. Many dislike the restraints of current econoimc morality and of the social institutions that enforce them. It is thus made to look as if economic restraints were temporary expedients rather than permanent neces- sities. Of these the most vital is the sex restraint that economic progress has enforced. Each advance in family life has added to the severity of this pressure until sex motives are in open war with the dominant morality. The revolt against sex restraint is widespread and is promoted in indirect ways more effectively than if openly stated. It is especially prominent in magazines, novels and the new drama. As literature becomes social, it takes this form and carries with it a revolutionary attitude that may become dangerous. Sex freedom is too deep a force to yield without a struggle. The issue between sociological and economic premises will probably come here earlier than elsewhere, but come it must and the sooner the better. VI. AN INTERPRETATION OF JOHN STUART MILL Before proceeding to an analysis of economic theory, the influence of John Stuart Mill in shaping economic thought must be considered and also it must be seen in what relation he put himself to the two economic schools of his time. One of these groups was the sentimental economists whom we have already described. The second group is known as the logical or orthodox economists from the fact that they appealed to logical method in developing their theories. In reality, however, they were as sentimental as their opponents. The appeal of the Utopists was to general social interests. Neither nationality, class nor personality obtruded themselves in their discussions. The success of the logical economists was due not to their logic but to the domi- nance of the capitalists whose sentiments they voiced. The growing influence of the capitalistic class was opposed to the Utopian econo- mists because they demanded improvements in the conditions under which laborers lived and worked. This, if carried out, would mean a fall in profits. On the other hand, the capitalists were interested in free trade, but more than anything else in the capitalistic control of the nation. Anything, therefore, that emphasized the importance of capital to social progress had their ardent support. But why did Mill become a defender of logical economics when his real sentiments lay with the opposing school? In solving this problem, it is fortunate that Mill wrote a truthful autobiography and also that his books are so accessible that the growth of his ideas can be readily traced. Until 1832 Mill's interest was pri- marily in political reform. He was one of those who helped to bring about the reform bill of that year. For the next ten years his interest was in logic, not, however, logic of the older type, but induc- tive logic, and, if we accept his statements, social logic, for the last section of his logic relates to the premises and concepts of social science. If we take this final section of his "Logic" to indicate Mill's anticipation of what was next to be done in social science, it is plain he intended to proceed on an inductive, historical and socio- logical basis. Why did not Mill carry out this plan so clearly expressed in his ' ' Logic ?" Why did he endeavor to make economics a deductive science instead of making it historical and inductive? Something must have happened between 1842 and 1848 to change his attitude, (31) 32 THE ANNALS OF THE AMERICAN ACADEMY and to cause him to rehabilitate a method that he had so skilfully overthrown. To find the cause of this change one must look into the current discussions to see the position in which Mill found himself. He had expected to proceed historically, but he found that his favorite doctrine could not be historically defended. The way to find what use was being made of historical proof at that time is to read the works of Carey. His method consists in taking a mass of heterogeneous illustrations from every clime and age, and aggregating them together to prove pre-conceived doctrines. He has no hesitation in traversing the world from America to India, or history from the present day back to Adam, to pick out illustrations that seem to enforce his doc- trine. This is historical sociology in its crudest form, but, at the same time, it was very effective for it served as a basis for the protec- tionist doctrines then developing. Its influence, therefore, was tre- mendous. I do not see how free trade or sound money could have been defended on historical grounds. No one of Mill's favorite doc- trines could be thus defended. Either he must give up the economics to which his traditions bound him, or he must abandon the method he had outlined and revert to the methods of his father and Bentham from whom his education had come. A second method of utilizing history is represented by the Ger- man economists. They avoid the crudity of Carey's position, but do it at the expense of general principles. German thought is intensely national, and has as its basis the concept of the superiority of the German race. Accepting these two premises, good history is German history. Everything that does not incorporate itself into German thought is bad doctrine. There is a conscious depreciation of other races especially of the English and the Jews. This makes an historical movement of thought which is correct in so far as German thought represents the growth of civilization but is erroneous as soon as progress of civilization ceases to be German. Such an attitude it would have been impossible to introduce into England because the English did not have a like concept of their national continuity and superiority. The best statement of the German viewpoint is to be found in a recent book written by an Englishman, but one who has thoroughly indoctrinated himself with German concepts. This is Chamberlain's "Foundations of the Nineteenth Century." In it is found the race emphasis so telling in German thought, and the THE RECONSTRUCTION OF ECONOMIC THEORY 33 contrast between the German and other national groups. This method of procedure was clearly out of Mill's reach. He was forced to abandon such schemes since they would not appeal to the English public in the way that logical concepts did. Between English historicalism and English logical method, there was really no choice. There was a third alternative which doubtless Mill saw but was also unable to carry out. This viewpoint is represented to-day by the theories of Marx. It rejects the capitalistic premises but retains the pessimistic part of Mill's philosophy. It is German thought over again except that the doctrine of continuity is the continuity of the laboring class, and not the continuity of the German race. Mill had drawn the contrast between capital and labor but he was unwilling to carry it to a point that would lead to the exclusion of one or the other. It is plain that all these historical methods were, in some form, in Mill's mind when he decided to abandon historical economics and resort to a logical defense of fundamental truth. The genesis of logical method as understood by Mill and defended by subsequent economists is primarily based on the doctrines of Newton and Ben- tham. The concept of one fundamental law controlling all social phenomena is derived from the law of gravitation, but the method by which this could be used as the basis of economic thought comes from Bentham. Bentham assumed that men were controlled by two motives, pleasure and pain, and that all of their acts were con- sequences of these two forces. The transference of this idea into economics comes through a process of substitution by which in the place of pain is put economic cost, and in the place of pleasure, the value of economic goods. Goods are thus made the center of economic discussion. They sell for their costs; they are bought because of their value. From these premises is derived the doctrine that costs equal values. Cost is labor. If the quantity of labor equals the quantity of value, then all values have an economic justification. From this premise comes a better justification of capitalism than any historical deduction could give it. The subsequent use of calculus by Jevons has disproved this conclusion; to-day no one can claim logical support who assumes that costs and values are equal. But in Mill's time no one realized how subsequent argumentation would turn. Their education did not include calculus and their sentiments were capitalistic. 34 THE ANNALS OF THE AMERICAN ACADEMY Even if Mill did emphasize logical method, it was impossible for him to make his social system logical. No discussion is clearly carried through to its logical consequences. He starts his argument from logical premises and draws logical conclusions in the first sections of each chapter. He then shifts his viewpoint until in the final sec- tions his social views stand out prominently. An examination of his method makes it plain that his final conclusions are not deductions from his original principles but are due to the insertion of new ideas and a new point of view into a discussion which if logical would have carried Mill to opposite conclusions. Our present viewpoint is more serviceable than the confused views of Mill's time to show the defects of his method. His choice lay between the crude historical method familiar to the English public and a resort to deduction in harmony with the views of his contem- poraries. We have new possibilities because of better statistics. Deductive conclusions now have little weight unless use is made of present facts to verify them. We thus have a check on dogmatic reasoning that was not available to Mill. The recognition of an eco- nomic interpretation of history creates the same sort of a check to loose historical deductions that the statistical method gives to deductive thought. We should not blame Mill for not foreseeing these develop- ments of method. The blame is only to those who in an age with better methods neglect to use them. The logical method, however, has been of importance in two respects. It has emphasized both rent and profits and has, therefore, brought out the difference between earned and unearned income. It has, however, failed in various ways because Mill's thought is based on two antagonistic economies, the agricultural economy of Adam Smith and the commercial economy of Ricardo's time. In an agricultural economy rent is contrasted with wages. Rent, therefore, becomes an unearned increment; wages include the return for all human efforts. Such a contrast is clear and the con- clusions drawn from it are sound so long as the deductions are made in regard to a purely agricultural economy. In the commercial economy, however, rent is lost sight of. The opposition is between profits and wages. In this contrast wages do not include all efforts of indus- trial society, but only the efforts of the toiling underpaid workers. Within profits are included all of the industrial efforts of the capital- istic class. In the commercial economy one cannot, therefore, say THE RECONSTRUCTION OF ECONOMIC THEORY 35 that wages are the reward of labor. They are the pay of inefficient workers. Sometimes Mill uses labor in one sense, sometimes in another. Sometimes wages are but a class reward. Sometimes they are the pay of all workmen. So long as this confusion remains, no clearly defined theory of distribution can be developed. Mill and his followers slipped back and forth between the two viewpoints and their conclusions are invalid because of the vagueness of their premises. There was no logical attempt to restate the theory of distribution, until Henry George's "Progress and Poverty." There we find the famous formula: Produce = rent-\-interest-\-wages. If these three terms are carefully defined, there would arise a logical view of the problems of distribution. This later stage of develop- ment, however, does not belong to Mill's epoch, but must be consid- ered in a chapter by itself. VII. THE FAILURE OF THEORIES OF DISTRIBUTION It is impossible to understand either the theories of distribution now prevalent or the sentiments that lie back of them without giving attention to earlier industrial societies. In primitive times the contrast was between lord and slave or lord and serf. Later it became a contrast between landlord and tenant and then between the leisure class and a working class. If we regard these various contrasts as creating economics, it is proper to speak of a slave economy, a cultural economy, an agricultural economy, a commercial economy and an industrial economy. In all these economies, a two- fold division of society exists, one class doing the work and the other enjoying the profit that comes from the industrial situation. In this earlier state, the contrasts in income were between surplus and cost, between profit and expense, and between public revenue and private gain. The first of these alternatives was advocated by the dominant leisure class, the other by the industrial classes. It was natural, therefore, for the industrial classes to give an emphasis to labor as the source of wealth and to wages as the one rightful income. In modern societies the problem arises of transforming wages and labor from sentimental feelings to economic concepts. The difficulty in this comes from the fact that in a primitive economy there are only two classes and only two forms of income, the earned and the unearned. When wages are made synonymous with earned income its claims have both sentimental and logical justification. In an industrial society the capitalist also earns an income. It is, therefore, impossible to use the term "wages" in the sense that it was used in agricultural nations. In an industrial economy toil is disappearing. Progress is measured by the displacement of the unskilled toilers and not by the increase in their income. The prob- lem in distribution, therefore, is this : are wages in a modern society a fund having a natural basis? The three-fold division of society is derived from the three classes present in England when economics arose. If there are a landlord class, a capitalistic class, and a class of workmen, a three- fold division is necessary. If one of the three disappears only a two-fold division will explain the facts of distribution. Which one is to disappear depends on the kind of economy dominant in each (36) THE RECONSTRUCTION OF ECONOMIC THEORY 37 nation. A pain economy or a downward pressure unites landlords and capitalists thus creating a leisure class as opposed to the working class. In a pleasure economy, the toilers are eliminated or trans- formed into a higher class, while the remaining classes blend into unity combining leisure and work in agreeable ways. The three-fold division, therefore, is logically and genetically defective. The logi- cal division is either surplus value and wages, or rent and wages. Genetically, however, it can be said that rent tends to disappear, profits tend to disappear, interest tends to disappear, or wages tend to disappear. All four of these propositions have some proof. The first two, however, are true of a static economy and the last two of a dynamic economy. Should society become static, there would be no rent or profits; the whole income would be divided between interest and wages. If a dynamic economy should continue, interest and wages would tend to disappear and the whole income of society would be distributed as rent or profits. Work would be a pleasure, and the providing for the future a joy. Of course, this is Utopian, but it represents tendencies. In any society either profits and rent are growing and interest and wages decreasing, or wages and interest are growing and profits and rent decreasing. This, put in another way, affirms that rent represents the aid that nature gives to man ; profits represent the aid of invention and character. Three forces, therefore, tend to the improvement of mankind, improved nature, improved industrial mechanisms and improved character. The future Utopia will have little toil, and much leisure, The origin of current theories of distribution was more acci- dental than designed because the three-fold division comes from the writings of Adam Smith in which it is presented not as a theory of distribution but as a theory of prices. It was the elements of price and not the factors in distribution that Smith had in mind. Prices rose, he thought, as rent, profits or wages increased and fell when one or more of thme were decreasing. He assumes that progress means a fall of prices, and that families gain their advantage by the lower price of goods bought. Under these conditions, no one can obtain an advantage over others through prices because his income accurately represents his costs. The whole gain of society is measured by the fall of prices. The confusion arising from reasoning based on these premises is due to the fact that there is no name separating this economy from societies which have other determining forces 38 THE ANNALS OF THE AMERICAN ACADEMY than those of price. Price has no adjective form. The result is that economists have reasoned about prices, and then have applied their conclusions to an industrial economy. They have also talked about an economic man when really their logic called for a man whose motives were determined by price. To prevent confusion, I shall speak of a price economy and of a price man. In this way we can distinguish the narrower economy determined by price from the broader economy determined by industrial conditions. In this price economy, the population gains by cheapness and not by the rise of income. What men pay represents the ultimate difficulty of attaining goods. In this society is neither unearned income nor monopoly. The dominant law would be that of supply and demand and the ruling tendency would be towards lower prices. I say this because no law can be derived from price changes that would show whether wages are increasing or decreasing. Additional facts must be added to those of a price economy before funds, whether of wages, profits or rent, can be isolated and contrasted. Some supplement to the laws of price is necessary to create theories of distribution or to enable economists to divide income into funds, be they many or few. During the Ricardian epoch, the laws of nature are made to supplement the laws of price and to create theories of distribution. These supplements take two forms, one a materialistic, pessimistic attitude, due to the assumption that nature is failing. The other in an optimistic form contends that income is increasing and with it a progressive social state is forming. In the first group are the law of diminishing returns, the law of population, the law of rent, the law of industrial concentration, the law of increasing misery, the iron law of wages and the law of physical retrogression. All these laws have a physical background and in them the basis of modern theories of distribution is to be found. In passing from the pessimistic to the optimistic attitude, emphasis is given to another group of doctrines based on genetic tendencies which reveal themselves in history. These doctrines include the disappearance of rent and profits, the displacement of labor by capital, the rise in wages, the fall of interest, the betterment of industrial processes and the appearance of new traits in man. It should be remembered that all such laws have a basis somewhere else than in the theory of prices. The laws of distribution, therefore, depend either on the materialistic, pessi- THE RECONSTRUCTION OF ECONOMIC THEORY 39 mistic concepts of Ricardo and Marx, or on genetic laws of social progress. One or the other is to be found in every writer on the distribution of wealth. The defects in the current theories of distribution are again made clear by questioning the reality of the funds into which income is divided. From the general principles of industrial progress, it is inevitable that both rent and profit should arise. It raises another problem, however, to say that a definite amount is set aside for the payment of wages. There are in reality three wage doctrines of this sort contending for supremacy the doctrine of an increasing wage fund represented by the American economists from the time of Carey to the present, the doctrine of a stationary wage fund rep- resented by the classical economists, and the doctrine of a decreasing wage fund presented in the writings of Marx and Henry George. It should be noted that proof of a rising statistical wage is no proof of an increasing wage fund. The statistical wage is shown by com- bining the stationary wage of the industrial toilers and the rising wage of efficient workers. This may give a rise in the general aver- age, but it does not prove the objective existence of a wage fund. Wages are not a fund having one origin, but the complex result- ant of many forces. To understand the organization of society, the workers who use machines must be contrasted with the toilers whose industry results in the transformation of nature. Machine tending is not toil unless the hours of work are abnormally extended. The transformation of nature usually is toil but the men of this group represent a decreasing proportion of the whole industrial society. Workers of the first class, get a wage which should be included under rent rather than under wages because it is a rent of ability. They also get a substitution wage, or what they would receive if they toiled instead of tended machines, and, thirdly, they get an organ- ization wage, or what they receive from collective bargaining. These three elements, the wages of ability, the wages of substitution, and the wages of organization, form the basis of their income. The larger part of this wage must be regarded as either rent or profits. This makes the workers who receive it an integral part of a capitalistic society. They have as much interest in the growth of the social surplus as the capitalists have. The toilers, however, do not even get a subsistence wage. A wage of a few hundred dollars a year is not determined by the needs 40 THE ANNALS OF THE AMERICAN ACADEMY of subsistence but by the physical endurance of those who receive it. Continue the pressure, and the class must die out. The down- ward pressure in wages equates itself by raising the death rate. Families on four hundred dollars a year can have as many children as they please without increasing population; the deaths equal the births. Likewise the upward pressure due to increasing standards of life gives another equilibrium, brought by the fall of the birth rate. At a family income of fifteen hundred dollars a year, the number of births does not exceed the deaths and hence population is again at an equilibrium. There is thus an equilibrium caused by a rising death rate and an equilibrium caused by a falling birth rate. One or the other must dominate, and as it does, the structure of society will be correspondingly changed. These facts show the defects of the current theory of distribu- tion. The real cause of its failure lies deeper. Social classes have their origin in struggle and between them no economic bonds exist setting limits to class aggression. Some class is always growing while its competitors are being forced to the wall. The movement towards better resources or into industrial centers is irresistible and ends only when the dominant group crowds out its competitors. Had the resources of the world remained static this tendency would have long ago been apparent. New resources and new centers ha\*e repeat- edly disturbed this equilibrium and thus renewed the old struggle under new conditions. To state these ideas in theoretical terms demands the use of contrasts not familiar to Mill and his contemporaries who recognized only two groups of laws, the laws of price and the law of diminish- ing returns. The theory of evolution has made us familiar with a new group of forces. There is an evolutionary pressure leading to increasing returns as well as the devolutionary pressure called dimin- ishing returns. There is also a social pressure in favor of human equality that partially counteracts the effects of both evolution and devolution. These three pressures are ever in operation, each tending to produce its own individual effect in distribution. Because of them there can be no equilibrium of economic forces nor are there definite funds to be divided between the contending classes accord- ing to natural law. This failure of equilibrium makes a new treat- ment of distribution necessary. VIII. A RESTATEMENT OF THE THEORY OF DISTRIBUTION Theories of distribution have been built on a common plan. The two elements are, first, the social classes into which nations are divided, and second, the funds into which income flows. Each social class is assumed to have its income derived from specific sources. Classes therefore have definite limitations to their income which prevent them from taking the income of other classes. Within each class there is also a law equalizing income. Profits and wages, we are told, tend to equality giving just shares to all participants. This theory was a part of the economic harmonies so much admired by early economists and while modified is still generally held. It corresponds to the early English industrial development and has thus obtained a concrete setting, making the visualization of other theories difficult. In criticism of it the first question is : Are the traditional classes in England the outcome of social struggle or are they real economic groups? The second question is: Can there be an equi- librium between hostile social classes or must not each temporary adjustment be a compromise that is disturbed by new alignments of the contending groups? In other words, is all struggle within indi- vidual classes or is the real struggle between classes some of which are growing at the expense of others? In this case there cannot be economic funds setting bounds to class aggression. Some group is being forced to the wall after which event a new alignment of interests creates new victims of the same process. Such at least is the theory of evolution, and by it the theory of class struggle has been strength- ened. If harmony checks struggle some compromise has been worked out between the discordant groups. Natural law forces a given action at all times and places. Compromise is temporary, local and subject to constant revision. Under which of these two heads does the income of industrial classes come? In seeking an answer for these questions in America the observer finds a different alignment of groups from what the early English economists found in their day. America has no rent class. Land is an investment and its income is not distinct from that of capital. Few know what part of their income is rent and what profit or interest. Landlords and capitalists are thus blended into one class with common views and interests. While this blending has taken place a new differentiation has arisen among the laborers. The machine workers (41) 42 THE ANNALS OF THE AMERICAN ACADEMY and city artisans have formed organizations through which a redis- tribution of income in their favor has been forced. Below them are the toilers working with their hands or with crude tools. Their income is set for them by objective conditions. Workers and toilers in this contrasted sense are non-competing groups whose incomes arise from such different sources that any one name is confusing. The application of English theories to American conditions can be tested by a review of wage arguments. No economist has said that groups of workmen could not acquire a super-wage. Both the existence of such groups and the power to perpetuate themselves were admitted. It was contended however that this super-wage was subtracted from a wage fund and hence its burden fell on other workmen. There could be no progress except by a rise in the average wage. The reasoning on which these conclusions were based runs as follows : If a given group acquired a super- wage, the rate of inter- est would be lowered by its payment. This reduces the margin between the income of the capitalist and his expenditures. The source of capital is frugality which demands for its exercise an excess of income over expenditure. From this excess all increases of capital come. If it is reduced by the payment of a super-wage the increase of capital is checked and the growth of industry retarded. The natural increase of population would not be provided with work; the surplus laborers would be forced back into the established indus- tries with the result that wages would fall. I take issue not with the logic of the wage-fund theorists, but with their view of the source of capital. Capital, they said, is savings and comes from a reduction of the expenditures of the capitalist class. There must be a group with social standards less than their income to permit the increase of capital. I would say industrial capital arises from the undivided profits in newly-exploited industries. In them a super-profit exists, and from this fund the expansion of industry takes place. No one would deny that there is a super-profit in new industries and that in seeking employment for it the newly-acquired capital flows over into other industries and builds them up. Is, however, this source of capital the leading one or does the mass of new capital come from the savings of those who reduce their expenditures below their annual income? This is the real test of the two theories. If new capital comes from the super- profit of new industries, the super-wage of other industries does not THE RECONSTRUCTION OF ECONOMIC THEORY 43 fall as a burden on other workers but is a burden on profits. Super- profits become super-wages by a change in prices altering values in ways favorable to industries paying super-wages. The super-wage is thus a problem of prices the burden of which falls not on other workmen but on whoever loses through the resulting rise in values. I would go further and assert that there is no interest fund because no equilibrium exists between the income and expenditures of the interest-receiving class. Interest is paid on investments in the hands of the inheritors of vested wealth. This class is not the source of new capital. Instead of their adding to capital the total of their investments is falling off and in each generation is replaced by the new inheritances bequeathed by the founders of new industries. The holders of fixed investments are not a strong class held firmly in their position by the needs of other classes. They are economically a weak class losing to the benefit of other classes in every industrial contest. The reasoning of the wage-fund theorists was a selfish upperclass view of those who wished to pose as humantarians without being so. Why should the receivers of a super-wage give it up so that the inheri- tors of wealth might save? If saving is needed could they not as easily save from their super-wage as the rich could from their invest- ments? It is not necessary to raise this question because in the main super-wages are a burden on the super-profits of new industries. They fall partly, however, on all who must in consequence pay higher prices. Inherited wealth bears its share, the general consumer has his burden, and the toiling underclass loses employment because of the slower rate of industrial progress. The super-wage does not fall on any special class but is a general burden on prosperity. There is no fund set aside for a specific class except the subsistence fund of the toilers. Rent and profit are funds but they have no social classes to claim them. They are diffused through several social channels and fought for by every claimant of social advantage. Economic groups do not therefore have funds given them by natural law. They must enter the struggle for the general surplus getting more or less as they succeed in the conflict that ensues. Each new equilibrium is a compromise lasting until some new alignment of social forces breaks it down; then come new adjustments but never a static equilibrium nor any fixed funds distributed by natural law. 44 THE ANNALS OF THE AMERICAN ACADEMY The real struggle is not between two classes but between two forms of industry. Industry either exploits some general advantage, in which case its surplus is profits, or it exploits local advantage the resulting income of which is mainly rent. Centralized industries divide those interested in it into two classes, the controllers who direct, supervise or manage, and the machine workers upon whose activity the industry depends. The one class is interested in cen- tralized profits; the other in personal super- wages. Between these two forms of income there are no fixed limits. Either can grow at the expense of the other. Every new struggle leads to a new com- promise in which some advantage conies to the workers. There is no profit-fund that will check this advance nor is there a wage-fund to restrain the fall of wages where organization fails. Super-profits may become super-wages or super-wages may become super-profits. Peace and progress thus come not from natural law but from com- promise through which alone any working equilibrium is possible. In the exploitation of local advantage another mode of distribu- tion is worked out which unites the rent of situation with the super- wage of efficiency. A working capitalist is thus evolved, since local industry is too small and many-sided to permit of class differentiation. Such a capitalist does not think of his joint income as arising from distinct funds: he blends it by a recomposition of values into one fund and thinks of it as due to his activity. His capital and his land are not distinct units but adjuncts to his personality. In this way a distinctive viewpoint is acquired that while capitalistic is opposed to that of centralized industry. To make a working capitalist takes about $5,000 in capital which may be put into a farm, into local trade and industry or into personal efficiency through education. This means an income of from $1200 to $3000, a large part of which is rent, but which is regarded as wages by its participants. This class grows with the rise of rent and loses with the increase of centralized profits. A line can thus be drawn between the part of the social surplus which localities or professional men hold and the part which may be delocal- ized and depersonalized. In the centralized industries work and wealth are isolated. In the localized industries they are united. Industrial evolution brings increased competition for the better grades of land and for the higher forms of personal service and thus raises personal and ground rents instead of lowering prices. If poorer land is brought into use by progress it means that the better THE RECONSTRUCTION OF ECONOMIC THEORY 45 land is being put to some higher use or that other industries are increasing their productive power. The loss through increasing rents is more than offset by the greater profit in other industries. When we recognize that rent is a lien on profits and not an indication of diminishing returns, we see that its growth is an index of progress even if it creates for favored individuals an unearned income. Poor land is thus discarded or put to some lower use. In a like manner the growth of the super-wage indicates an evolution by which the less efficient are crowded out or forced into less effective occupations. The disuse of poor land and the lack of employment of inefficient laborers is a part of every forward movement. Evolution brings out latent differences in both land and men and emphasizes the better at the expense of the poorer. It is a sign of progress to have differen- tial incomes increasing. Evolution helps the better more than the worse. These two pressures determine the natural distribution due to objective conditions. Social distribution counteracts the results of struggle in three ways : by taxation, by the organization of laborers, and by the conservation of life and resource. A measure of equality is thus secured but never enough to prevent the workings of evolution. Distribution is thus complex, following no one law. It is the net result of many laws all of which must be understood before a solution can be reached. Natural law is but an element in the final result. Its funds dominate in primitive distribution, but they fail to explain the facts of modern industry. From these facts and the resulting modification of social classes a theory of distribution arises which may be stated as follows : There is but one social surplus for which all industrial classes contend and among whom it is divided not in definite funds but in parts altered by each new alignment of economic forces. At first this surplus becomes industrial profits through the increase of efficiency and the improvements of nature. Part of it is then transferred to a rent fund by the increase of local and personal advantage. Another part as undivided profits becomes capital, the return on which is interest. The part used socially by the state and absorbed in its expenses is taxation. The part secured by workmen through organization or local advantage is the super-wage. The residual or pure profits is the share of centralized industry. In addition to this surplus there is a subsistence fund for the toilers which may be inadequate 46 THE ANNALS OF THE AMERICAN ACADEMY for their conservation and in proportion to their numbers tend< to decrease. Such statements differ from those of the wage-fund theorists. They differ not less in the action called for than in the theory itself. The one view demands activity of the workers in securing their rights ; the other gives them an income fixed by natural law. It seems simpler and less troublesome to have the laborers penned within bounds and to have their income handed out to them by fixed eco- nomic laws. In reality, however, the difficulties are thereby increased. The laborers will act in any case and if industrial relief is denied them whether by nature or man they will resort to political action to enforce their demands. The choice is really between a political social- ism that would absorb all profits and such direct action on the part of laborers as will insure them a share in the social surplus. In the one case they act unitedly and are interested in the overthrow of existing institutions. In the other case they act as an industrial group and force such changes in prices as will permit of increased wages. Every change in wages forces readjustments in values favorable to the industry in which it is made. The burden falls on the super- profits of new industries if profits are increasing more rapidly than wages. If, however, wages rise more rapidly than profits, family budgets are burdened by the excess, and a recomposition of budgetary values ensues. In this change the working capitalists are protected by their increasing personal efficiency. The budgetary losses thus fall mainly on those with fixed incomes ; this means that it falls largely on inherited wealth. Practically, therefore, it may be said that high wages are a burden on centralized wealth enjoying super-profits, or on inherited wealth in the form of fixed income. These classes have no way to recoup their losses. High wages thus result in a redistribution of wealth to a greater degree than in a redistribution of income. The working elements of society gain at the expense of the leisure class. Socially this is advantageous even if it is wrought with much individual suffering. It is better to have economic law distribute income through group pressure on prices than to have the whole social organization upturned in a class struggle for social control. IX. PRACTICAL APPLICATIONS OF THE THEORY OF DISTRIBUTION Two important facts have been brought out: a large social surplus exists; its distribution is not determined by natural law. Less than a third of the income of the people of the United States has its distribution fixed by natural conditions. The rest of it is distributed by social laws. This statement will not be readily ac- cepted for two reasons. Many economists attached to the doc- trines of natural law, dislike to see the old viewpoint disturbed. Another type of opposition is of more practical importance. I shall state it in the words of a reformer to whom I recently pre- sented my view. His comment was that if my argument could not be refuted the result would be confusing. He admitted that if a man inherits ability and from it gets an income of five thousand dollars a year, his income is no more earned than if he inherited a corner lot. But the older viewpoint gave a decision as to how to increase public revenues. All this is thrown into confusion by any indefinite- ness in the statement of natural law. One can no longer say, "Fix the rent of each farm or city lot and take as much as is needed for public purposes." This apparent confusion I admit, but I do not believe it indicates any ultimate confusion. The difference between the older and newer view can be put in this way. The earlier economists said that economics treats of the production and distri- bution of wealth. If economics is divided into two departments, the theory of distribution is the end of economic theory; and in it a decision must be made as to how income should be distributed. This view was simple and clear so long as production and distribu- tion were thought to be determined by natural law. As soon, how- ever, as it is realized that distribution is not determined by natural law, it must be replaced by views based on other principles. A new definition of economics should run like this: economics treats of the production, distribution, control and consumption of wealth. After the theory of distribution is explained, theories of wealth control and of wealth consumption should be discussed. It is not, therefore, an objection to a theory of distribution that it does not settle the distribution of wealth if it is followed by other theories the joint effect of which is to give the needed decision. This position does not differ materially from that of Mill. He affirms the reality (47) 48 THE ANNALS OF THE AMERICAN ACADEMY of social control and the importance of the consumption of wealth. He, however, regarded the generation of public opinion as not being within the range of economic theory. He says that human opinions "are a part of the general theory of human progress, a far larger and more difficult subject of inquiry than political economy." This was a good statement of economic theory in 1848, but it is not correspondingly true at the present time. The theory of social con- trol is now well developed and economists can with confidence enter a field that Mill of necessity avoided. Another change must also be made to bring Mill's statement down to date. Speaking of the laws of the distribution of wealth, he says that they are a matter of human institution solely. "Mankind can do what they like with what they have produced and place it at the disposition of whomever they will on whatever terms they please." This is an over-statement. It is not true that public opinion has any such control over the distribution of wealth; it is true, however, that there are options in the distribution of wealth, and these options are of importance in economic decisions. Three supplementary theories must be discussed before the distribution of wealth becomes definite. There must be a law of prices, a law of progress and a law of social control. In each of these fields are opposing theories, one of which must in. the end be accepted. As to prices, there is the theory of cheapness and plenty formulated by Adam Smith which makes the criterion of progress the reduction of prices. Opposed to this is the theory that prices cannot as a whole be raised or lowered but are altered to the advantage or dis- advantage of particular groups. In the field of social progress utilitarian doctrines set up as a measure of progress the sum and distribution of happiness. Opposed to them is the evolutionary concept which assumes that progress is measured not in happiness but in the growth of new types and in altered social relations. Of social control there are five kinds. The oldest type is ancestral control which at present is mainly exerted through the church and the courts. A second type is wealth control best seen in leisure class privileges. A third is group control, by which I mean the organiza- tion of industrial groups so that they can alter the prices of the commodities they make. Industrial groups that can raise prices grow strong and survive; those that cannot fail and break up. A fourth type of control is family control. That kind of a family THE RECONSTRUCTION OF ECONOMIC THEORY 49 perpetuates itself that intensifies the enjoyment of the goods its income permits it to buy. Intensive family life, therefore, is measure of family control. The fifth type of control is coercive state action. It is not likely that either ancestral control or wealth control will dominate in the future. The church and the courts have less influence; the leisure class is losing its power. Group control, how- ever, and family control are growing and are in reality two sides of one problem. The group is the unit by which producers unite for the purpose of increasing prices. The family is the unit in which the same people unite to intensify their consumption. The two together make voluntary control, which is to be set over against the coercive state control. The real choice of the American people lies between voluntary control and coercive state control. I shall not attempt to describe state control because this is already familiar to the public, but how voluntary control would operate needs descrip- tion and its laws need enunciation. The central point of voluntary control is the budgetary concepts of the families that participate in it. This means that discussion must be shifted from distribution to family budgets and to this field I shall turn in the following sections. Before doing so, however, it is necessary to point out the place where these doctrines will be brought to the test. From time to time commissions are appointed to determine the right of laborers to an advance in wages. These commissions must have a theory of prices, a theory of progress, a theory of social control, and they also must make decisions in regard to the centralization of industry. One way of showing the practical application of these theories, is to state the views held by the Interstate Commerce Commission. In discussing the right of the railroad employees to a higher rate of wages, one of them is reported to have said that no rise in railroad rates would be permitted to meet such an increase in expenses, and if a change in wages were made, it should begin with the lower classes" of laborers rather than with the higher. A third doctrine should be added to these in order clearly to understand what issues ere in such decisions the doctrine that low freight rates are nation- ally advantageous. Before it can be determined whether or not railroad rates should be increased to allow an increase in the wages of employees, it must be decided whether high prices or low prices are socially advantageous. This decision is a part of the theory of 50 THE ANNALS OF THE AMERICAN ACADEMY prices and not of distribution. The second proposition comes under the theory of progress. It is a question of evolution as against utilitarianism to decide whether the wages of poorly paid employees should be raised before those of the better paid workmen. If we were attempting to improve a breed of animals, we would not begin by trying to improve the poorer stock. Do animal progress and human progress have different laws? Low freight rates favor the centralization of industry, while high freight rates tend to localize industry. There is the same problem internally in regard to freight rates as externally existed in regard to the tariff. The theory of industrial centralization is not a part of the theory of distribution and yet some decision about it must be made before theories of dis- tribution have a practical value. These theories demand conscious attention. When they are decided the theory of distribution is definite and of great practical importance. X. BUDGET MAKING In current theories of distribution two radically different forms of society are confused. By trying to blend them into one social concept economists have set for themselves an impossible task and thus paved the way for the failure of their theories. They have assumed that the national dividend was divided into definite funds from each of which a distinct class obtained its income. There are funds but they are not all derived from the same social structure, and hence they cannot be added together to make one national dividend. Rent and profits are integral parts of a pleasure econ- omy and become recognized only in a highly specialized society. A subsistence fund belongs to a primitive pain economy. Wages are a definite fund only when they are the equivalent of the toil of production or of the subsistence fund needed to perpetuate the working population. When values are due solely to work, rent and profits represent the exploitation of labor. On the other hand if the growth of rent and profit indicates progress the wage fund represents the still unsurmounted obstacles standing in its way. Theoretically an advanced society should have no wage fund, nor on like grounds should a primitive society have a rent or profit fund. Economists however have seized neither of these bold concepts but have tried to compromise between them by assuming that the laborers are in a pain economy struggling for subsistence, while the capitalists are in a pleasure economy, enjoying rent and profits. This compromise creating a national dividend composed of three definite funds may have fitted the conditions of England in a par- ticular stage of its progress, but it cannot be accepted as a general law. Every new adjustment shifts the relations between profits and the income of the toilers. If the surplus grows, the toilers are driven into narrower fields: if it falls off, profits shrink and the subsistence fund becomes relatively more important. Between them however there are no definite relations such as would create fixed funds each with its own laws. There is no equilibrium between struggling classes. The weak do not divide with the strong : they are either destroyed or driven from the field. If income is not divided into funds some other viewpoint must be adopted to discover how income is distributed between strug- (51) 52 THE ANNALS OF THE AMERICAN ACADEMY gling groups. Socially the equilibrium must be looked for not in a series of funds but in a series of budgets, each of which represents the forces acting on a given class. In each budget there is a recomposi- tion of values so as to force an equilibrium between receipts and expenditures. To add to costs in one particular, forces reductions in costs in other quarters. To reduce costs likewise alters the value of other items. A change in one estimate forces changes in every value relation. This doctrine has often been stated in the abstract but no application has been made of it in distribution. A budget is another name for the value estimates which each man or group of men make when at stated intervals they round up their relations to other men or groups. Budgets are social estimates. No man forms an equilibrium by himself. He is a part of some family thus modifying his esti- mates of expenditures, or he is a member of some cooperative group of producers and thus acquires social estimates of costs. Usually both cost and expense estimates are social and hence on both sides of the ledger there is a recomposition of values. Each item gets its value by a process of social imputation and not from direct estimates of the pleasures and pains involved. Pleasure and pain disappear as psychic quantities and reappear as social estimates of cost and value. Pain is socially thought of as expense and pleasure as value. Every budget thus equates at some equilibrium and thus gives a social measure of group standing. This shift from natural standards to social standards furnishes the economic measure of progress. Primitive men have more or less as nature's abundance alters in amount. The budget maker rounds out his relations to nature in such a way that he has an equilibrium independent of nature's variations. These budgetary forces are the active agents in dis- tribution; as they increase or are modified the national income is forced this way or that. A nation thus has a group of budgets each with its own forces, but not a group of funds each with its own laws. There is a budgetary assumption back of current thought although the method of expression hides its real character. The trade of two nations equates itself in a budgetary balance brought about by a recomposition of values in each nation so as to bring trade to an equilibrium. This national budget and its influence on values are well understood. It is also recognized that each class has a budget in which there is a similar recomposition of values to that THE RECONSTRUCTION OF ECONOMIC THEORY 53 taking place in international trade. This is the theory of non-com- peting groups. It is, however, not so clearly seen .that each business enterprise has a budget in which a similar recomposition of values takes place. Does a business firm merely add up costs and sell at a given profit, or does every change in costs force other changes both in costs and values so that a budgetary equilibrium is pre- served? Another way of putting the problem is to ask whether, with each addition to the costs of single items, the value of the final product can be correspondingly increased, or must this growing cost in one respect be met by increasing economies in other items ? What power, in other words, have business men to increase prices when costs increase and what likelihood is there of a fall in price if costs are reduced? The answer to these questions depends on whether the business man is looked on as a bookkeeper who gives his statistics to the public in price tables or whether each business group is a unit with a budget in which a recomposition of values is worked out. The answer has been given by economists but their reasoning has not been generally accepted. In fact two theories have been pre- sented each with its advocates. Adam Smith said that values were the sum of costs and that they increased or decreased as costs rose or fell. This popular view has its best expression in free trade doctrines. Ricardo however contended that the increase of costs does not increase values: it lowers profits. The Ricardians were quite willing that trade should concentrate in England but they were not willing to say that the benefits of this trade were wholly English. They did, however, say that all the benefits -of English industry went to the capitalists as profits, and that the laborers were paid from a fixed fund that had no direct relation to the pro- ductivity of English industry. In which were the English econo- mists right ; in their assumption that the laborers did not share in the benefits of increased production or that foreigners who traded with England did? It is plain that they used the theory of Adam Smith in the one case while they used the Ricardian theory in the other. It is also plain that the Ricardian theory is a budgetary concept involving a recomposition of values. Capitalism is industry organized for profit. A producer becomes a capitalist as soon as he keeps his accounts so that profits and costs become distinct. His viewpoint now shifts so that he measures every act by the way 54 THE ANNALS OF THE AMERICAN ACADEMY it affects his profits. There is a revision of his estimates, so that costs figure as pains and values as pleasures. He thus creates a social viewpoint that distinguishes 'him from the primitive worker. In a primitive society the wealthy class are not budget makers. The limit to their expenditure is the varying annual produce of their land which is easily overrun in any nation where there is a money-lending class. The rest of the community is divided into traders who scheme and the toilers who suffer from exploitation. Primitive traders are notoriously unscrupulous. They prey on one another as well as on the community. It is from their cut-throat methods that the theory of competition arose. When traders are transformed into producers each sale ceases to be an individual unit brought about by the higgling of the market. It becomes an item in a ledger showing not the high profit on individual sales but the average profit on many sales. The merchant deals with a group and his methods must become social to succeed. No one can become a statistician without socializing himself. The trader is thus brought into harmony not only with his community but also with his fellow dealers. Competition is in harmony with high return on single sales : it is not in harmony with high average profits. No one keeps an accurate ledger of receipts and expenditures without finding that his average profit is lowered by price cutting. He may thus dispose of otherwise unsalable goods or gain by some uncontrollable exi- gency of the market but his average profit will fall off. Budget- makers deal fairly with consumers and cooperate with fellow pro- ducers. Square dealing and cooperative methods are the only means of raising the rate of profit. Competition is not a human trait but an unsocial tendency. It fails in large scale production because this is the first to be social- ized. Large producers keep accurate books and know the cost of competition. They are the first to place high average profit in the place of high profit on single sales. Gradually, however, the small producers are becoming budget-makers and as they do their action differs from large producers only in being more social and hence more coercive in their demands that all members of their group live up to the standards of the trade. High social morality and high average profits have the same roots because they are both the results of the socializing influence of budget-making. The theory just stated gets a practical bearing when it is asked : THE RECONSTRUCTION OF ECONOMIC THEORY 55 Does prosperity raise wages and lower prices or does it raise profits? If competition is social and group unity unsocial, the increase of prosperity should lower prices and raise wages. The gains of social progress would thus diffuse themselves among consumers and work- men. If, however, group unity is the effect of accurate budget- making, the pressure of economic progress will favor socialized pro- ducers at the expense of family budgets. Profits grow by the failure of prices to fall when the expenses of production are reduced. High rents result from a rise in prices. When prices are rising rents are growing; when profits rise costs are decreasing without a corre- sponding decrease in prices. There is thus a decisive test as to whether the consumer is injured by the rise of rents or of profits. When he fails to secure benefit from improved production profits have risen. When he pays more for goods rents are on the increase. Higher prices show that the national income is being transferred from profits to the rent and also that localized differential advantage is growing at the expense of centralized wealth. Rent is either a return for local advantage, for favorable positions, or for special ability. What a man gets for his individual powers, whether due to education or inheritance, is rent as truly as the income from a corner lot or a mine. Industries, therefore, are centralized, in which case their return remains profits, or they are localized, in which case their return is mainly rent. Profit and rent represent two opposing tendencies, and from the opposition thus developed comes the acutest problem of modern civilization. Budget-making is the force uniting men into groups and blend- ing smaller groups into larger ones. It makes a social group out of all who keep their budgets in the same way, and creates an economic morality that prevents the aggressions of individuals from injuring members of the group. Of these budget-makers there are several varieties, or perhaps it is better to say budget-making has gone through several stages of development. The first type of budget might be called a nature budget because the contrast is between what man does in production and what nature does for him. The surplus is then the aid nature gives. These estimates are true of an isolated man gaining advantage over a reluctant nature. They are defective in that they overlook the effects of invention and neglect class antagonism. The second type of budget is the national budget so much emphasized by protectionists. While apparently national 56 THE ANNALS OF THE AMERICAN ACADEMY it is in reality a class viewpoint, because tariff schedules are made by manufacturers and reflect their interest. A third budget is that of the centralized industries. Wealth not welfare gains recognition. All progress thus seems bound up with and measured by the growth of capital. From such industries there is no hope of lower prices, but at the time there is little danger of a rise. The fourth type of budget is that of the working capitalist. Here the estimates are in terms of work. Capital is an adjunct of work but not an independent agent. The farmer says he has done a day's work when he has plowed eight acres of corn because he thinks of himself as the active agent in the process. He says he raised eight hundred bushels of wheat, not that his farm produced it. A physician also says that he cured the patient, not that his acquired skill did it. All professional men think in terms of work and overlook the capital involved in their education. They have no budget showing profit; it shows only day's work and annual income. Profit and work are thus symbols of opposing budgetary ideas, and the two views seem to clash where there is in reality a fundamental unity. To think in terms either of capital or activity shows defective budgetary concepts which the future development of budgetary relations will remove. There is a unity even if as yet it is unseen. All budgets would harmonize and blend if they were complete enough to show the needed facts. XI. FAMILY BUDGETS The fundamental change separating industrial nations from their primitive predecessors is the rise of budgetary concepts and the resulting recomposition of economic and social values. Modern calculation forces readjustments through which primitive emotions are decomposed and reorganized in more effective ways. Emotional outbursts are thus suppressed or turned into useful channels. The first of these budgets was the nature budget that traces the source of welfare either to the favorable action of nature or to the work of men. The second was the national budget made prominent by the mercantile economists. The commercial budget came next in which the emphasis of profits and costs became prominent. The budget of the working capitalist is the most recent addition to this series. It is harder to name this type of budget because it appears in many forms each of which is too specific to be generally applicable. The product which the worker with machines imputes to himself is largely the product of the machine he uses. So too the farmer's product is largely that of land, the small dealer's product is partly that of his location, while the product of the professional man is mainly that of acquired skill due to capital sunk in his education. In each of these cases there is a joint product of rent, capital and energy imputed to the active agent as work. This is a recomposi- tion of values which brings a social reconstruction in harmony with budgetary needs. Call this class what you may, it is the largest and strongest class in modern societies and by its action the progress of the future will be shaped. The growth of budgetary concepts does not cease with these developments. There are other types of budget forming of which the municipal budget is the most easily recognized. But of more importance, although thus far more indefinite, is the family budget now so forceful in shaping social estimates. Personal development is said to be a recapitulation of the history of the race. The child starts early in his emotional life and becomes rational as he suppresses emotional estimates and puts in their place values formed by the budgetary group of which he is a part. The word "family" has two meanings. We think of it as an emotional group whose ties are sexual or we think of it as a budgetary group (57) 58 THE ANNALS OF THE AMERICAN ACADEMY held together by common work and life interests. The first sort of a family has no budget. Its morality consists of emotional checks voiced by tradition. Family budgets represent the change that comes over families as they rise in efficiency, and are thus capable of putting into effect economic checks to the evils from which they suffer. The first effect of improved production is to raise profits. What are the forces that take revenue from this fund and transform it into wages or into cheap commodities ? Protectionists reply that national prosperity brings high wages, and thus adds to the family income. Free traders, on the contrary, argue that their policy reduces costs, and thus aids families on the expense side. These two seemingly differ- ent policies are rooted in the same economic doctrines. Prosperity lowers costs, and thus permits a higher wage rate, says the one; prosperity lowers costs, and thus reduces family expenses, says the other. A third possibility that prosperity, by lowering costs, raises profits is overlooked by both disputants. Which then is good eco- nomics: prosperity raises wages; prosperity lowers prices; or pros- perity raises profits ? To answer this question the nature of indus- trial changes must be explained. Improvements of the nineteenth century have been especially prominent in iron and steel production. A second group of changes show themselves in a lowered cost of trans- portation; a third in agricultural machinery. These improvements affect the family budget only indirectly, either in the price of houses or of food. The real cost of producing food has fallen, but instead of lower food prices there has been a rising price of agricultural land. The burden of higher prices is on raw materials, farm build- ings, fences and machinery, and building material in city homes. None of these items enters into family budgets. Between producer and consumer, in all these cases, there is a landlord to whose benefit the lower costs accrue. Family budgets do not, therefore, show the improvement that industrial changes would warrant. Rising profits check the growth of wages; rising rents absorb the gains of industrial efficiency. Family budgets face a deficit where, if the relations between costs and expenses were direct, there would be a surplus. There are articles, however, to which the consumers' relations are still direct. Of these, sugar, wool and silk are important. To families with an income above $1,000 a year, they form a burden of THE RECONSTRUCTION OF ECONOMIC THEORY 59 say five per cent of income. The same families are paying twenty per cent of income as rent. Let me illustrate in my own case. I buy three suits a year, on which the tariff duties are ten dollars each. For room rent I pay four times as much as for clothes. It costs me two dollars a day for food, of which one-fourth is rent in some of its various forms. My tariff duties are not more than fifty dollars a year, while my payments for rent exceed $800 a year. This is a fair sample of incomes above $2,000 a year. It is rent, not the tariff, that makes the burden under which the workers groan. What the landlords, city and country, obtain is that part of the gains of con- centrated industry which the trusts, railroads and the protected industries have not been able to hold. There is a real opposition of interest between the centralized industries, whose gains are profits, and the localized industries where income is mainly rent. It is possible to aid Illinois farmers at the expense of Pittsburgh profits, or New York landlords at the expense of those of smaller towns. Neither group, however, has any right to claim they represent the people. To transfer dollars from New York to Wisconsin is no more to the public interest than a movement in the other direction. The family budget is not improved by going from city to country, or from Iowa to Texas. Local advantage is absorbed in land values. To move is merely to change landlords. To vote another ticket may help this politician or that, but it will not remove the deficit from the family budget. The annual produce of a nation is thus distinct from the sum of family budgets. The total income of families equals the total output of personal energy, but the annual produce that results far exceeds the sum entered on the expense side of the family ledger. All that goes to replace capital or to increase capital forms no part of family budgets. If the annual surplus of a nation were used to increase capital, a steady growth in the number of families would result, but no change in the average family budget. Such a nation would be called prosperous and trade statistics would prove the contention. It would, however, be a national not a family prosperity. Some other change than mere growth must take place to alter budgetary relations. We get an explanation of budgetary improvement by contrasting personal income with vested income. Personal income comes from productive acts which cease when the producer dies or is disabled. 60 THE ANNALS OF THE AMERICAN ACADEMY Vested income is impersonal and is enjoyed by some one so long as production is unaltered. All profit and rent are vested income. The share that goes to them is capitalized and remains a fixed charge on industry. Family income increases as personal income grows. It is not altered by what increases vested income. The sum of profits and rent is thus outside of the influences affecting family budgets. There is a well-known economic law which says profits fall as wages rise and rise as wages fall. The newer expression of this law is that the sum of family budgets increases in amount as vested income falls off, and is reduced as vested income grows. What- ever reduces the price of articles composing the fund replacing capital benefits vested income by the resulting rise in profits and rent. If industrial improvements reduce the cost of articles in the replace- ment fund and not those entering family budgets they will increase vested income without any necessary alteration of family welfare. There is a gap between national prosperity and improved family life that must be filled in some other way. Higher values for personal services do not seem to relieve the situation because the change merely raises prices and does not alter price relations. This objection would hold if all personal services were used to produce consumers' goods. Much of them, however, is employed to replace capital. In so far as the higher prices of services increase the value of the replacement fund, the burden of the change falls on vested income and not on family budgets. All of the increased value of personal services goes to improve the monetary side of family budgets while only a part of the increased cost falls on the expense side. Roughly speaking, two-thirds of the laborers are used either to increase capital or to make non-consumable goods. The major part of the growing cost of personal services thus falls on vested income. Consumable goods rise in price but the capitalized value of investments falls off because of the decrease of vested income. There is, therefore, a way in which budgetary values can react on the industrial situation. Is there a practical way in which it can be realized ? To answer this question the social effects of budgetary pressure must be analyzed. Wants in a progressive society grow more rapidly than the means of satisfying them. This creates in family budgets a state of chronic deficit. There is no hope of relief through de- creasing costs, because low prices are the index of low values of per- THE RECONSTRUCTION OF ECONOMIC THEORY 61 sonal service. The family budgets lose, therefore, on the income side, all the savings that low prices bring while the gains from low costs accrue to the benefit of the replacement fund and hence raise profits at the expense of personal income. Reductions in prices thus increase the budgetary pressure. The relief must come from other sources. Budgetary pressure comes from whatever intensifies family life and puts its welfare above other units, groups or ideals. Its growth is mainly due to the socialization of ideals by which personal, national or religious standards are displaced or incorporated into those of the family. Early religions emphasized a future state, primitive morality emphasized the repression of wants, while national preservation depended so fully on struggle that it emphasized mili- tary valor and self-effacement at the expense of family obligation. All these external pressures must be removed before social ideals stand out in contrast with those of primitive societies. The new standards are, however, plain enough to permit of their enumeration and valuation: Health, leisure, recreation, education, home, food, clothing and social service are among the forces increasing budgetary pressure and to them social progress is due. In contrast to them, however, stand certain other tendencies that relieve budgetary pressure. Prominent among these are : The increase of personal efficiency. The industrialization of women. The lengthening of the working life. The shortening of the working day. The increasing power of substitution. The intensification of activity. The increase of family altruism. The diffusion of wants. The socialization of household expenses. The increase of taxation. Most of these tendencies need no explanation. An exception to this is the law of substitution. If low prices cannot be secured through the competition of producers, there remains a possibility of relief through the shifting of consumption from costly articles to those less expensive. The change from woolen to cotton clothing 62 THE ANNALS OF THE AMERICAN ACADEMY or from meat to cereal food illustrates widespread alterations in consumption that do much to relieve budgetary expenditure. This power grows steadily and is the only effective check to high prices. Low prices form the goal of industrial progress to be attained by the consumers having many ways of satisfying their wants. A socialized community has no effectual escape from monopoly except by changing desires so as to utilize new commodities. The fate of the consumer lies solely in his own hands. The competition of producers is a vain hope resting on a misunderstanding of economic motives and of the social forces they generate. Family budgets have, however, another source of relief. Checks to expenditure tend to bring the family budget to an equilibrium and are the basis of industrial morality. The effects of this new morality may be stated in the following terms : The increase of sex restraints. The decrease of the birth rate. The delay of marriage. The economy of house rent. The economy of costly food. The economy of time. The decrease of saving. The increase of life insurance. The sacredness of trusts and contracts. Promptness in fulfilling engagements. Restrictions on child labor. The decrease of luxury. The reduced use of intoxicating liquor. The increased valuation of future welfare. The love of economy for its own sake. The socialization of industrial groups. Such are the moral effects of budgetary pressure and they rank high among the causes that relieve it. Do what they may, however, there is still a net deficit in the normal family budget which must be met by a rising value of personal services. Budgetary pressure in distribution acts either against vested income or it forces the toiling underworld into a less favorable posi- tion. There is no economic law that will prevent or restrain this THE RECONSTRUCTION OF ECONOMIC THEORY 63 pressure. Wage funds and interest funds are antiquated concepts derived from pre-industrial conditions. The power of survival is always in the hands of one class. Industry gives it to the working capitalist as the earlier military society gave it to the leisure class. Society is in the hands of those who combine thought and work. In this unity lies the hope of the future. XII. THE HIGH COST OF LIVING The recent rise of prices has created a demand for new investi- gations and new theories throwing light on price changes. With two theories of price changes the public is already familiar; the theory that rising prices are due to the increase of money and that they are due to monopoly. We know the effect of rising prices on various incomes, on business activity, on the value of property, on saving and the distribution of wealth. Changes in monetary prices have occurred often enough and have been sufficiently wide- spread to establish valid conclusions on all these points. I state these facts to suggest that these two fields do not cover all the cases of price changes. The current high prices may not come from either of these causes but from economic phenomena not fully observed and hence without a theory for their explanation. The demand is, therefore, for an hypothesis about which to organize the new facts and then for statistical investigations to verify the preliminary hypothesis or to point the way to a better one. I shall start therefore by asking a question: what would be the effect on prices if the supply of loanable capital should fall off? To answer this question a clearer definition of loanable capital and a better contrast between it and other types of capital must be devised. Adam Smith thought of capital as a stock of goods annually pro- duced and consumed by the participants in production. By capital we now mean any permanent investment from which income is derived. A contrast is sometimes drawn between fixed and circu- lating capital but of it little use has been made. Economists state it and then pass along to draw conclusions about fixed capital which forms the bulk of national investments. In my opinion the stock of Adam Smith, the commodities of trade, circulating capital, loan- ~able capital and consumers' goods are practically the same fund named differently as it appears in various forms. It would need a more concise definition to make them equivalent but in so doing we violate no usage and help towards the acquisition of clear ideas. Loanable capital must be in some mobile form so that it can be employed in many ways. A bolt may be used or not used, but its destiny is fixed. It must go into a given mechanism. But food and clothing may be used by different people and hence their trans- (64) THE RECONSTRUCTION OF ECONOMIC THEORY 65 formation may produce a multitude of objects. Their direction is not determined until the loan has been made and used up by given workers. If this mobile stock is in the hands of a banker it is called loanable capital; if in the hands of a dealer it is called commodities; if talked about by an economist, it is circulating capital, and if in the hands of a consumer, it becomes consumable goods. The view depends on the problem we desire to discuss but in all the views we have one objective fund standing in contrast to the fixed invest- ments of the nation. Practically all loanable capital is in the hands of bankers and disposed of by them at given rates of interest. The rate of interest is determined by the return on circulating capital and not by the return on fixed investments. It is fixed by the difference between the value of the consumable goods used up in an act of production and the consumable goods that this act creates. Fixed capital yields a net return which is valued through the rate of interest. A net return of $10,000 and a four per cent rate of interest means an investment value of $250,000. We then say this investment yields four per cent when in reality the rate of interest was the cause of the value and not the reverse. The measure of interest comes to light only when consumable goods are used to make other consum- able goods. It follows from this that the rate of interest is the index of the amount of consumable goods and thus of loanable capital. If it rises, the amount of consumable goods is falling off relative to other forms of wealth. If this did happen, would it affect all prices alike and thus act as alterations in the supply of money do, or would it be felt in particular ways and under given circumstances? Here is a query that it is at least worth while to follow up. Alterations in the quantity of loanable capital are due to changes that affect consumers. If there is less consumable capital, the con- sumer has in some way altered his habits. Funds that were formerly set aside, and thus came into the hands of bankers, are now used in other ways. This means that families have found new openings for expenditure and have less to save than formerly. If this is true, a better tabulation of wealth statistics would reveal a falling off of saving, even if familiar statements of facts seem to prove the reverse. But to make this clear needs some revision of definitions and more care in statistical tabulation. One difficulty is in the definition of saving. If a man working for wages spends less than 66 THE ANNALS OF THE AMERICAN ACADEMY he earns the surplus becomes loanable capital. If, however, he enters into business, he uses his capital and goes to the banker for more. Small businesses are of such a nature that personal skill is essential to their success. The capital used is an adjunct to the skill and the joint return is regarded as due to the person and not to the tool or stock. Most capital in sums of less than $10,000 is personal capital of this sort. Its increase means a shortage of loanable capital. If savings are defined as a loanable fund, used by some other person than the saver, then savings have fallen off and at the same time the personal qualities and virtues of the non-savers have increased. The non-saver of earlier generations was an extravagant individ- ual without family ties or social motives. Non-saving to-day is a budgetary pressure forcing alterations in the family expenditures. The non-saver is now a higher type of a man than the saver, just as the saver was an elevation of type above the extravagance of more primitive men. This higher family aims to create a flow of income to enjoy and not an accumulating fund for future support. Its striking effects are manifest in the pressure to reduce the birth rate and to delay marriage. The budgetary equilibrium is attained not by reducing expenditures but by elevating the family to a higher social status where more efficiency produces the needed income. This means an increased demand for education and a delay of the time when children enter industry. Economy is thus forced on each generation of parents to put their children in a station above their own. This economy shows itself not in a personally unused fund but in an intenser use of present income. With a boy at college the family income is fully used, the banker gets no new funds, deposits may even fall off, and yet by the pressure the family is elevated in social position through the increased earnings of the son. Measure by the year and there seems a loss. But a survey made after a half century would show more earning power and a better adjustment of income to expenditure. Progress is by epochs; failure shows itself in short periods. It forms the temporary curves that delay but do not prevent the rise of standards and the increase of welfare. If we shift the view from the family budget to that of the banker, we find another pressure forcing a flow of capital to more effective points. The function of a bank is not to create capital but to econ- omize its use by checking the expenditures in places where the return is low and causing a more rapid flow of capital in productive directions. THE RECONSTRUCTION OF ECONOMIC THEORY 67 This in practice brings two results: investments of fixed capital are favored and personal loans are concentrated in the hands of the more efficient producers. Increased economy thus means the more effective use of loanable capital in the form of consumable goods, so that the fixed investments may be increased. Progress is made either by improving the personality of those who control the making of consumable goods or by the permanent transformations of nature that fixed investments promote. The pressure on the banker to find a more efficient type of local producer is matched by the pres- sure on the family to be more efficient so that the family status may be raised. The family saves less and spends more so as to bring this about, while the banker uses his reduced loanable funds to so much greater advantage that the shortage in savings is made up by the increased skill of the banker. Progress thus goes on, but if we look beneath the surface the forces that make it are radically altered. Personal efficiency rather than a growth of population is now the great force in increasing wealth. The line of progress has been from saving to efficiency and from a stock of consumable capital to perma- nent investments yielding greater income with less current expen- diture. With the uplift of the personality of those using capital has come a better social spirit and a replacement of competition by co- operation. It is thus easier to get groups of producers to combine to prevent waste and when they combine the maintenance of fixed prices is more readily insured. High prices of consumable goods are thus the natural result of the increase of personal efficiency on the one hand and of the increased economy of circulating capital on the other. The need of increased efficiency cuts down the supply of loanable capital and the smaller supply of loanable capital creates a demand for more efficiency in its use. High personal incomes are the complement of a high return on capital. The scarcity of capital causes an intenser use of labor while the scarcity of labor causes an intenser use of capital. An oversupply of cheap labor is the index of an early civilization, while dear labor and a deficiency of loanable capital offer evidence of a newer type manifesting itself in contemporary events. We have become used to the thought of a rising rate of personal income. We lack the complementary thought that a high rate of interest is also the index of progress. The reason for this lies in the acceptance of an antiquated theory of distribution making it appear that a rise 68 THE ANNALS OF THE AMERICAN ACADEMY in the rate of interest is at the expense of wages. This is perhaps true of a static society, but in a dynamic society the less effective forms of both labor and capital are eliminated and from this change there should result both a rising rate of wages and of interest. The more careful investigations of recent years have shown the slow but steady rise of wages and a more than corresponding improvement in the welfare of laborers. It is more difficult to prove a rising rate of interest. There have often been changes in the local rate of interest but there has been no marked change in the rate paid on secure investments. Either the rate of interest has been a conventional matter not indicating the rise and fall of profits, or family ideas of stability have altered so little that a steady flow of new capital has been assured without adding to the inducement to save. There are now indications that this is changing. Secure investments have a less favorable market than formerly which may indicate a permanent change in the attitude of the public towards them. Life insurance has become so safe that it offers greater security for the family than any investment. It would thus seem to add to the causes that check the increase of loanable capital, and in this way help to bring about a rising rate of interest. If greater personal efficiency, a higher wage, less loanable cap- ital and a higher rate of interest are parts of a complementary group of changes, there would result from their joint effect a new adjust- ment of prices and a series of price alterations different from those now recognized as coming from monopoly or from alterations in the supply of money. High wages and high rates of interest would raise the price of consumable commodities; they would, however, lower the value of permanent investments. The higher wage would reduce the net income of permanent investments while the higher rate of interest would reduce their face value. A five instead of a four per cent rate of interest reduces the value of investments twenty per cent. High prices of consumable goods that enter family budgets mean also high wages and high replacement charges on fixed capital. A larger part of the total income of society thus flows into family budgets. While they are the index of blessings in the hand and in the future, high values of consumable goods are a real hardship when measured from year to year. The rise in income comes in lumps with the new efficiency of the rising generation; the price changes are a steady pressure always felt and always the cause of a current THE RECONSTRUCTION OF ECONOMIC THEORY 69 deficit. Each family runs down as it grows old but is replaced in the end by a new family on a higher scale of existence. The apparent fall and the increasing pressure are thus blessings in disguise, indi- cating deeper currents that counteract their visible effects. The flow of social progress is all in one direction : the apparent failures are in reality short-sighted views of a larger evolution. The important facts after all are the changes through which industrial evolution is carrying the nation and not the passing items of momentary interest. Only when they are all grouped together and inter-related can the trend of progress be seen. The following are some of the elements now visible in industrial life: 1 . High prices of commodities. 2. Higher family incomes. 3. The industrialization of women. 4. The delay of marriage. 5. A low birth rate. 6. Restrictions on child labor. 7. The increase of industrial education. 8. The increase of voluntary associations. 9. The reduction of intergroupal competition. 10. The decrease of speculation. 11. Higher rates of interest. 12. Lower values of securities. XIII. VOLUNTARY SOCIALISM Social sentiment and social action are not closely related. The difference, however, is well defined and the contrast so apparent that some working compromise between them should be found. Social sentiment is democratic or socialistic. Both these movements are leveling processes bringing men nearer to an equality by breaking down the barriers of prejudice, tradition and class difference that have kept them apart. Sentiment is thus a negative force removing barriers and not a constructive force reorganizing society in harmony with new conditions. In passing from sentiment to action two well-defined programs present themselves coercive action that becomes state socialism, and cooperation which as group action becomes voluntary socialism. The voluntary principle was the basis of socialism, but certain errors of the early socialists helped to bring about the transformation of socialism to its present coercive attitude. They appealed to the rational opinion of individuals biased by class and race prejudices. The so-called rationalist was in reality a disguised sentimentalist whose opinions were egoistic and whose action was unsocial. Opinions are consequences, not causes. Molding and reshaping a man, they create for him a new view in harmony with his new situation. They are therefore bad when inherited and good when acquired. The new is formed through social action; the old is impressed by imitation and argument. Action is better than thought when new situations must be faced. It is not the wrestle of thought with thought but of social group with social group that gives the final test in evolution. The early socialists studied social movements and interpreted them in the light of current thought. Marx read books and argued about the validity of premises. We should neither take the facts and interpretations of the earlier socialists nor Marx's arguments. The problem is not what were the facts or what were the arguments valid in 1848 but what conclusions do current facts warrant in 1912. Cooperative farm colonies have not succeeded nor has profit sharing been a success. So much can be readily conceded. For the advocacy of these measures the early socialists merit the discom- fiture that all prophets would have if they faced the outcome of (70) THE RECONSTRUCTION OF ECONOMIC THEORY 71 social progress. It is one of the paradoxes of progress that the march of events inaugurated by reformers moves in directions not antici- pated, and often assumes forms to which their originators are radically opposed. No one would be more disappointed than the martyrs who have died for progress if they were here to-day to see what events have wrought. Voluntary socialism is not to-day what its originators anticipated, but it is here in a thousand observable forms. We should not go to Owen or Marx to discuss it, but should take it as we find it and describe it as it now exists. Every industry has changed from an antagonistic or individualistic form to one of voluntary cooperation. Social movements are on a voluntary basis from which observations may be made revealing the methods and results of social cooperation. Progress has not forced social groups into distinct classes, each with a bundle of interests to defend, but each interest has been made effective by the formation of a special group to promote it. We are all in many groups in each of which there are new faces. Our foes are not groups of antagonistic men, but incompetence, mismanagement and maladjustment. Our friends are thus personal and our foes abstract concepts. This blending of individuals in a multitude of associations keeps opinion mobile and makes thought plastic. Out of each group some element of public opinion comes which rises into a principle and thus gets a validity which no argument can oppose. Even that which is coercive has a voluntary origin. If we have coercion in the future, it will not be the coercion of Marx but a coercion of principles and habits which now we accept as a voluntary expedient. The best example of voluntary cooperation is the evolution of the modern banking world. Having had an uninterrupted growth for two centuries it has had time to show the results of voluntary action. State banks have never received popular approval, and large banks have always met with public opposition. A voluntary growth of banking action, opinion and morality was thus forced on the bankers whose axioms and usages have no other means of enforcement than the voluntary assent of those ruled by them. The result is that the bankers are the most social body in the world; they have also a high type of business morality. The new morality of the inter- national world can be said to be a banker's morality, since its rules and traditions were first put in force by bankers. As the outcome of this voluntary growth of opinion, the banks are the most conservative 72 THE ANNALS OF THE AMERICAN ACADEMY of all organizations. High prices and high rates of interest have been discountenanced, the long view has become the banker's view, while the gains of plodding industry have grown in favor above those of speculation and rash venture. The public still has complaints to make and doubtless the evolution of banking opinion is not com- plete, but it is interesting that these complaints largely hinge on the too great force of social usage. If one banker opposes a man or an enterprise they all follow suit. They thus effectively curb one another and elevate their social standards. There is practically no competi- tion and yet for individual services there is a low range of prices and no disposition to take advantage of the public by short-sighted prac- tices. Restricted competition, low prices and public spirit are thus combined in ways that reveal their tendencies and show what other industrial organizations can do when time and experience have developed usages bringing group action in harmony with public wel- fare. When an international struggle recently was prevented by the action of bankers, all applauded even if they failed to see what put the bankers in opposition to war. Long experience, however, has taught them that while a war may temporarily increase their profits, they lose by the destruction of capital and the lower rate of profits that follows its destruction. They may be as patriotic and as desirous of temporary gains as are other citizens, and yet the force of socialized banking opinion causes them to conserve public welfare. The bankers really form the one effective international group, and thus their action is based on the world's welfare and not on that of individual nations or classes. Banking morality is the highest morality because it lacks the limits that national, local or creed morality possesses. We all see this when peace and war are at stake. What we forget is that the same instinct that restrains war also restrains useless construction. A new railroad may be advantageous to its promoters but it is as much a loss of national capital as if it has been used as powder in a battle. We think still worse of bankers when they refuse to help some industry or check the aspiration of some city or section for a rapid growth. The instinct that leads to the refusal is social, and raises the general rate of profits as definitely as would the checking of war or of rash railroad expansion. It is a wise judgment that says we have enough railroads, factories and business enterprises, and that capital should be used to increase their efficiency rather than THE RECONSTRUCTION OF ECONOMIC THEORY 73 to make new rivals. This helps in the formation of trusts, and encourages the successful business man at the expense of his less active competitor, but it helps also to improve social relations and to increase social efficiency. This change in the conditions of survival has come to stay. Public opinion is sound not as it opposes such changes, but as it takes advantage of the improvements made and applies them in other fields. The development of the railroads along social lines has not gone so far as with bankers, but the movement is in the same direc- tion. Temporary profits, cut-throat competition and the arbitrary changing of the rate of dividend to influence the stock market have not ceased, but they have been checked in their operation. It is to-day true, as it was not true yesterday, that some men are too bad to be permitted to control a railroad. It is also true that railroads put their new capital in permanent improvements and not in track extensions. Large concentrated investments giving a lower but more permanent return, receive a preference thus bringing their action in line with public interest. The trusts show fewer of these socializing changes because their history has been too brief to create the group sentiment that enforces them. In the history of their formation, we find that each failure led to the exclusion of the less social of the competitors. Every new attempt found the survivors more social in their inter- groupal relations, until the upward movement was complete enough to create a compact social group with a high sense of business honor. Say what we will of their outside conduct, the greater and firmer the business organization, the more compact is its social opinion and the keener the realization that personal honor and business ability go together. Social power is to-day of more consequence than brute superiority. Survival now is not an individual struggle, but a success within the limits of group action. Labor organizations are crude and yet progress lies in their upbuilding. Any outside control of a group is bad, because it is a dogmatic suppression instead of an internal evolution. Sound group opinion will grow among the workmen only as it is formed by the success of their organizations. Revolutionary ideas are born in failure; they come from bitter experience and from short-sighted views. Success tempers and elevates. It makes group opinion social and group action conservative. Give the workmen what they 74 THE ANNALS OF THE AMERICAN ACADEMY want and their interests will be found to correspond to public welfare. By this I do not mean to claim that the interests of all laborers and all employers coincide. That would go further than present evidence warrants. But it is true that the interests of permanent investments, and of the workmen who operate them, would be pro- moted by better conditions and a higher wage for the workers. Organization gives to each party the ability to enforce its urgent claims and creates a willingness to yield where the concession is less vital. No one but the group can form its restraints or elevate its social tone. The present state of labor disputes is bad because both sides carry such a load of dogmatic opinion. Only internal strength can uproot dogmatism. The greater the strength, the more empirical the judgment, the more social is the action. The cure of struggle is the socialization of the contending forces. There is such a wealth of examples of the action of voluntary groups that the only difficulty is that of selection. Sixty years of successful evolution force a change of judgment from prediction to fact. Instead of looking ahead and prophesying we can now look back and review. The evolution of a social group is from interest to sentiment, and from an admiration of superior persons to that of programs. Superior men, the hero and martyr, unite groups; their subsequently formed ideals elevate their standards. Evolution is thus from struggle to cooperation, from personal control to social control and from concrete rules to abstract principles. The growth of social control is from persons to words, from words to artistic expression and from art to religion. A word or phrase can unite people and hold them together more permanently than can any leader. Art is more expressive than words, while the cosmic emotions of religion are deeper and more unifying than the social awakening of language or culture. The social groups grow larger and the opposition of interests diminishes as each of these stages is reached. The lower diversity of interest is transformed into a higher unity. The strength of social bonds lies in the freedom that led to their perception and acceptance. There is also a change in judgment accompanying this growth of social sentiment. Pragmatic judgments replace the dogmatic decisions of the earlier stages of progress. Pre-judgments are thus transformed into post-judgments; experience wins over opinion. The state is the last surviving form of dogmatic opinion but even THE RECONSTRUCTION OF ECONOMIC THEORY 75 here the yielding to voluntary action is evident. Government is now party government and political parties are organizations held together by assent. Back of the party is a multitude of smaller voluntary organizations whose activity gives it its force. Govern- ment action is thus not a public decision, but the action of some voluntary group who for the time act as the state. Laws are thus made and when made are enforced by some active voluntary agent organized along social lines. To have state socialism would not create a new power above men but would make emphatic the voluntary political organizations which control the state. There would be the same formation of group within group until the real control fell into, the hands of the more active and the more social. We are governed by minorities just as industries are controlled by them. The problem is not to escape control but to transform society so that wisdom dominates. Volun- tary grouping evokes an ability to select the better which when given full expression brings group action and social action into har- mony. Sentiment and judgment are one when social groups are blended into one society. The first axiom of social advance is, never take the chance of conflict when compromise is open. From this simple creed all social progress comes. The full moral code is but a more explicit statement of what this axiom implies. The way of peace is the way of prosperity and there is no prosperity without cooperation, toleration and compromise. XIV. THE AVOIDANCE OF STATE SOCIALISM The preceding discussion has shown the difference between socialism as a sentiment and socialism as a mode of thought. State socialism is not this sentiment but a means of realizing it. It is a program for attaining industrial ends and must be judged in its rela- tions to rival programs. The real contrast in programs is between state socialism which is coercive in its action and voluntary socialism that has back of it the cooperative action of the various social groups. Voluntary socialism was weak because it pictured early agricultural conditions and gave to each group a greater independence than modern industry permits. This agricultural grouping was made impossible by the growth of centralized industry. So long as the scale of production was growing the evidence seemed to show that industry in its final form would be unified under state control. State socialism is coercive industrial action. The centralization of industry appears to leave no other alternative. It must be either state action in the interests of the masses or their exploitation by those who acquire industrial control. Such was the picture of 1848 and on it the recent development of socialism has turned. The conditions of 1912 are different from those anticipated by the prophets of 1848. Centralized industry has had a great development but its limits are now plainly seen. It is one of the elements of the present industrial situation but without power to dictate to other interests. This failure to control leaves open the way for other forms of social action of which so many are in active operation that the trend of social development is discernible. There is no industrial group that does not have a voluntary organization uniting its mem- bers and voicing its claims. The industrial groups never were so diverse as at present, nor so intense in the social control they exercise. There are large groups and strong groups but no dominating group. The law of social growth is that of the diffusion of interest. This is a stronger principle than that of the centralization of industry, and with its dominance comes the strengthening of local industries in each of which is a social group united both in feeling and interest. What type of action meets this condition of diversified industry? There must surely be some way to progressive action in such a (76) THE RECONSTRUCTION OF ECONOMIC THEORY 77 society, and this way must be different from the state socialism a centralized industry would force on a nation. Back of these two types of industrial organization are two modes of reaching decisions that must be contrasted before the issue is clear. Decisions may be either dogmatic or pragmatic. Dogmatic decisions are based on predetermined data and enforced by racial or class sentiment. A dogmatist can determine what should be done before a given case arises, because acts are judged by standards set up before action takes place. Pragmatic decisions are made after the event and are based on evidence that it creates. Every pragmatic judgment incorporates new material in each decision by which it is modified. Judgments also differ in being coercive or cooperative. Coercive judgments are made by a strong group and then forced upon the weaker classes. A good illustration of this is the subjection that men have forced on women. The strong make the law to which the weak must submit. The opposing principle is that of cooperative assent. An example of this is found in international law. No modern nation is strong enough to impose its will on other nations and hence general action must have the assent of all interested. On this basis has grown up a series of decisions cooperative in origin that have a force no nation can resist. These decisions are pragmatic. International conferences are not called to settle hypothetical cases. The subjects arise out of unexpected circumstances and the assenting nations act with a full knowledge of what the effects of the decision will be. There is no blind alley in international law. It is conscious cooperative action based on a full knowledge of the losses to which each nation must submit and the gains it secures. The pressure of such a situation forces each nation to yield on points of less im- portance in order to secure that which it deems essential. Each nation thus gets an advantage out of international decisions just as it does out of international trade. In both cases what is less desired is given up to secure what is more important. Pragmatic decisions thus maintain peace where coercion and dogmatic predetermination would fail. The key to all social progress lies in accepting this principle and applying it to complex industrial situations. Industrial groups must cooperate in decisions just as nations do. Such decisions are pragmatic, the judges having full knowledge of the case, deciding 78 THE ANNALS OF THE AMERICAN ACADEMY only on events that have already transpired. Each party must yield the important to secure the essential. Such a method is not mere theory but is in active operation. It means the decision on industrial differences not by the courts nor by legislative acts but by commissions formed after the dispute arises, with judgments limited to present cases and secured with the assent of all parties concerned. The courts and the legislature decide cases on predetermined data and impose their decisions by force and not by cooperative assent. Majorities thus crush minorities instead of raising them into a co- ordinate position. Take as an illustration the dispute about pro- tection and free trade. The free trader asserts that if an industry fails to sustain itself under foreign competition it should be permitted to die out. The protectionist on the contrary asserts that every industry should have protection enough to enable it to pay current wages. Both of these contentions are dogmatic and the decision is made on predetermined data. Either principle fully acted on would bring on a conflict to be decided only by the coercive power of a majority vote to be reversed by every temporary whim of the ruling element. The pragmatic method would demand decisions based on evidence coming out of the events to be judged. On the one hand capital and labor must be employed, on the other the con- sumer needs protection against needless waste of productive power. Every case if treated individually offers some compromise giving both factors what they most need. No legislative body can rightly settle any such case on predetermined evidence or by deductive principles. The facts in dispute must first arise and then upon them some cooperative decision must be worked out. Dogmatism and pragmatism stand opposed in every industrial decision. The one leads to state socialism and the other to intergroupal harmony. The lack of progress in settling tariff disputes may rightly be compared to the steady strides towards international peace. The need of peace is certainly as urgent as the need of free trade. Both are based on sound principles that must some day be universally accepted. The advocates of free trade, however, set up dogmatic principles based on predetermined facts and from them they judge current events. They do not compromise with opponents but carry on a destructive war out of which increased animosities come. In contrast to this, the advocates of international peace pursue the pragmatic method. Single evils are isolated from the general effects THE RECONSTRUCTION OF ECONOMIC THEORY 79 of war and eliminated by the general assent of combatants. Every nation knows what it is doing when it limits the sphere of war and sees in it some advantage for which its assent was given. This pragmatic process would be as successful in industrial matters as in international disputes. There is no majority and minority in trade relations nor is it a case of the good against the bad. As many industrial groups are involved in trade disputes as there are inde- pendent nations in international conflicts. Each age is ruled either by the judgments of past ages expressed in sentiments, tradition and law or it judges its own acts, expresses its own will and avoids the evils it sees instead of those its prede- cessors assumed would exist. The rules of a stable advancing civil- ization are concurrent estimates of present welfare and not pre- determined judgments based on ancestral anticipations. The change from one basis to the other is not a sudden revolution but the gradual result of awakened public opinion. We have really gone much further than is apparent in the application of the newer attitude in legislation and in settling trade disputes. The many specific examples of its application need only to be recalled to show their breadth. The referendum and the initiative are crude forms of concurrent control. They lack, however, the cooperative assent needed to make them effective. If such legislation were limited to cases where co- operative assent had been previously obtained, the legal enactment would be merely a satisfaction of agreements already secured. The steps would then be like an international tribunal whose acts are only effective when ratified by the concurring nations. It is only formal justice that needs preorganized courts. The unsocial acts should be condemned by them but in industrial disputes their power should be limited to enforcing delays and in the protection of public rights until a properly constituted tribunal can be formed. Choosing judges, after it is known what the dispute is about, is better than recalling judges who make bad decisions. The trouble arises not from the shortcomings of the judge but from the temper of the pre- cedents on which he relies. When current judgments displace ancestral anticipations of coming evils the courts and the public will be in harmony as to the remedies needed and both will replace their dogmatism by cooperative assent. The law should merely register and the court apply decisions reached by mutual concessions of the groups concerned. 80 THE ANNALS OF THE AMERICAN ACADEMY In the past there has grown up a buttress to individual liberty in the form of political rights. When our national constitution was formed no bill of political rights was included. The defect however was soon remedied, thus creating a limitation to majority rule which has been an important element in national stability. If this is true in regard to political rights, it is equally important in industrial disputes where suppression of weak groups by the strong is as danger- ous as is the political dominance of majorities. There is as much need of economic rights as there was for political rights. A right is an effectively expressed sentiment that carries with it a self-condemna- tion of its violation. It gives the individual or group a clear basis on which to make an appeal and furnishes a test of where the strong are over-riding the weak. Such a bill of rights could be readily formulated ; it would check aggression and arouse sympathy in behalf of the industrially wronged. In another place 4 I have formulated a bill of economic rights that would correspond to the political rights now a part of our constitutional guarantee. I will restate some of them so that the content of such a bill can be apprehended. The more obvious rights are these : The right to security. The right to publicity. The right to an open market. The right to customary prices. The right to share in national prosperity. The right to cooperate. The right to decision by public opinion. The right to wholesome standards. The right to leisure. The right to cleanliness. The right to recreation. The right of women to income. The real dangers of state socialism do not lie in its bolder schemes, but in policies that appeal more directly to social sentiment. Op- position to banks, railroads and the trusts is not so much against the present form of these industries as to their high profits. We may expect a strong movement that has the equalization of profits as its end, but there is nothing in such a movement that would lead 4 Theory of Prosperity, chap. vi. THE RECONSTRUCTION OF ECONOMIC THEORY 81 to the nationalization of these industries. There is, however, danger wherever social sentiment is made the determiner of public policy. The strongest emotional appeal of state socialism is for pensions and for a minimum wage. The road to them has already been opened by our generosity to military heroes and by the precedents set by foreign nations. In the appeal of the industrially poor, however, we should not forget the long standing appeal of those afflicted with disease or inherited defects. The problem is not whether industry or heredity create the greater evils, but which of these groups of evils can be first attacked and removed. We know the source of hereditary defects and have also learned that they cannot be cured by environmental improvement. The defective and delinquent classes must be segregated if they are to be eliminated and thus a place made for a better stock. It is, however, a temporary burden to be removed after a generation of generous care and faithful atten- tion. The science of eugenics tells us how to proceed and sound reasoning makes plain the social uplift that would follow its applica- tion. In this field a social appeal can be made fully as strong and more effective than in any other field. The sources of industrial evils are removed by altering the conditions under which industry is carried on. It is against these conditions that social sentiment should turn. Premature old age should be prevented rather than supported. Educating the young to avoid dangers is better than pensioning those who fall into them. Changes at the source of industrial evils effect more than the same effort in time and money used to alleviate the suffering caused by bad conditions. It is a good axiom never to act until the source of an evil is known and then to attack the source and not the result. Were this axiom acted upon we would first remove the evils due to heredity and then with a clearer vision reorganize industry so that the worker is conserved and elevated. We can mold industry as we will when we see what form we wish it to take. The general principles of cooperative action, however, are more important than their specific applications. Either majorities have the right to impress their ideas, sentiments and institutions on minorities, or social decisions need the approval of the groups affected by them. The one method is that of dogmatic impressment, the other of cooperative assent. There is no compromise between ideals so different in their origin and in their goal. Industry must 82 THE ANNALS OF THE AMERICAN ACADEMY square itself with other forms of progress, and as it does coercion and exploitation will be displaced by cooperative action. When the state merely registers what mutual assent has already attained industrial peace will be as stable as international peace will be when arbitration is universally applied. Both fields demand the same methods: victory in either field will strengthen the cause of peace in the other. XV. THE MEASURE OF PROGRESS Last summer I met a Second Adventist who, in harmony with the views of his sect, saw in the passing events proof that the world was approaching its final crisis. The Bible, history and current events were interpreted in light of the belief that they gave evidence of an immediate catastrophe. To-day such views are striking because they are rare. Yet, odd as they seem, they are a remnant of old beliefs that before the age of science were generally held. No one then thought that the world or its civilization was enduring. Every one looked for signs of the coming end and accepted without question the various prophecies based on such data. A belief in progress is new. If man was made perfect and fell, tests of devolu- tion constitute the only science worth investigating. The devolution of the Adventists has been discredited by the progress of science. Social devolution is even now a common belief. It colors history, gives rise to revolutionary views of politics, and makes economic doctrine pessimistic. Were it merely an academic belief, it might be left to die out in its own way. It is, however, an important element both in socialistic literature and in economic thought. That capitalism must go down in a tragedy appeals to an instinct too deep seated to be ignored. The same is true of the oft-stated economic doctrine that the resources of the world are diminishing, and that in the crash civilization will go down before some form of barbarism. While the orthodox economist and the socialist who use these pictures have a greater appearance of presenting the truth and state their arguments more in harmony with history and science, the sentiment they evoke is the same as that the Adventist arouses with his crude pictures of ruin and failure. They are pre-evolutionary views, appealing to fear and wonder, and resting on a confused state- ment of the facts. Such views are hard to controvert because of the crude logic their advocates use. They review current events for evidences of disaster and then by an accumulation of historical data, create a picture of misery and failure. If their view is opposed by a pre- sentation of the happier phases of life, they call their opponents optimists. Scientific economics is thus made to consist of depress- (83) 84 THE ANNALS OF THE AMERICAN ACADEMY ing facts that call for forceful action. If the optimism of Godwin and Owen is put against the pessimism of Ricardo and Marx, it is, indeed, hard to decide which is the better. They both assume that happiness is the normal state of all men, and then they try to show how social institutions fail to secure it. But is the contrast thus made valid and fundamental? Are men either happy or miserable or are they under ordinary conditions both happy and miserable? If the latter is the reasonable attitude, evidence as to the happiness or misery of mankind is beside the main issue. There are no valid tests by which pleasure and pain can be quantitatively compared. The individual judgment is usually clear, but we have no comparative means of measuring happiness and hence the judgments based on such evidence are not of much consequence whichever side they are on. Believers in progress are not in the same position to-day as they were in the age of Ricardo and Marx. The theory of organic evolution has been unfolded and from it come tests both of evolu- tion and devolution. A theory of progress should now start not from surveys of happiness and misery, but from the evidence of the general evolution in which both men and society have a part. From this it will be seen that struggle brings both happiness and misery happiness to the successful and misery to the vanquished. The presence of misery is, therefore, no evidence of the failure of evolu- tion. We evolve through misery as much as through happiness. It is only the abiding effects measured in physical units that tell which force is dominant, and to these tests we should turn to decide the truth or falsity of human progress. If socialists had formulated a law of the persistence of misery instead of the increase of misery, they would have been on safe ground. We know that misery persists but we have no measure of its increase. Happiness tests have been displaced by evolutionary standards which are capable of definition and measurement. Changes for the worse in physical conditions are likewise no test of devolution. They accentuate struggle and hasten the elimination of the weak. Nor can we infer retrogression from deductions based on the law of dimin- ishing returns. Professor Carver in a recent article 5 gives three a priori tests of diminishing returns and hence of retrogression : the spread of population, the concentration of population in cities and the introduction of inventions. He contends that population would not spread, cities would not grow nor would inventions be made 6 "A Bugbear to Reformers," Popular Science Monthly, May, 1912. THE RECONSTRUCTION OF ECONOMIC THEORY 85 unless they were forced by a pressure of deficit. They are thus evidence of increasing misery and represent what mankind should avoid. Such a position is pre-evolutionary. If an animal spread over a continent, a biologist would assume that it was improved by the change. So, too, the presence of more animals in a locality or in closer relations to each other would indicate not degeneration but the evolution of new psychic qualities. Invention is also an index of greater mental power and not of greater devolutional pressure. That the spread of population and the growth of cities often increase misery may be readily admitted without in the least impairing the proof that progress is also taking place. Devolution cannot be predicated from a knowledge of environ- mental conditions no matter how poor they may be. No accurate measure is possible until the reaction of the animal to this environ- ment has created definite structural modifications. Devolution is a matter of animal structure and not of environment. It is retro- gression without growth. Of it there are two tests, revision and retardation. Animals retrogress by going back to some ancestral form, or they are retarded in growth and thus do not attain a full development. Devolution does not create new forms: it revives old ones and prevents the appearance of the higher attributes. Degenerates should be cared for and finally eliminated, but their misery should not be added up to arouse social sentiment or to determine the effect of social change. We cannot measure devolu- tion in terms of civilization, of happiness and misery, of wages or of poverty. The evidence of statistics and history is poor when com- pared with that of biology. The burden of proof is thus against those who would show an increase of misery without some compensa- tion in growth or in social uplift. In changing from the consideration of devolution to evidence of progress a contrast must be made between political stability and social evolution. The danger of political instability has been so great and its evils so manifest that political theory has evolved as a theory of stability rather than of progress. Political stability has arisen in modern nations by substituting majority rule and average happiness for the cruder tests of numbers and strength. Political theory assumes that an equal distribution of happiness gives greater security than its concentration. Wage theories and subsistence theories have thus arisen through which the equality of man has been proclaimed. The doctrine that every man counts for one, 86 THE ANNALS OF THE AMERICAN ACADEMY checks aggression when applied to food and wages. It leads, however, to a pure individualism in which group action has no place. Society is changed from an organism to a mob, thus checking the rise of social sentiment through which a higher unity comes. From brute strength to majority rule is progress, but still more comes when minorities through compromise and toleration displace the need of majority coercion. When the difference between political stability and social evo- lution is recognized the need of a new measure of progress becomes apparent. We assume that when men have equal income, they are equally happy. While this political axiom leads to political stability, it does not help to create new adjustments. To get evolutionary tests, we must start from the physical tests that have back of them the authority of science. Thought, motive and product although indices of a higher mental life, are not measurable in masses so that a transfer may be made from individual judgments to social predicates. The one sure test is the structure through which they arise. If structures, mental, physical or social alter, we may be sure that a racial evolution has taken place. To accurately measure thought, motive or product, we need a complete record of all thought, all activity and all products. Such history and such statistics are impossible. The history we have is a record of social struggle and not of human activity. Few would claim that the tabulated statements of thought, action and wealth are accurate enough to make them available for social deductions. Fortunately, however, there is one test that abides and reveals the net result of all past action. Structure evolves through pressure of thought, motive, action and product. What people do becomes history; what they get becomes happiness: the abiding effects of what they do and get become social structure. Action in social terms is character; product ensures happiness; neither of these is inheritable. Only structure is passed along and modifies the race. For this reason social meas- urements improve as they pass from activity to the product of activ- ity, and from this product to the structure that shapes the activity. The first test of structure is its activity. The more active are the more advanced in organization. The second test is in sur- plus. This measures the economy of effort and the excess of return over cost. The third test is invention. This is the measure of prog- ress in thought. The fourth test is wealth. It shows the structural changes in the environment which remain to aid future generators. THE RECONSTRUCTION OF ECONOMIC THEORY 87 The fifth test is the growth of will power. Will is more than the abstract power of choice. It is surplus energy moving through im- proved mental mechanisms. Social changes should show more than the physical background in structure and yet should be directly related to it. Viewed in this way the first social measure of progress is the desire for intenser forms of happiness in the place of quantitative satisfactions. The second is the removal of fear. The third is the stability of social institutions. The fourth is the growth of voluntary associations. The fifth is the growth of the spirit of toleration and of decision by compromise instead of by struggle. Each of these changes indicates a growth of social structure and an advance in social evolution. There is no mechanism for social degeneration. If it comes, its source is not in society but in its physical Background. No social evidence can prove decay except as it corroborates what physical retrogression has made plain. Progress in these physical phases is beyond dispute. The burden of proof is against those who use historical examples or a crude tabulation of social facts to disprove what more fundamental evidence shows to have an evolutionary support. The new tests are so plain that they can readily be set over against their pre- evolutionary predecessors. Thought is being modified to meet the new conditions even if it has not gone far enough to give the new an irresistible force. This point I shall not argue but will illus- trate by putting in contrast the older and the newer tests of social improvement. OLD TEST NEW TEST In life Happiness Health In physical superiority Strength Endurance In mental superiority Understanding Originality In production Population Wealth In social organization Liberty Cooperation In character Integrity Efficiency In rivalry Brutality Manliness In disposition Amiability Generosity In logic Dogmatism Pragmatism In business Shrewdness Squareness In art Appreciation Expression In religion Submission Inspiration 88 THE ANNALS OF THE AMERICAN ACADEMY All these tendencies have a common source and a common meas- ure. They show the trend of progress and put its result on a firm basis. The lesson is plain. Prophets of disaster are a remnant of an older epoch. The new economics rejects superficial facts and the dogmatic attitude they presuppose. Its evidence is corroborated by organic changes that cannot be reversed by the effect of occur- rences of present interest but of -no permanent value. XVI. THE OUTLOOK While I cannot claim to have made a complete restatement of eco- nomic theory, enough has been given to show the nature of the thought transformation now taking place. It is essential to recognize that we have passed from one epoch to another and that our principles and facts must be correspondingly modified. We live in 1912 but think in terms of 1848. This is due to the fact that several men then expressed the dominant tendencies so forcefully that their mode of thinking has been impressed too deeply to permit current facts to have their full weight. The past epoch was one of natural and class readjustment. It intensified struggle and aroused class antagonisms. It is a mistake to give much weight to the evidence of this epoch: its appeal was after all local and temporary. It is even worse to attribute the thought development to any one man. Marx was as much a creature of this environment as was Mill, Carlyle or Carey. They had the same facts before them and acted on common principles. Their differences are details for their fol- lowers to wrangle about. Their similarities are a common heritage forcing us to act in a different way from what we should have done if this epoch had not remodeled social concepts. The national and class readjustment has now taken place, struggle has been limited, and national sentiments are turning into new directions. We can, therefore, tell something of the trend of events and of the forces now in the making. Two results of the preceding epoch form the basis of the antic- ipations I now venture to give. One is that political stability has been secured. All of the nineteenth century thinkers were filled with dismal forebodings as to the stability of modern nations, and this fear had much to do with the forecast they made. Mobs can now be as readily handled as could an attempted invasion of barba- rians. The fall of civilization from either of these sources is no longer to be dreaded. Nations and classes are stable units. It is economic fact not brute passion that now determines public opinion. The second fact equally apparent is that we have entered a new epoch. The industrial revolution through which modern nations have passed has had four recognized epochs. The first may be called a national economy and in it the mercantile school voiced the demand (89) 90 THE ANNALS OF THE AMERICAN ACADEMY for local industries. In the main this economy was due to the divi- sion of labor and to the spread of industry to new regions. The second epoch was that of free trade, in which England comes to the front as the representative of advanced industry. The third epoch was an economy of unused resources: during this epoch there was a spread of agricultural population and the rise of new nations, of which America is the prototype. The fourth epoch was that of large production, in which concentrated wealth became the controlling power both social and political. If these epochs had brought industrial evolution to a close, the anticipations of Marx would have been realized. The poor and the rich would have been isolated and all struggles would have resolved themselves into a conflict between the two. But evolution did not stop here. We have entered into a new economy in which personal and local advantages are exploited as effectively as were the central- ized advantages of the last epoch. The present struggle is not between the rich and the poor but between centralized and localized wealth. Personal and local advantages are much more numerous than are those on which the success of the great industries turn. Political control is thus in the hands of those interested in local industries and in personal income. Under these conditions, the old contrast between the rich and the poor has ceased to be vital and in its place will come a new alignment of the social groups. To determine the changes that will thus be wrought a more definite theory of progress is needed. Prediction in the past has been prophesy based on historical interpretations or the picturing of Utopian ideals. More definite measures of progress than either of these are now available. Progress can be measured through the increase of wealth, thus giving a material interpretation: it can be measured through the structural changes that evolution has wrought ; or it can be measured through the social control of classes or races. Social control is the repression of the weak by the dominant. Acting through acquired characters it makes no structural change. Any shift in industrial conditions or in the location of natural resources can bring a new class to the front and with their ascendency a new form of control is exerted. Of these forms of control, democratic control, which is the control of numbers, is especially important. Democracy has adopted without question the utilitarian axioms and thus has accepted the quantity and distribution of happiness THE RECONSTRUCTION qr ECONOMIC THEORY 91 as the measure of progress. Every one in this calculus counts as a unit and no one as more than one. With happiness measured in material goods, this standard makes the distribution of wealth more prominent than its production. The control of income seems a social necessity and with it arise new functions for the state. Social control rests on opinions and not on social structure. It is a development of thought and not of activity. It is hard, therefore, to predict what changes in control will be made other than that utilitarian control is likely to undermine the control of precedent, tradition and wealth. This would create a simpler society than we have at present, but it would not be a final nor even stable form of society. Structural development would continue and with each marked change, opinions would alter and thus create a new form of control. No measure of progress is, therefore, valid that does not recognize the need of structural change and the fundamental character of alterations made by it. Opinions about progress are of little consequence unless we can show structural changes that bring what we predict. Such statements seem vague, but they are readily transformed into objective standards. Social structure shows itself in three definite forms: in health, in wealth and in culture. We cannot tell how happy a man is, but we can determine the state of his health. Income is a better test of welfare than happiness, but it is not so accurate a test as health. The activities connected with production are predetermined by the situation in which it takes place. Dis- tribution, however, is a matter of opinion. There are no income structures to shape its distribution as there are productive structures to create it. Structural activity produces wealth: men distribute it. This is a revised statement of Mill's introduction to his theory of distribution but it is no less true in its new form than in the old. We think of culture as the final product of civilization and not as one of its elements. Yet if we look at the facts, we find that culture is an index of activity, not of ancestral tradition and opinion. Social tradition has been broken more in the field of culture than elsewhere. It is no longer the admiration of the old or of the foreign but an intenser form of enjoyment than that yielded by traditional pleasures. Wealth is the consequence of effective activity in pro- duction. Culture is the result of more satisfying combinations in its consumption. Both are in a like manner determined by struc- 92 THE ANNALS OF THE AMERICAN ACADEMY tural activity. Every new product modifies the direction which culture takes. In former descriptions of progress, I divided it into two parts, a pain economy, in which fear and suffering drive man to his daily tasks, and a pleasure economy, in which the motive of action is the pleasure derived from the goods enjoyed. I now regard this division as defective. To love pleasure is a higher manifestation of life than to fear pain; but the pleasure of action is in advance of the pleasure of consumption. Action creates what pleasure uses up. This would divide progress into three stages : a pain economy, a pleasure economy and a creative economy. Each stage has its own mode of thought, and its own social institutions. To visualize the elements of these stages, I have put them in the following table : STAGE OF FORM OF PROGRESS. STRUGGLE. 1. A pain economy. Race struggle. 2. A pleasure economy. Class struggle. 3. A creative economy. Self direction. FORM OF CONTROL. Ancestral control. Wealth control. CHARACTER OF THE SOCIAL BONDS. Blood bonds. Interest bonds. Character control. Social beliefs. TYPE OF THOUGHT. THOUGHT LIMITATIONS. KIND OF PHILOSOPHY. TYPE OF MORALITY. 1. Theological. 2. Rational. 3. Pragmatic. Substance. Space. Time. Anthropomorphic. Material. Ideal. Traditional. Utilitarian. Telic. The transformation of activity and thought which this third economy imposes has already taken place or at least the change has gone so far that its outline is manifest. It is more difficult to predict the uplift in sentiment that it will bring. The emotions of the older epochs were centered about religious and race antagonisms. Evils have been clearly perceived objects with definite local manifes- tations. Heroes and gods also made a personal appeal and kept the emotions too specific to bring out their social possibilities. To build up social sentiments demands the elimination of struggle and fear on the one hand, and of personal renunciation and hero worship on the other. Social life seems incapable of making use of these primitive reactions and thus lacks the effectiveness of the older more animal life. Neither the rational nor the utilitarian logic has ever done more than to arouse mild cosmopolitan sentiments that pleased the philosopher but failed to vitalize the man of the THE RECONSTRUCTION OF ECONOMIC THEORY 93 street and shop. For such a condition there must be a remedy if the new life is to arouse men as effectively as did the old. Senti- ment and thought should not be antagonistic nor should sentiment be crushed by the growth of logic and science. To prevent this catastrophe, thought must be reorganized so that its concepts 1 create emotional reactions as definite and as prompt as did the vivid rela- tions that struggle originated. Thought stimuli must be put in the place of sense stimuli, and thought ends in the place of the victory struggle sets as a goal. A step has been taken in this direction by the shifting of interest from the past to the future. History is a history of struggle, and usually of defeat. By the emphasis it gives to retrogression and decay, it increases struggle and makes present personal success vivid and vital. The thought of progress gives a new turn to the emotions by giving them a new goal. We become social as we look forward; more animal as we look back. The dread of the future must be changed into an eager anticipation before the new emotions will be as vivid as the antagonisms that the past provoked. From this it is easy to see why the future should become promi- nent in socialistic schemes before a like reorganization of the popular thought can take place. Progress can not be visualized in past events. Its goal is ahead and must come through a social reconstruc- tion of ideals and a material reconstruction of wealth products. Progress is necessarily economic because its embodiment is material and environmental. Social antagonisms thus stand opposed to prog- ress. From this it seems to follow that progress comes through emotional suppressions, thus creating the Utopian stage illustrated by the early English socialism. Marxianism is a reversion to the prim- itive attitude and the acquisition of a driving power in class antag- onism. Socialism has not, however, abandoned the earlier ideals, contradictory as they may be to the material tendencies of Marx. Back of conflict loom up clearly defined pictures of social unity which give a charm to modern socialism even if the clearness of the picture is dimmed by the terror of the immediate struggle that is to bring them. Socialism is thus a half-way house from the old to the new. It unites the beauty of what is to come with an emotional awaken- ing evoked by past conflicts. To look both ways and to get inspira- tion from both views is contradictory but effective. Purely Utopian reconstructions do not arouse vivid motives to action. Cosmopoli- 94 THE ANNALS OF THE AMERICAN ACADEMY tan progress and utilitarian measures fail because they evoke no emotional machinery to carry men toward the ends they seek. A goal less vague than the cosmopolitan and more social than personal ends must be outlined before sentiment and thought can direct activity toward new ends as forcefully as the old ideals did. I reach this conclusion by assuming that surplus promotes activity and that activity transforms the natural surplus into wealth. With wealth come price relations through which ancestral control is broken and wealth control put in its place. Price relations give rise to budgetary concepts. In the endeavor to bring the family budget to an equilibrium, activity is increased and consumption is put on a cultural basis by increasing the intensity of new wants. This brings on a self -repression which is the essence of character building. The struggle for supremacy is now changed from a race and class struggle to an internal struggle for self-control. Primitive feelings and instincts are repressed, sex and appetite are curbed, and cultural motives replace the older sentiments due to race and class antagonisms. These newer struggles are growing elements in English and American life. A higher culture will result that makes decisions individual and personal rather than racial and class. There will be no unity of race, of language, of history or of ancestral tradition, but there will be a new type of men forced into a common mode of living by their culture, education and activity. Such a civilization is a reality among the English-speaking peoples and its spread to other races and regions is only a matter of time. To make its reality apparent, and to give it an emotional force, it needs a name which it now lacks, for the many nations and regions to which it has spread keep any historic name from being appropriate. To call it English or American is to prevent the united appeal which is so much needed to give it force. Anglo-American has a racial limitation that must be avoided. As a mere suggestion that may lead to the adoption of some appropriate term, I offer the word "Angloid," which seems to come nearer to what is wanted than any other term. It implies a heterogeneous origin and thus seems weak, but this weakness is a real strength as it permits a fusion of all elements making for a higher civilization and an energetic personality. The unity is in the type, the culture and in the resulting character. We progress not through an heredity but through our improved environment. THE RECONSTRUCTION OF ECONOMIC THEORY 95 With or without a name, this new civilization will impress itself more deeply on the coming age. The new and the old types of culture, motive and character are bound to come into sharper con- flict as the century advances. The older tendencies are coercive and will strive to impress themselves as state socialism. The newer forces will express themselves in voluntary association. It will be a struggle of tradition, race and class with the blending influences that make for unity and character. The history of the coming age will be a chronicle of such results as a future historian can describe better than an economist can predict. INDEX Adventists, the, 83. America, application of English theories to, 42; double origin of economics in, 13; socialism in, 7, 8; types of socialism in, 26-30. American economics, 4. American thought, 2; advance of, 9; development of, 4-8. Austrian economists, 6. Bismarck, 14, 17. Budget, 52; kinds of, 55; makers, small producers as, 54; making, 51-56. Budgetary concepts, growth of, 57. Budgetary pressure, basis of, 61; forces increasing, 61; in distribu- tion, 62; moral effects of, 62; tendencies that relieve, 61. Budgets, family, 57-63. "Capital," Karl Marx, 20, 24. Capital, circulating, 67; effect of banking upon, 66; law of, 38; loanable, 64, 65; scarcity of, 67. Capitalism, 26, 53; and profits, 11; large scale, 28; socialization of, 27. Capitalist, working, 44, 57. Carey, H. C., 17, 32. Carver, T. N., 84. Centralized industry, 76. Chamberlain, "Foundations of the Nineteenth Century," 32. Clark, J. B., 4, 5. Classes, basis for, 1 8 ; conflict between, 28, 32, 36; in society, 36; origin of social, 40. Communism, agricultural, 27 Competition, 54, 55; decrease of, 23; in banking, 72; increase of, 44. Comte, Auguste, 21. Consumption, laws of, 5. Continuity, doctrine of, 33. Cooperation, promotion of, 22. Cooperative farm colonies, 70. Cosmology, contrasts of economic, 10; essentials of economic, 10. Democracy, 90; and socialism, 29; emotional, 11. Democrat, the progressive, 29; the social, 11. "Development of English Thought," S. N. Patten, 2. Devolution, 40, 83, 85. Diminishing returns, 38, 40, 84. Distribution, effect of budgetary pres- sure in, 62; failure of theories of, 36-40; practical applications of the theory of, 47-50; problem of, 12; restatement of the theory of, 41- 46; social, 45; theory of, 21, 37, 38, 45. Dogmatism, 74, 77. Economic doctrines discarded, 22. "Economic Interpretation of History," E. R. A. Seligman, 7, 13, 21. Economic interpretation of history, 6, 7, 9, 11, 34. Economic monism, 4, 6, 9, 12. Economic pluralism, 4, 6, 7, 9, 11. Economic rights, 80. Economic theory, and evolution, 20; and Marx, 23; German, 15. Economic thought, application of prag- matism to, 3; basis of German, 32; basis of reconstructing, 12; trans- formation of, 89. Economics, American, 4; difference between, and sociology, 5; double origin of American, 13; elements in, (96) INDEX 97 92; English, 2; logical, 31; revolu- tionary, 22; scientific, 83. Economists, Austrian, 6; early, 10; orthodox, 16, 31. Economy, agricultural, 36; creative, 92; cultural, 36; pain, 5, 9, 33, 37, 92; pleasure, 5, 9, 33, 37, 51, 92; price, 38; slave, 36. England, socialism in, 7, 16. English theory, application of, to American conditions, 42. Environment, progress through im- proved, 94. Europe, socialism in, 7. Evolution, 40, 41, 84; and economic theory, 20; industrial, 44. Family budgets, 57-63. George, Henry, 2; "Progress and Poverty," 35. German thought, application of, to economics, 2; effect of, on students, 2, 13, 14. German revolution of 1848, 20. Germany, basis of economic thought in, 32; basis of progress in, 14; economic evolution in, 2; economic theory in, 15; socialism in, 15. Giddings, F. H., 4, 5. High cost of living, the, 64-69. High prices, effect of banking upon, 72. History, economic interpretation of, 6, 7, 9, 11, 34; material interpre- tation of, 9, 20; sociological inter- pretation of, 9. Income, 91; equalization of, 27; forms of, 36; personal, 59; rise in, 68; unearned, 38, 45; vested, 59. Individualism, 86, 94. Industrial centralization, theory of, 50. Industrial evolution, 44. Industrial life, elements in, 69. Industrial morality, basis of, 62. Industry, capitalistic, 1 1 ; centralized, 76; modern, 18. Interest, 16, 38, 68, 72. Interstate Commerce Commission, views of, 49. James, William, 4. Labor, and wealth, 17; organizations and progress, 73. Living, high cost of, 64-69. "Logic," J. S. Mill, 31. Logic versus sentiment, 14. Marshall, A., 6. Marx, Karl, 2, 13, 24, 27, 39, 70, 71, 84, 89; and economic theory, 23; development of, 20; originality of, 22; problem of, 21; service of, 7, 15; the economic, 19-25; volume on "Capital" by, 20, 24. Material interpretation of history, 9, 20. Method, problem of, 12. Mill, John Stuart, 2, 6, 13, 14, 21 47, 89; interpretation of, 31-35; vol- ume by, on "Logic," 31. Monism, economic, 4, 5, 6, 9, 12. Monopoly, 38, 64. Morality, basis of industrial, 62; current economic, 30; effects of new, 62; primitive, 61. Owen, Robert, 22, 71. Pain economy, 5, 9, 33, 37, 92. Philanthropy and social sentiment, 28, Pleasure economy, 5, 9, 33, 37, 51, 92. Pluralism, economic, 4, 6, 7, 9, 11. Political stability, 85, 89. Population, law of, 38. Pragmatism, 3, 5, 74, 77. Price economy, 38. Prices, law of, 48; rise of, 37, 64. Production, cost of, 58; effect of 98 INDEX improved, 58; large scale, 54; laws of, 5; problem of, 11. Profit sharing, 27, 70. Profits, 15, 34, 41, 43, 51, 55, 60; and capitalism, 11; centralized, 44; distribution of, 11; equalization of, 11, 26, 27; fall in, 31; in England, 14; right of employers to, 17; rise in, 27; theory of, 21; undivided, 42. Progress, and labor organizations, 73; law of, 48; measure of, 36, 83-88; problem of, 12; tests of social, 87; theory of, 50. "Progress and poverty," Henry George, 35. Progressive democrat, the, 29. Prosperity, effect of, 55, 58. Public opinion, 1, 17, 48, 89. Rationalism, 3. Rent, 34, 38, 43, 45, 51, 55, 60. Ricardo, David, 6, 14, 39, 84. Rogers, Thorold, 6. Saving and wealth, 16, 42. Scientific economics, 83. Seligman, E. R. A., "Economic Inter- pretation of History," 7, 13, 21. Sentiment versus logic, 14. Sex freedom, motives, and restraint, 30. Small, Albion W., 21, 22; "Socialism in the Light of Social Science," 13. Smith, Adam, 21, 53, 64. Social action, 70. Social control, 90, 91; kinds of, 48; law of, 48; problem of, 12. Social democrat, the, 11. Social distribution, 45. Social forces, new alignment of, 43. Social progress, 77, 87. Social revolution, 26. Social sentiment, 70. Social surplus, 39, 45, 47. "Socialism in the Light of Social Science," A. W. Small, 13. Socialism, 6, 27; and democracy, 29; and sociology, 2 1 ; and surplus, 2 1 ; avoidance of state, 76-82; collegiate, 29, 30; emotional, 11, 24; growing influence of, 7; hero of, 13; America, 7; in England, 7; in Europe, 7; in Germany, 15; Marxian, 26; modern, 93; origin of, 13-18; political, 46; program of, 24; scientific, 19, 22; sentimental, 8, 26; sociological, 29; state, 24, 70, 75, 80, 81; transformation of, 7; trend toward, in En land, 16; types of American, 26-30; unity of, 13; voluntary, 26, 27, 28, 70-75, 76. Socialists, American, 8; early, 27; literary, 29; sentimental, 7. Socialization of railroads, 73. Society, classes in, 36. Sociological interpretation of history, 9. Sociological socialism, 29. Sociology, and socialism, 21; dffer- ence between, and economics, 5, transformation of, 21. State ownership, 26. State socialism, 70, 75, 80, 81; avoid- ance of, 76-82. Statistical wage, 39. Subsistence fund, 45, 51. Subsistence wage, 39. Super-profit, 42. Super-wage, 42, 43, 45. Surplus, 16, 17; and socialism, 21; social, 39, 45, 47; undistributed, 21. Surplus value, 15, 21. Survival, power of, 63. Theorists, deductive, 4. "Theory of Prosperity," S. N. Patten, 1. Unearned income, 38, 45. Unearned increment, 34. Utility, principles of, 6. Utopists, the, 29, 37. INDEX 99 Values, 53. Wage, statistical, 39; subsistence, 39; super, 42, 45. Wage fund, kinds of, 39. Wages, 41, 46, 60, 68, 85; iron law of, 38; rise in, 38; study of problem of, 6. Wealth, 47, 48; and labor, 17; and saving, 16, 42; creation of, 11; redistribution of, 46. "< M ' CALIFORNW A 000 676881 6