UC-NRLF ^B 23b S3T ^^mMmmv^mmsy !lemeis!Ts of FOR HIGH SCHOGI.,S B Y U. S, PARKER. A,, M. ELEMENTS OF ECONOMICS FOR HIGH SCHOOLS BY U. S. PARKER, A. M. H^'i'T ^h 111 5 f.3 COPYRIGHT, 1916 by — U. vS. PARKER, A. M. CHAPTER I. OUTLINES OF ECONOMIC HISTORY. Page 1. Scope of economics 2 2. Importance of study of economics 6 3. Industrial evolution of society 6 4. The first two stages 9 5. The agricultural stage 9 6. The handicraft stage 10 7. The factory stage 12 8. Industrial development in U. S. to 1815 13 9. Development from 1815 to 1861 14 10. Development since 1861 16 CHAPTER II. LAWS OF CONSUMPTION. 11. Definitions 20 12. The law of satiety 22 13. The law of variation of utility 23 14. Marginal and total utility 23 15. The law of demand 25 16. The law of elasticity of demand 26 17. The law of economic order of consumption 28 18. Law of development of wants 30 19. EngePs law 32 CHAPTER III. PROBLEMS OF CONSUMPTION. 20. The standard of living 34 21. The housing problem 35 22. Evil conditions 37 23. Causes of these conditions 39 24. Remedies 40 25. The liquor problem 43 26. Solution of the problem 45 27. Extravagance of the rich 46 CHAPTER IV. FACTORS OF PRODUCTION 28. Production defined 48 29. The three factors of production 48 30. Classification of capital 49 31. Increase of capital 51 52. Increase of labor: Law of Malthus 53 33. Our immigration problem 55 CHAPTER V. EFFICIENCY IN PRODUCTION. 34. Richness of natural resources 58 35. Efficiency of capital 59 36. Efficiency of labor 60 37. Social cooperation in production 62 38. Advantages of social cooperation 63 364747 II 39. Disadvantag^es of social cooperation 64 40. Forms of business organization 66 41. CorpoTatioroductfon The Econom- /c unii- x3oc/qI Orga/2 - Too/^ Trans- portat/'oq Exchar^e, L.abor /.ThG. ■family a.nd. fukin^ 1 tOLCh ■family /ncicpen- de.nt /.Division /abor /n fam//y i\Nood^ bark, bone., roi/y/x Stor2//sheci ^yya^ons druvvn by Qni/Tta/s ^ copper- 4. HancL- icrciff ^\//ll<^^ or Clf/ ^biv/s/on of Occu- pat/'oa ^Alone.y labor /n clfycs /n Q^f^l- culfor^ pass serfdom. Irffo ^ •^t'^cejdom 4^ Bronze 5. Tn^ na tion s Tron ^Sailin^ ^ Afoncy and credit factory ^Af/nutc. •Subdi- VlJ/O/2 /cfbor lYoric^ ^7?ull- wa.y, Steam- J.hip \ 20 ELEMENTS OF ECONOMICS CHAPTER II. The Laws of Consumption . 11. SOME DEFINITIONS. Before entering upon a discussion. of the laws of consumption, several definitions must be clearly fixed in mind. Consumption is the destruction of goods. It may assume any one of three forms. When goods are destroyed for the purpose of producing other goods, as when coal is burned to give heat for converting water into steam, or wool is consumed in making cloth, it is productive consumption. When goods are consumed in order to' satisfy our personal wants, it is final consumption. And when goods are destroyed without producing either of these two results, as when a house or factory burns, it is waste. Three terms are closely associated in economics, and for all practical purposes mean the same. These terms are, wants, needs, desires. In common usage the term want may mean desire or it may mean destitution; need means something one ought to have, or some- times it also means destitution. But in economics the three words simply mean desire, or a longing for something. Economic needs or wants or desires are those which are related to our getting a living, and are to be kept distinct from other v/ants, such as the desire of friendship . Our wants may be classified under two heads, existence wants and culture wants. The three great existence wants are for food, clothing and shelter. These may be called the animal or physical wants. Culture wants include desire for education, for satisfaction of the love of the beautiful in nature and in art, and desire for travel. These are wants that spring from our higher aesthetic and intellect- u;al nature. Theoretically these two classes seem quite distinct from each other; but in practice there is no sharp dividing line between them. Our desire for shelter, for example, leads us to build a house; but to what extent does the house serve to keep us warm and pro- tected and to what extent does it minister to our love for the beauti- ELEMENTS OF ECONOMICS 21 f ul ? Or just what sort of a house would minister to our animal wants without appealing to our sense of the beautiful? And just how good would the furnishings need to be to supply only the demands of our physical nature? It is clear that no such sharp distinction can be drawn. The subject assumes a practical phase when we ask what the working classes consider as necessary for them to live in decency. Our American standard of decency in living would be far different from that of our ancestors of the colonial days or from that of the European working men of today, for the American workmen would include many things as necessary that were -iiot known in colonial times and are not now enjoyed by the working classes of Europe, es- ' pecially the lower classes of labor . And the question would assume a still more practical phase if thie^^stat^ were to establish a minimum wage, for the minimum would naturally be high enough to afford a decent living. And a third phase of the question needs to be con- sidered, and that is the effect of our surroundings upon our energy and our character. Men cannot do as good work if they have the bare necessities, using that word in its strict sense, as they can do if they have some of the finer things of life. The man who goes to his work with the memories of a pleasant home lingering about him, with the thoughts of a good book in his mind, with the echoes of song and music in his soul, goes with a greater power to do good work than he who goes forth from the home whose bare interior stirs within him none of the finer qualities of his nature. Another group of terms that are also closely associated are utility, value, wealth, price. Utility is the power of satisfyiny our wants. Four forms of utility exist. Some things have utility be- cause of the elements which they contain, as cotton fiber for making thread, when it is said to have elementary utility. When the cotton is made into thread or cloth or garments, or into a form to suit our wants, it has form utility. When the cloth is transported to market where people can get it, it has place utility added to it. And when it 22 ELEMENTS OF ECONOMICS is brought to our door when we need it, place utility is again added and also time utility. The want that is satisfied may be for things for productive consumption or for final consumption. In the latter case the goods possess all four kinds of utility. Value is power in ex- change. Some things, such as air and sunlight, may have the great- est utility, but they are free goods and have no power in exchange, and hence have no value. Wealth is anything which has value. Price is value reckoned in terms of money. 12. THE LAW OF SATIETY. The laws of consumption grown out of human nature and their proof is found in human experience. One of these laws, called the law of satiety, is, that any one want can be fully satisfied. This does not mean that any want can be so fully satisfied now that we shaTT not experience that desire in the future. It means that during any given time any want can be sat- isfied, if, of course, we have the commodity in sufficient quantity. Our want for bread, for example, can be completely satisfied from day to day, so that we would not consume any more if it could be had for the asking. Our want for hats, say, might not be so easily sat- isfied, but clearly there is a limit beyond which we would not be bothered with any more . Our desire for culture is still more ex- pansible and not so easily satisfied, and it may seem that this is an exception to the law. But desire for culture is complex, and if we take our desire for a particular line of culture and for the things that satisfy that particular line, we can see that such desire is not unlim- ited. The desire for money may seem an exception to the rule, but money satisfies no want directly, but is a means of satisfying all wants; and, as we will learn later, when one want becomes satisfied others spring up, hence it follows that though the desire for money cannot be satisfied, this does not contradict the law of satiety. This law is one of the most fundamental and far-reaching in economic science, for it underlies most of the other laws of con- sumption, and the laws of value are partly built upon it. No human ELEMENTS OF ECONOMICS 23 progress would have been possible if this law had not been true, be- cause otherwise men would have spent all their time and energies satisfying the lower wants. 13. THE LAW OF VARIATION OF UTILITY. Directly out of the law of satiety grows another law, the law of the variation of util- ity. This law is, that the utility of a given unit of a commodity varies inversely with the supply. That is, the more wheat there is the less importance we attach to a bushel of it. Since we want only about so much of it during the year, the more wheat there is the more fully can that want be satisfied, and as the want becomes more fully satisfied we care less about possessing an additional bushel. If apples were scarce we might be willing to pay two dollars a bushel for, say, ten bushels to put in the cellar for our wint<3r*s use. If they were very plentiful and sold at fifty cents a bushel we prob- ably might buy twenty bushels, if we had a large family. But if ap- ples sold at twenty-five cents a bushel we would not greatly increase our winter's supply, because we would not use them all. This illus- trates the practical importance of the law of satiety and of the law of vaHation of utility which grows out of the law of satiety. Upon these two laws are based largely the calculations of the commercial world. This illustrates also the close relationship between these two laws. The law of the variation of utility is really implied in the law of satiety, for if a want can be satisfied more and more com- pletely it simply means that our desire for each additional unit of the commodity grows less. 14. MARGINAL AND TOTAL UTILITY. Out of these two laws springs the conception of marginal or final utility, which seems so puzzling to those just beginning the study of economics, but which becomes perfectly simple if we will just keep in mind the above laws of consumption. Marginal or final utility is the utility of the last, or least important, unit of the supply. The utility of each unit of a given supply is of course the same. But since the utility of each 24 ELEMENTS OF ECONOMICS unit diminishes as the supply is increased, it is convenient to think of the last unit added to the supply as the marginal or final unit, and consequently as having the least utility, or as being the least im- portant unit of the supply. Salt, for example, has several uses. Its most important use is for cooking and preserving food. A less important use is to melt the ice on the walk in winter or to kill weeds in summer. If that were the least important use to which salt could be put, and if there were enough to supply all needs for the table,, and for cooking and preserving food and some to use for killing weeds, or melting ice, this would measure the marginal utility of salt or the utility of any unit in a supply that large. But the idea of marginal utility applies even if a commodity has but one use, because of the law of satiety. Take bread for example. Suppose it had but one use, that of satisfying the hunger of human beings. If there were only enough to partially satisfy our wants for that kind of food so that we would be compelled to satisfy the remainder of our want with something less suitable and less desirable, the marginal utility of wheat would be high. If on the other hand there were an abun- dance of wheat so that we could get all we wanted of it, its marginal utility would be low. Marginal utility is to be distinguished from total utility, which is the utility of the whole supply. In case of a necessity, say of the total wheat crop of any year, its total utility is infinite, in case we could get no other food or substitute, for we would starve without it. But the marginal utility of that same commodity may be small. There are some interesting applications of this distinction be- tween total and marginal utility, the most important of which is that marginal and not total utility measures the importance of goods. In other words, it is marginal and not total utility that helps determine the price of an article. From this it may happen that a large grain crop might sell for less than a small crop, that is, the total value of the large crop would be less than the total value of small crop; but ELEMENTS OF ECONOMICS 25 this is not true of the total utility of the large crop, because total utility increases with the quantity. 15. THE LAW OF DEMAND. Another great law of the business world is the law of demand. By demand is meant the offer to buy. The amount of a commodity that we will buy depends upon three things, its marginal utility to us, the price, and the amount of our income. If the marginal utility is high, that means that our desire for that thing has not been very completely satisfied and our demand for it is strong. If the marginal utility of a commodity is low it means that our desire for it has been fairly well satisfied and we do not care very much about any more of it. The utility of some things does not depend upon their quantity but upon their quality or style. If, for example, a hat is out of style its selling price will drop perhaps to a small fraction of its price when it was in style, though there may be but few like it on the market. The utility, that is, the marginal utility of other things in which style plays no part, as wheat, for example, depends upon the quantity. Our conclusion thus far is that demand varies directly with marginal utility. The price of an article affects its demand because our income is limited. If the price of an article goes up and we purchase the same amount that we did when the price was low we will be de- prived of something we are accustomed to, or else we shall have to Increase our expenditures for final consumption and consequently have less of our income to "save for the rainy day." If the price goes down we are tempted to buy more in order the more completely to satisfy our desire for that thing, unless our desire has already been satisfied. Then, too, it may be that by purchasing more of the article that has fallen in price we can decrease our expenditure for some article that is more costly but which answers the same purpose as the cheaper article, and by so doing we could reduce our expenditure for final consumption or buy something we have before wanted but considered beyond our means. Hence it follows that demand varies inversely with the price. 26 ELEMENTS OF ECONOMICS Demand depends also upon the amount of our income. If our in- come increases we will buy more of all those things for which our desire had not already been fully satisfied. Ordinarily, this would mean that our demand for all but a few great staple articles such as bread, salt, and other articles of absolute necessity, would increase, because in most cases we do not consume all we would if we had more money. Most people would buy more and better clothes, more and better furniture, have better houses, and increase their expendi- ture along many lines if they had more income. We may therefore put all three things together and state the law of demand as follows: Demand for a commodity varies directly with its marginal utility and the amount of our income and inversely with its price. This is the great law that all business men must understand and take into ac- count in their commercial transactions. 16. THE LAW OF ELASTICITY OF DEMAND. In our dis- cussion above there is implied another law which is called the law of elasticity of demand. This law is, that demand for necessities changes less than demand for luxuries, with changes in price or in our income. Things that are really necessary to support life we must have and the price has little to do with the amount demanded, unless some substitute can be found for them. Usually this is true to some extent, and for that reason the demand even for necessities varies with the price. But the great staple articles of food and cloth- ing people must have in fairly constant quantities, and changes in price do not affect demand very greatly. But if the price of a luxury goes up demand must fall off from all those who have only a moderate income, for if they continued to consume the same quantity of luxuries as before they would not have enough left with which to satisfy the more urgent needs. If the price of luxuries fall we are tempted to buy more, in order more completely to satisfy desires only partially gratified before. But if the price of necessities goes down we will not demand very much more or possibly no more because we have about all we want of necessities, unless we are of that unfortunate ELEMENTS OF ECONOMICS 27 class who are underfed and insufficiently clothed. We may lay it down as a general rule, therefore, that demand for necessities is less elastic than demand for luxuries. From this law some interesting and important changes in prices will follow changes in supply. If there is a comparatively slight de- crease in the yield of wheat or corn it will send the price very high. Since people want about so much of these things, producers and mer- chants will take advantage of the shortage and boost prices, knowing that people will buy, regardless of the p/rice. Within a few weeks in 1915 the price of sugar doubled on account of the war in Europe; but merchants say they can see no decrease in demand for sugar. If on the other hand there is an extra large crop of grains, prices will go very low, because merchants and producers know that there will be difficulty in getting rid of the whole supply, and they louver prices to tempt people to buy more. Competition hastens this process, since each producer and dealer fears that rivals will lower prices first and supply the demand. An oversupply of luxuries on the other hand would have no such a depressing effect on prices, since a slight drop in prices might increase the demand enough to ab- sorb the supply; while a shortage in a luxury would not send prices so high as in case of a necessity because a rise in prices decreases de- mand very greatly, specially of an article used quite widely among the people. Thus there is a law of elasticity of price, which may be stated thus: the price of luxuries changes less than the price of necessities with changes in supply. The law of elasticity of demand has many applications in the business world. One of the most important applications is made by monopolists. In case a monopolist controls a necessity he can injure people greatly because he can put the price at an unreasonably high figure without greatly decreasing demand. If the monopoly controls a luxury, however, consumers are not so completely at its mercy, be- cause if the price goes up they can cease to buy and then the monopo- list will "come to time" and keep his prices reasonable. 28 ELEMENTS OF ECONOMICS 17. THE LAW OF THE ECONOMIC ORDER OF CONSUMP- TION. Closely associated with the general law of demand is another law called the law of the economic order of Consumption which is, that the commodities we consume and their relative quantities de- pend upon their relative marginal utility and relative prices and the amount of our income. It will be observed that the same forces that determine the conomic order of consumption also determine demand. The economic order of consumption is in fact only the result of the relative strength of our demand for different things, while the law of demand looks at the strength of our demand for a single thing onlyV As a matter of fact, however, when we are considering whether or not we will buy more of a certain thing we either consciously or uncon- sciously think of what it will cost us as compared with something else we want, and whether the thing in question will give us more enjoyment than something else, and whether we should buy anything more or save our money for further use. Hence these two laws, the general law of demand and the law of the economic order of consump- tion are looking at the same conditions and the same forces but from different points of view. Let us be sure that we know what the economic order of con- sumption is and what the law governing it means. The thing about which this law is concerned might be called the family or private budget. The economic order of consumption does not refer especial- ly to the order in which things are purchased and consumed, though the name implies that; but it refers to the amount of our consump- tion of different things during, say, the year. Some people include in their consumption silks and satins and furs, automobiles, splendid mansions, and all sorts of things; other people lay up treasures in books, works of art, and things that appeal to the intellectual nature; still other people consume none of these things, or but very few. Again two persons might include in the list of things they consume about the same articles, but the relative amounts consumed by the two persons might be very different . The law of the economic order ELEMENTS OF ECONOMICS 29 of consumption tells us why these facts are so. Why does the range of our consumption and the relative amounts of our consumption depend upon relative marginal utility, relative prices and the amount of our income? Why do some people buy au- tomobiles, for example, and some not? The answer is simple. Some cannot afford it, by which is meant that if they buy luxuries they will deprive themselves of things more necessary and hence have less pleasure with the automobile than without it. Others may have plenty of money to spend for such things but do not care for autos, that is, they get more pleasure out of other forms of luxury. Gener- ally speaking, the smaller the income the greater is the relative proportion that must be expended for necessities. In too many cases, however, perverted tastes cause people to spend a large portion of a small income upon such things as liquor, tobacco and harmful amusements, and as a result not enough income is left for necessities . This law tells us many things about the consumption of the commu- nity. If some things are especially cheap we are tempted to buy more of them and less of something else, so that we may get more satisfaction out of the total expenditure, or so that we may get the same satisfaction for less money and lay by more for the future. If apples are fifty cents a bushel and oranges three dollars a bushel ,. those whose income is moderate in amount would spend considerably more on apples than on oranges. But if apples are as high as or- anges people would buy fewer apples and more oranges. This law gives us a basis for the study of the family budgets of the community. It also suggests the study of right living and wrong living. It leads us into the study of extravagance, of perverted tastes, of right and wrong conceptions of the relative value of things in human life. If, for example, we discover people with small in- comes trying to copy after the rich in their expenditure, we con- clude that they are not wise in this matter, since too small a portion of their income, or none at all, is going to the support of their old 30 ELEMENTS OF ECONOMICS age. Their judgment is wrong, since they value present show more than decent comfort in their daclining years. If again we discover men spending for liquor and tobacco, even in moderate quantities, we conclude that they too have perverted tastes and poor judgment, since they are feeding depraved appetites to the detriment of their better nature. If again we discover the rich spending large sums on automobiles, dress, parties, and amusements, and comparatively little on books, music, works of art, we conclude that their tastes too are perverted, and that our civilization has failed to create in them de- sire for intellectual culture. And these conclusions should lead us to examine our social institutions to see why they are thus failing to give the people right tastes, why our civilization is not leading men upward more into the higher life instead of creating in them a desire only for material things. 18. LAW OF DEVELOPMENT OF WANTS. Such a study would lead us to discover another law of consumption, the law of de- velopment of wants, which is, that when existence wants become fairly well satisfied culture wants spring up without any assignable limit. It should be noted that this law has three distinct points to it, or in other words, it is composed of three distinct statements. The central idea is that new wants develop; but they will not develop until after the lower wants are fairly well satisfied, and the number of new wants that may spring up we have no means of knowing, since they are now growing more rapidly than ever before, after thousands of years of development. This law is true because of human nature. Man alone of the animal creation is endowed with the capacity thus to progress. The conditions under which new wants develop are as stated because of human nature. These con- ditions are simply two primary laws of consumption incorporated into this more complex law. These two primary laws, it will be ob- served, are the law of satiety and the law of relative intensity of wants. This law has a very important application which our social ELEMENTS OF ECONOMICS 81 workers and society in general are beginning to understand. For years our "college settlement" workers and "slum" workers seemed to be under the delusion that what the lower classes chiefly needed was religion and Sunday schools. But such workers now realize that men cannot be lifted bodily into the higher life and that they cannot develop into it unless they first have means of satisfying the lower wants. Little can be done to elevate people into a higher life if their income is insufficient to enable them to satisfy existence wants. Generally speaking, man develops through a slow process of evolu- lion, though the power of religion often suddenly reforms men who Lave lived in the midst of higher things but have cast off their in- fluence and followed the downward road. Not only among the de- graded elements at the bottom of the social scale do we find the great law of development of wants illustrated; we find it exemplified among the working classes and other people with small incomes. The more enlightened portion of the community has a constant struggle to in- duce those classes to give their children a sufficient education to en- able them to develop into men of a higher type. Most people are satisfied with the rudiments of an education and satisfied if their children have the same . And if the time ever comes when the masses will care much about real culture it will be when incomes are suffi- cient to enable them to satisfy much more fully than they can now the wants at the lower end of the scale. The masses will never ex- perience a very keen desire for things that cultivate the mind and enrich the soul so long as they live in hovels or dingy flats and take their pleasure rides in crowded street cars, while their neighbors live in splendid mansions and ride in automobiles. And if some few should aspire to give their children a higher education it would be chiefly with the hope that their children may some day own a fine mansion and an automobile, rather than that they may enjoy a higher intellectual and spiritual life. This law of development helps us to understand another phase of our civilization, and that is what is called its materialistic nature. 32 ELEMENTS OF ECONOMICS A large portion even of the rich seem to seek pleasure almost ex- clusively in material things. This is explained partly by the ex- pansibility of our wants v^hen bare necessities are provided for. In the realm of desires that lie midway between absolute necessities and purely intellectual and spiritual wants are the desires for the finer material things and forms of pleasure which have in them something of the intellectual and spiritual element but which largely satisfy physical enjoyment. In fine houses and furniture and auto- mobiles there is much that elevates and refines; but such material things do not primarily cultivate the mind as does the study of book^, of nature, and of art. Modern invention has so multiplied these material things that give us mainly physical pleasure, and there seems to be so much room for expansion of this class of wants, that 'the development of the real higher life of the race is somewhat checked. These finer material things are good to have and man must have them to develop properly; but when we spend so much of our time and means and energy in seeking pleasure from these material things that the study of good books and of nature and art, and even attendance upon divine worship, is neglected, the too great multipli- cation of these material things is much to be regretted. 19. ENGEL'S LAW. Economists include among the laws, of consumption a law named from a German statistician. Dr. Engel. This is not a law distinct from those already considered, but it merely illustrates these laws of consumption. Dr. Engel made a detailed study of family expenditures among the working classes in Saxony, the incomes of the families ranging from $225.00 to $1100.00 a year. His conclusions were that as the incomes increased, (1) ex- penditures for food increased, but not in proportion to the increase in income, (2) expenditure for clothing increased nearly in proportion to increase in income; (3) expenditure for rent, fuel and light in- creased in proportion to income; and (4) expenditure for education, recreation, health, etc., increased more than income increased. His tables show some remarkable results. Families with about $300.00 ELEMENTS OF ECONOMICS 33 a year income expended about $180.00 on food while families with $1000.00 a year income expended about $500.00 on food. This shows either that the families with the smaller income are greatly underfed or else the families with the larger income are extravagant. In- vestigation would doubtless show that both conditions exist. Investi- gations by the U. S. Department of Labor show results similar to those obtained by Dr. Engel, though there are some interesting variations in details. For example, in the U. S. the expenditure for food increased much less than in Saxony, with the increase in in- come, and the American family with $1000.00 a year income spends considerably less than the Saxon family with the same income, the former spending about $350.00 for food and the latter about $500.00. On the other hand, the expenditure of the American families for education, health and recreation increased much more rapidly, with increase of income, than the expenditure of the Saxon families for such things. This indicates that the American working classes sp6nd more wisely than the Saxon working classes, if the investiga- tions in both cases included families typical of their class. ELEMENTARY LAl/l^S DERIVED LAIVS /■ ySa/-/G/K - A l^r/a//o/? of 0/-// //}/ •_ \ ^ J ^ ^. ^/ \ \ 3 De?7)an d varies^ ^ ^^-^Eccnom/c order ' s / ^ "y ' — — d/rccf/y \^^//h /ncorh^ " ^^ _ o fCon^umpt/on 4 Ex/^fer?CG. v\/cir}'tsar^ ^ 4- 'E/o^//c/ Ty C^ 34 ELEMENTS OF ECONOMICS- CHAPTER III. Problems of Consumption. 20. THE STANDARD OF LIVING. Problems of consumption center around the standard of living. Of these problems three are of special importance, the housing problem, the liquor problem and the extravagance of the rich. These three problems will be considered in this chapter. The standard of living means either of two somewhat different things. It may mean merely the present conditions under which one is living, without reference to any ideal in the person's mind, or it may mean an ideal condition which one is struggling to reach or main- tain. In the former case people are just drifting with the tide, so to speak, taking whatever comes along without attempting to better their condition. In the latter case people are either endeavoring to maintain their condition against adverse circumstances or else they are trying to improve their standard of living for themselves or their children. The standard of living in either sense is of vast importance to society, for it measures very largely the height to which civilization has risen or will rise in the future. It makes a vast difference to the friends of humanity striving to help elevate the lower classes, whether those classes are just drifting without any definite standard or are struggling to improve their conditions. In the latter case social workers meet with a ready response from the lower classes when as- sistance is offered, and in the other case those classes resent any at- tempts to help them. The standard of living is important in another sense. The conditions under which children are brought up determine largely their character. It is impossible to tell just what part hered- ity plays in determining character, but experience shows at least that environment is a powerful factor in determining character. And the effects for good or for ill are cumulative. If people start on the ELEMENTS OF ECONOMICS 35 downward road they drag- the coming generation down, and each succeeding generation is lower than the one preceding it. Such was the history of Rome during the later centuries of its existence. If a nation is on the upward road each generation rises higher than the preceding, so long as conditions are favorable for the succeeding generation. In the standard of living, therefore, civilization is at stake . This standard of living includes the sum total of our material surroundings, the food w^e eat, the clothes we wear, the houses we live in, the books we read, our amusements, and the whole round of our daily lives. And each and all of these things has a decided effect upon our character. Even the clothes we wear affect our character and that of others around us, for if our style of dress is immodest, the purity of our thoughts is contaminated and the contagion spreads more or less to those around us. And so with each item of our ma- terial -existence, for each has its effect upon our character. 21. THE HOUSING PROBLEM. Probably the most important problem of consumption is the housing problem. The home is the chief character builder. During the first few years of the child's life, the home, with its surroundings, whether city streets, back yards and alleys, or the broad fields, is the only social institution with which the child comes in contact. During later childhood the school and the church begin to add their influences to those of the home. But even then the child is at school but a few hours in the day and at church but a few moments a week, if at all, and the home continues in most cases to be the chief factor in the child's life. Our housing problem is a vast one; for it is estimated that about ten millions of people in the United States are living in wretched places called homes which are entirely unfit for human habitation. The housing problem has until recently been considered a problem of private charity to a considerable extent. But it is at once apparent that the problem is too vast for private charity, even organized private 36 ELEMENTS OF ECONOMICS charity, to deal with. Morever, some consistent, proper, uniform policy- must be pursued if we are to remove the causes of the evil conditions- in these so-called homes, and it requires the authority of law to carry out such a policy. These ten millions of people must themselves be reformed and be given an opportunity to improve their conditions before there can be any improvement in their homes. If, for example^ low wages or drunkenness were causes of people living in miserable dens, it would require the power of public authority to d'Sal with the situation and attempt to remove the causes. Again the housing problem has been considered a local one. But ' any conditions which so vitally affect the lives of such a large portion of our population and which are found in every state in the Union and in every considerable city of every state, are not a local matter. Such evil conditions breed vice and crime and the whole people suffer in consequence. If the city breeds criminals and beggars they prey upon city and country districts alike. If a degraded city popula- lation enables a corrupt political ring to maintain its power over city, state or national governments, the whole country suffers. Hence, the housing of these ten millions of people is aT matter de- manding the cooperation of city, state, and nation. This coopera- tion is necessary not merely because all are affected, but because cooperative effort is necessary in order to carry out any plans to re- move the causes of bad housing conditions. For instance, just now the problem of unemployment, one of the causes of bad housing conditions, is being much considered, and social workers suggest that public employment bureaus be established by the cities, by the state and by the national government, in order to cooperate if there is any demand for labor in other parts of the country where laborers are scarce, and if work cannot be found for all with private employers, the different governments should employ them on public works during the dull seasons. To conclude, the housing problem is a public problem of vital importance, to be solved by the cooperative efforts of cities, states, and the nation. ELEMENTS OF ECONOMICS 37 22. EVIL CONDITIONS. It is impossible in a few pages to give an adequate conception of housing conditions in our "slums"; the essential points will therefore be touched upon briefly. Bad condi- tions may be grouped under five heads, overcrowding, foul air, lack of sunlight, filth, ugliness. Overcrowding, especially in large cities, has two phases, too many in a given space of the city and too many per tenement. In our smaller cities the latter phase of congestion is the more pronounced. In New York City there are eleven blocks in the lower part of the city that contain thirteen hundred persons per acre. At that rate little Delaware would hold all the people in the world. The evils of such overcrowding are manifest. Bad air is the inevitable result, for such a swarm of humanity must make the air foul, outdoors as well as in. Lack of play space for children is not the least of the evils of congestion. In old Greenwich Village, a section of New York City, there were, according to an official report of 1914, but 16,000 square feet of play space, and 24,000 children lived in the district. Greenwich Village is on the lower West side of the city, a district not hitherto considered bad enough to need special attention, efforts to secure more play space having been directed to- wards the lower East side. In all our large cities play, normal, healthful play for children, is out of the question. Under such condi- tions it is impossible for the children to grow up with strong, healthy minds and bodies. The worst phase of congestion is, too many per tenement. In this respect our small cities are not far behind the larger ones. Fam- ilies of four or five often live in one or two rooms and take in two or three boarders and lodgers. In New York City about 18 per cent of the families live in one room and often take in one or two lodgers. In small tenements of four or five rooms there is no distinction be- tween bedroom, kitchen or dining room at night, the floor of each room being literally covered with mattresses filled with people of all ages and both sexes. In the daytime the mattresses are piled up in one corner of the rooms. Sometimes two or three rooms of the small 38 ELEMENTS OF ECONOMICS tenements are rented to two sets of lodgers, one set occupying them at night and the other set in the daytime, the day lodgers being ..ight workers, or tramps, night prowlers and thieves. The bad air, the filth, the indecency under such conditions can better be imagined than described; but no one can imagine the foulness of the air in such places until he has actually stepped from the open air into one of these dens. The lack of pure air and sunlight is also due to faulty con- struction of the tenements. Great blocks of houses are solidly packed together, four or five stories high, and as a result of this method of construction most of the rooms have no windows opening out into the broad daylight, but have windows and doors opening into other rooms, and often these other rooms have no outside door or window, but have windows opening upon small, narrow air shafts, three or four feet wide. These air shafts often get filled at the bottom with gar- bage, and windows are tightly closed to keep the foul air from com- ing into the rooms. The filth in many of these tenements and around them is indes- cribable. Floors are black with dirt, both in the rooms and in the hallways, the latter seemingly not only unwashed but unswept from one year's end to another. Garbage in the air shafts, in the back yards, in the alleys and even in the streets; rats and mice and vermin everywhere, laden with contagious disease; flies and insects in swarms bringing their portion of dis*3ase germs; such in brief out- line are the conditions in the slums of our cities, great and small, such conditions as one would scarcely believe could exist, unless tie had seen them with his own eyes. The general results of such conditions are inevitably a grave menace to society as a whole. These slums are hotbeds of disease, vice and crime. Children are stunted in mind and body and depraved in morals. Deprived of God's free air and sunlight, with no chance even in the daytime to play as normal children should, housed among- ELEMENTS OF ECONOMICS 39 vagabonds, beggars and thieves — for such are many of the lodg-ars — filth, disease, ugliness everywhere, it is no wonder that 90 per cent (the estimate of Jacob Riis) of our children in reformatories come from the slums. It would be far wiser and more humane for society to reform the dens whence come these poor unfortunates. As Riis humorously put it, we should recognize the fact that we are our brother's keeper, rather than his jail keeper. 23. CAUSES OF THESE CONDITIONS. Why will human be- ings live in such surroundings? There are many reasons, five of which are especially emphasized by social workers, (1) low wages, (2) drunkenness, (3) laziness, (4) factories congested in certain parts of cities, (5) the low standard of many, especially foreigners, coupled with an intense struggle to save from an exceedingly low wage. Not all of the five causes would apply to the same people, but two or more might sometimes apply. The relative importance of these causes is not easy to determine, but wage statistics would indicate that low wages is the chief cause. According to the latest available data, published both by the State bureaus of labor and by the United States government, about one-tenth of the adult male workers in this country earn less than $325.00 a year, while half our wage earners get less than $500.00 a year. Any one can readily prove from his own knowledge without much investigation that a family of four or five, the average size of a family, could not possibly live in decency on three hundred and twenty-five dollars a year, and with five hundred dollars a year the struggle for a decent living would be a hard one. With prices such as have prevailed for the last ten years, a family of five could not provide themselves with food for less than three hundred dollars a year, and it would have to be the plainest of food at that. A decent house or flat of four rooms would cost on the average not less than one hundred fifty dollars a year, and clothing of the plainest kind would cost not less than fifty dollars a year. Thus it appears that these three items alone amount to more than half our laborers earn, counting only the head of the family as a 40 ELEMENTS OF ECONOMICS bread winner. The results are inevitable. In order to live at all, peo- ple must crowd into the worst tumble down shacks obtainable and often the mother and little children must become wage earners, to the very great injury of both. Many, made desperate by such a hopeless struggle for mere existence, seek to drown their troubles with strong drink and make their condition worse. Thus drunkenness is often the result of poverty rather than the cause; and some of our social workers assert that drunkenness is more often the result than the primary cause of poverty. Pure laziness no doubt is a cause of these conditions in many cases, especially of the filth, for.. water is easy to get and a little work would keep things clean. In many cases the income is suffi- cient, but foolish expenditure, including the drink bill, does not leave enough for necessities. Then, too, factories are often congested in one part of the city, and in order to be near their work, laborers crowd into the tenements, and since rents are usually high in the thickly settled parts of a city, intense overcrowding is necessary to bring rents down to a reasonable figure. Finally, large, portions of our immigrants have an exceedingly low standard of living but are anxious to lay up something out of their pittance of an income, in order to return to Europe and live in comfort the remainder of their days. Hence, they are willing while here to put up with almost any condition, if they can only save. 24. REMEDIES. No remedy of any evil can be effective unless it removes the causes of the evil. Therefore, if we would find any ef- fective remedy for bad housing conditions we must discover some way of removing the causes of such conditions. From the nature of the case no one remedy would remove all the causes, within a reas- onable length of time. The most fundamental of all remedies, and the one that will go farthest in removing the different causes of bad housing conditions, is to give a living wage. This would remove a large part of the cause for drunkenness and in time, that is, in the ELEMENTS OF ECONOMICS 41 course of a few generations, the natural tendency of man upward will reduce the problem from the stupendous proportions it now assumes to one of small dimensions. But how to secure the living wage is the difficult problem. But however difficult, this result must be at- tained or all other remedies combined must utterly fail, except pos- sibly that cleanliness might be attained in some degree by judicious help and advice of wise friends of these unfortunate people. But how shall wages be raised to a living standard? Some ■countries are adopting a minimum wage law, and about a dozen American States have adopted such a law, but laws in this country apply only to women and children, who are not the chief bread- winners; and these laws do not therefore touch the heart of the problem. If such laws applied to men also they would be more ef- fective in enabling the working classes to live in decency. Low wages, however, are caused by an oversupply of unskilled labor and inefficiency. A minimum wage law alone would not, except after a long time at least, and through the slow rise of the standard of liv- ing and the adjustment of the supply of labor to the demand, lessen the oversupply of labor; nor would it increase its efficiency, unless the state offered more opportunity for industrial education. The most important cause of our present oversupply of unskilled laborers is immigration. The logical remedy therefore is a restriction of that class of immigrants. We would not need to prohibit immigration, but to exclude a much greater number of the less desirable sort. Th-e most authoritative recommendation for a considerable restriction of immigration comes from the recent report of the Federal Immi- gration Commission, a commission composed of some of the leading economists and statesmen of the country, appointed especially to in- vestigate our immigration problems. A bill intended to decrease the number of immigrants and raise the standard of those admitted has three times passed both houses of Congress, but was each time de- feated by the presidential veto, the first being vetoed by President Cleveland, the second by President Taft and the third by President 42 ELEMENTS OF ECONOMICS Wilson, the main objection in all cases being to the literacy test. In order to increase efficiency of laborers, more opportunities should be given for young men to get vocational training. As we consider the problem later under the head of problems of production, we mention it here merely to make our remedies for low wages com- plete. Another helpful remedy seeks to reduce unemployment by es- tablishing employment bureaus by cities, by the states and by the national government. Often laborers are wanted in different part^ of the country, but without public employment bureaus, well or- ganized and connected all over the country, those desiring help and those desiring work do not get together. In response to this need several states and many cities have established em- ployment bureaus, and the National Department of Labor is now cooperating with the Post Office Department to bring the manless job and the jobless man together. If all these var- ious measures, the minimum wage laws, restriction of immi- gration, industrial training, better distribution of laborers by em- ployment bureaus, could be secured, we would be on the road to a solution of the housing problem. ' But other remedies are needed to help bring about results more effectively and more quickly. We need a wiser economy in spending. Strong drink should be eliminated. And greater economy in the home would make wages go farther. Many poor people buy baker's bread, which costs twice as much as it would to bake it at home. In many cities charitable organizations are employing trained house- keepers to instruct the poorer classes in more economical methods of housekeeping. A third class of remedies needed includes those which seek to re- form the tenement. Many cities have tenement-house laws which prescribe the conditions as to light, ventilation, plumbing, and other provisions which should make the tenements more habitable. Greedy ELEMENTS OF ECONOMICS 43 landlords have fought such legislation most vigorously, as they do not wish to lose any of the twenty or thirty per cent which they often make on their investments. But in a few of the large cities much has been done to improve the new tenements that are being built and some of the worst dens have been condemned and torn down. Much remains to be done yet along these lines; in fact, taking the country over, the "battle with the slums" is not half finished, and in most of our smaller cities the problem has not been attacked. But even where fairly good tenement-house laws have been enacted, those relating to ovet'crowding in tenements are wholly ineffective. After a generation of struggle to prevent overcrowding in a few of our great cities conditions are worse now than ever before, because the tendency to overcrowd is so strong that laws to prevent it are a dead letter. In the smaller cities this evil is just beginning to be serious, owing to the recent coming of the immigrant to the smaller cities and the development of manufacturing in them. European cities attack the problem by building municipal tenement-houses which are rented to working men at a low rate, and inducements are offered the renter to become the owner of his home by paying for it on the long-time installment plan. America, however, is as yet too individualistic in its theories to adopt this plan. But if all the other plans here suggested could be adopted we could make some headway against this vast housing problem which is becoming more serious every year and which threatens greatly to interfere with our progress towards a higher and a nobler civilization. 25. THE LIQUOR PROBLEM. Scarely less important than housing reform is the liquor problem, and in some respects the latter is the larger problem of the two, partly because it affects more peo- ple and partly because a very large element of our population is fighting against any effective reform. The first great fact that confronts us as we view the situation is the enormous size of our drink bill. In 1912 the people of the United States consumed over two billion gallons of alcoholic liquor at a cost to the consumer of 44 ELEMENTS OF ECONOMICS over two billion dollars, the per capita consumption being twenty-two gallons, at a cost of about twenty dollars. We spend more for strong drink each year than the total value of all the hogs and cattle in the country, more than twice the value of our wheat crop, more than the vcost of all grades of our government, and more than three times as much as we are spending for education. When a nation spends three times as much for strong drink as it does for education, when more education is much needed, there is something radically wrong with its estimate of the relative value of things. But ths outlook is encouraging. The maximum per capita consumption was reached about 1896 or 1897, and since that time the tide has risen no higher and the indications^ are that during the last two years it has receded a little. The liquor interests are becoming somewhat alarmed at the outlook, as they fear that the great temperance wave now sweep- ing over the country will in time destroy them. The evil effects of alcohol are well known and there is little ex- cuse for a people being ignorant of those effects. Even the drunkard himself knows in his sober moments that excessive use of alcohol weakens him mentally, physically and morally. Drunkenness is a very powerful factor in helping fill our jails, penetentiaries, alms- houses, and asylums. According to the report of the Mass. commis- ,sion to investigate drunkenness, alcohol was the cause of 67 per cent of the commitments to prison during the year ending Sept. 30, 1913. Even moderate drinking is now considered by all scientific men as detrimental. Says Bishop Lawrence, "The time has passed when any intelligent person claims that strong drink makes a man m-ore efficient. Industrial efficiency is driving the drinking man, even the rather moderate drinking man, to the wall." Many employers of labor, especially the great corporations, absolutely forbid their em- ployees the use of alcoholic liquor, even in moderate quantities, not only when on duty but when off duty, and an infraction of the rule leads to dismissal. These employers of labor are not temperance fanatics, but they know from experience that even moderate drinking ELEMENTS OF ECONOMICS 45 lessens the working ability of their men. Says President Eliot of Harvard University, "The alcoholism of the white race must be over- come or that vice with the licentiousness that it provokes will over- come the race." 26. SOLUTION OF THE PROBLEM. The temperance forces seem to rely largely on closing the saloons as a sufficient and proper remedy. Their opponents claim that society has no moral right to forbid a man from drinking, and that the destruction of the liquor business would be economically injurious to society as a whole. Or- ganized society exists for the benefit of the people. If any industry is proven to be injurious to society, that is, to the individuals com- posing that society, it is not only the right but the duty of society to suppress that business. A man has no moral right to do anything that injures the other members of the community. The saloon busi- ness has been condemned by ages of experience, and if society thinks the business injurious it has a right to suppress that business.- Moreover, an individual has no moral right to do that which injures himself and incapacitates him for performing his economic and polit- ical duties. Man is the natural bread winner, and he has no moral right deliberately to lessen his power to support a family, nor has he a right to weaken his own mental and moral nature and thus unfit himself for citizenship. And if a man is too weak to resist the temptation to destroy himself, it is the duty of society to save him from destruction, for we are, by every law, human and divine, our brother^s keeper. The friends of the saloon claim that the destruction of the liquor business would injure industry generally. First, they urge, all those engaged in the business would be thrown out of work. That would injure merchants and producers who had been furnishing them with goods. Then the demand for grain and other materials consumed in the production of liquor would be destroyed, and a vast injury would result to business generally. This argument is exceedingly shallow and perfectly fallacious. The results indicated would be merely tern- 46 ELEMENTS OF ECONOMICS porary, until society got itself adjusted to a new economic order of consumption. The argument of the friends of the saloon overlooks the great laws of consumption and assumes that if men should cease to drink liquor their powers of consumption of other things would remain stationary. The simple fact is that if the consumption of liquor is cut off, demand for other things will immediately increase. Those that now go hungry and half clothed because of the saloon business would be better fed and better clothed. The suppression of the liquor business would not diminish manVs capacity for consump- tion, but a new and better consumption would spring up. Thus those temporarily thrown out of employment by the closing of the saloons would find other employment where they could help supply society with things beneficial to it rather than harmful. But society should give needed aid to those temporarily thrown out of work and it should compensate owners of property made valueless by de- struction of the liquor business. But the suppression of the saloon is not enough. The saloon is the poor man^s club. Men must have amusement, and society should take upon itself to provide places of amusement of a kind that would elevate and not destroy. Society already has at its command, es- pecially in the cities, places that can be made into social centers, and these places are its schoolhouses that have as yet only been half utilized. By proper effort recreation and amusement could be provided that would attract those who now make the saloon their social center. 27. EXTRAVAGANCE OF THE RICH. It is a common, al- most universal, belief that the extravagance of the rich is a benefit to the poor. The thought of the average person on the matter runs as follows; If the rich keep a great many servants for menial work, which results in no concrete goods, there will be a greater demand for labor, because somebody must labor to produce the goods which society demands. If the rich spend lavishly in dress, keep half a dozen automobiles, take frequent and expensive trips abroad; all ELEMENTS OF ECONOMICS 47 this creates a demand for labor, and thus increases wages. This reasoning looks sound upon a very superficial view. But it is fallacious. If the labor that is employed in supplying this super- abundance of luxuries for the rich were directed towards the pro- duction of things needed by the masses, there would be a double gain to the laborers. In the first place, things consumed by the masses would not be so high in price, because they would not be so scarce. Some of the necessities being cheaper, more money would be spent to satisfy culture wants. This in the second place would lead to in- creased demand for labor, and wages would be higher. Let us look at it from another point of view. As it is now a large portion of the labor and capital of the country is directed towards the production of high priced luxuries of the rich. If a part of this labor and capital were directed towards supplying goods such as the masses need, the wants of the masses would be more fully supplied. The extravagance of the rich is harmful to society in another way, as pointed out above, since it sets a bad example which others strive to imitate. Thus it sets the middle and lower classes to strug- gling after material luxuries instead of intellectual culture that lies within the reach of all, if they would revise their estimate of the relative value of things. 48 ELEMENTS OF ECONOMICS CHAPTER IV. The Factors of Production. 28. PRODUCTION DEFINED. Production is the creation of- utilities. It will be recalled that there are four kinds of utilities, ele- mentary utility, form utility, time utility, and place utility. Hence,, production includes not merely the making of materials and finished products, but it also includes all transportation enterprises that give place utility as well as all mercantile business which also gives time and place utility. Mere speculators, however, who buy up goods in large quantities to hold them for an advance in price are not producers. They render no useful service to society. Just as much work must be devoted to the distribution of such goods to the consumer after these specula- tors have sold the goods to the regular dealers as before the specula- tors bought them up. All persons who gain a living by such means- are mere parasites upon society. All those connected with stock ex- changes who are not performing the useful service of selling stocks and bonds to investors, but merely manipulating the stock market so as to enhance their values, are among these social parasites. 29. THE THREE FACTORS OF PRODUCTION. There are three factors of production, man, nature, and capital. Nature in- cludes lands, minerals, and all physical and chemical forces. Capital includes all goods, made by man, that aid in production. The dis- tinction between capital and consumers* goods must be kept clearly in mind. Consumers* goods include all commodities that satisfy our wants and that are in shape for final consumption. Without capital, man would stir the ground with his hands, plant the seed with his hands, and tend it with his hands. He would catch fish from the streams and lakes with his hands and with his hands twist into thread fibers of plants and weave them into garments. Needless to say, this direct method of production would be very inefficient. With tools and machinery, or by the indirect or roundabout method, man's ELEMENTS OF ECONOMICS 49 labor is more effective. It is indirect or roundabout because man first makes his tools and machines and with these makes other tools and machines, and finally makes the commodities for final consumption. Thus capital is one of the greatest aids to civilization. Without capital man would forever remain a savage, for all his energies would be used up in supplying himself with necessities. A distinction should be made between private capital and social capital. Private capital is merely property from which a man de- rives an income; social capital enables man to produce more goods than he otherwise could produce. A dwelling house rented to a tenant is private capital; but it is not social capital. A dwelling house is to be classed as consumers* goods, just as much as food or clothing. And the fact that the houses are rented rather than occupied by those who own them does not increase the productive forces of society. Land may be classified as private capital, since all business men and farmers reckon their land as a part of their capital. But land is not to be classified as social capital, not merely because man did not make it, but for a much more important reason. That reason is that income from land is determined by a different law from that which governs income from capital. As a country becomes more thickly populated and capital becomes more abundant, the rate of interest declines; while under the circumstances stated, income from lands increases. Hence the science of economics, which tries to explain the phenomena of the business world, must disregard the practice of business men in this respect and put land and other natural agents in a class by themselves, in order to discover the law that governs the income from these natural agents. 30. CLASSIFICATION OF CAPITAL. Capital may for con- venience be divided into four classes, considering the way in which it aids in the productive process. These classes are, (1) the tools and machines we work with, (2) improvements in the soil, which help nature to do her work better and thus render our labor more 50 ELEMENTS OF ECONOMICS effective, (3) materials we work upon, and (4) finished consumers'" goods in the hands of producers and merchants. The first class in- cludes, besides tools and machines in a narrow sense, horses, fences,, buildings, and many other things that make our work more effective than when the direct process of production is used. The second class includes fertilizers, drains, and other improvements that increase the productive powers of the soil. A close analysis shows that both ths first and second classes of capital make our labor more effective for much the same reason, namely, they harness the forces of nature and make them v/ork for us. The materials we work upon do not directly aid in production but are merely the passive instruments in the productive process. Finished consumers' goods in the hands of producers and dealers are classed as capital simply because they are in the last stage of the productive process, time and place utility being added to them in passing from the producer to the consumer. Both the third and fourth classes of capital are passive, and do not directly make our work more efficient, and the fourth is metely a re- sult of division of labor. Another classification of capital, based upon durability, is that of fixed and circulating capital. Fixed capital includes those forms of capital that are fixed or limited to one or at most to a few uses. A railway locomotive can be used only in transporting goods and people, and the roadbed and cars are also devoted to one use. A fac- tory building can be used economically for nothing but a factory, though it might be transformed from one kind of factory to another. Tools and machinery of all kinds are limited in the uses to which they may be put; but the degree of limitation varies widely. Axes, saws, hammers, and such tools, can be used in building all sorts of things, while a lathe in a machine factory has a much more limited use. The term, specialized capital, is often used instead of fixeC capital and means practically the same thing, that is, its use is lim- ited or specialized. Circulating capital is that which is used up in a single process, ELEMENTS OF ECONOMICS 51 ^s the coal in the furnace, the thread of which the cloth is made, the lumber which enters into all kinds of things. But a better term than circulating is free, which indicates that the uses to which the capital may be put are many. The degree of freedom in use is however widely different for different things, as will readily be seen by a moment's reflection. It will be observed that fixed or specialized capital practically corresponds with the first two classes above, tools and improvements in the soil, and that circulating or free capital corresponds roughly with the materials we work upon. The fourth of the above classes, consumers' goods in the hands of producers and dealers, would seem to belong under specialized capital, since the use of such goods is quite limited. Clothing, for -example, can- not be used for any purpose but to wear. The latter classification of capital suggests facts of great in- dustrial importance. For example, if too much capital is invested in fixed or specialized forms of certain kinds it may lead to great in- dustrial disturbances. In 1837 the great crisis resulted from in- vesting too much capital in canals, turnpikes and railroads, and most of our other panics were due to similar causes. People borrowed money or creditjargely of banks, in order to build the roads or canals, more were built than were then needed, the enterprises did not pay dividends, the banks that advancd the money and credit were ruined, and with their fall came the ruin of many other business houses, and so the mischief spread all over the country, carrying sorrow into hundreds of thousands of homes. 31. THE INCREASE OF CAPITAL. The process of accumula- tion of capital involves three steps, saving from current income, in- vesting, which means, in reality, deciding what is to be produced, and the production of capital goods. Some writers use the word waiting in this connection, which calls attention to the fact that a certain interval must elapse between the time of saving and the final profits which result. Waiting, however, is not a step in the process, but only incidental to the process. Other writers use the 52 ELEMENTS OF ECONOMICS term abstinence instead of waiting, the term abstinence calling at- tention to the self-denial and hardship involved in foregoing present consumption with the hope of having more for consumption in the ' future than one would have without the saving and waiting. Some writers, especially the Socialists, deny that there is any pain or hard- ship involved in saving and waiting, and they cite in proof of their contention the pleasure involved in anticipating the future increase of capital, and they also contend that the rich capitalists experience no hardship in the process. No doubt those who are thrifty and sav- ing take pleasure in providing for the future, and it is doubtless true that the rich do not have to deprive themselves of many luxuries in the process. But it is not true that all the saving is done by the rich. A very large portion of the savings comes out of the meager incomes of those who must forego many things they would like to have. The practical point involved in the dispute is that those who hold to the abstinence idea justify the payment of interest on capital on the ground that interest is a reward for the pain involved in saving and waiting. The Socialists claim that since no pain is involved, interest on capital is not justifiable. We shall return to this point in a sub- sequent chapter. The forces governing the rate of accumulation of capital are two, the productivity of industry and the habits of the people. If a coun- try is poor in natural resources and the people lack energy, little will be produced from which to save, even though the people are saving in their habits. And even if the people are both energetic and saving, capital cannot be accumulated rapidly if the country is poor in natural resources. But with rich natural resources and an in- dustrious and saving people, wealth and capital will accumulate rapidly. Again, nature may be favorable, and the people energetic, but if they spend it all in riotous living like the prodigal son, there will be' little wealth and little capital. These three things, there- fore, the natural resources, the degree of energy of the people, and their habits as to saving are the main factors determining the rate ELEMENTS OF ECONOMICS 53 of increase of capital. Economists a generation ago usually laid it down as a law that the rate of accumulation of capital depends upon the rate of interest and that as the rate of interest declines the rate of accumulation of capital declines. But later economists have pointed out that the lat- ter part of the law is not necessarily true. The motive for saving is a more decisive factor than the rate of interest. If, for example, the motive be to save for old age, the person saving hoping to live from the interest of his capital, a lowering of the rate of interest would increase savings, because it would take a larger amount to keep one in old age. If, however, the savings are from the incomes of the rich, lowering the rate of interest would decrease the rate of saving, since the rich would continue to spend about the usual amount on pleasure and luxuries and less would be left for invest- ment. Hence, a variety of circumstances would determine whether or not lowering the rate of interest would increase or decrease the rate of saving. 32. THE INCREASE OF LABOR— THE LAW OF MALTHUS. Land cannot be increased, hence we need not consider the increase of that factor. The increase of labor, however, is of vital concern. The increase of labor means the same as the increase of population, and the law of increase of population was worked out about a hundred years ago by an English economist by the name of Robert Malthus, and the law of population is known as the Malthusian Law. This law is that population has a natural tendency to increase faster than the food supply, unless checked by wars, disease, famine or what Malthus called moral restraint, by which he meant late marriages. The proof of this law is abundant. In this country in the colon- ial days population often increased so fast that it doubled every seven- teen or eighteen years, not counting immigration. During the last hundred and fifty years the population of this country has about doubled every twenty-five years. Germany, an old country, has doubled its population in the last forty years, under the stimulus 54 ELEMENTS OF ECONOMICS of the great industrial development which she has undergone, and she has in the meantime sent millions of her people into other parts of the world. Numerous examples might be given from various coun- tries to prove that where means of subsistence allows, population will double itself every twenty or twentj-five years at most. At the latter rate there would be in the United States, not including Alaska, in four hundred years from now twenty persons to every square rod of ground in the country, and in another century after that there would not be standing room. No proof is needed to show that the food supply would run short long before that time. In India and China the population has long been stationary because of a lack of means of subsistence, and starvation is one of the principle means in those countries that keeps the population from further increase. The law of Malthus does not imply that the population must be kept down by starvation. But it does mean that if wars, disease, and famine do not keep the population within the limits of the food supply, starvation will be the force limiting further increase, at some future time, and that not very far distant, unless the great majority of young men delay marriage until their income is suf- ficient to enable them to bring up a family. Later marriages would result in smaller families, and thus the population would be checked and the standard of living could be maintained or even raised. A young man who enters the marriage relationship and has a large fam- ily of children while he has nothing to support a family upon except his wages, and while his wages are too low to support a large family properly, not only violates common sense, but he is an enemy of the race, since such a course pursued by all would inevitably endanger the welfare of the race. A high standard of civilization is more im- portant than vast numbers. On the other hand, the rich who refuse to bear children that they may pursue their round of pleasures with- out the burden of rearing children, commit a sin against society, not only because they !refuse to bear th-eir share of the burdens of keep- ing up the race, but also because the rich are most able to give to ELEMENTS OF ECONOMICS 55 their children the the highest standards of life. In all countries the lower classes, that is, those lowest in the scale of civilization, increase the fastest, which hinders the progress towards a higher civiliza- tion; and when those best able to propagate the race refuse to do so, they are helping the downward tendency of the race. Not that the race actually goes backward, necessarily, but when the rich refuse to help elevate it, they leave the work for the lower classes, which increases the difficulty of elevating the race through the various up- lifting agencies, the school, the church, the state, the club. 38. OUR IMMIGRATION PROBLEM. The law of Malthus has important bearings upon our immigration problem, and it helps dis- pel several popular delusions regarding the effects of immigration. The prevailing notions among the masses of the American people seem to be (1) that the great tide of immigration into this country during the last half century was needed to develop our resources; (2) that these foreigners have done the disagreeable work that Amer- cians would not do; (3) that our native workers, thus benevolently relieved of the disagreeable tasks, have been forced up into higher positions. Such, however, are not the facts of the case. Until the tide of immigration began to assume large proportions after 1830 there was no notable decrease in the rate of increase of our native population, the rate of increase being about 34 per cent per decade. But since 1840, when the tide began to affect the American laboring men, the rate of increase of our native population has rapidly declined until it is about stationary in the older portions of the country. And taking the total population, immigrants included, the rate of increase has steadily declined since 1860 until it reached as low as 20 per cent for the last decade. It is quite evident, therefore, that the effect of im- migration has been to check the rate of increase of the native popula- tion and that the total population is probably little larger than it would have been had there been no immigration. Our polulation is rapidly becoming transformed from the old Teutonic stock to a 56 ELEMENTS OF ECONOMICS mixture of races from southern Europe and western Asia. We can see this process at work all over the country. The cot- ton industry of New England furnishes a good example. Half a cen- tury ago the work in the cotton mills was done mostly by boys and girls from the farm. As the falrms became cleared and improved, and machinery was substituted for hand labor, the farmer no longer, needed so many of his children at home to help, and the rise of the cotton factories afforded an outlet for surplus labor on the farms. When the French Canadians came into the mills, the native boys and girls, not liking the low wages or the society of the Canadians, would not work in the mills. Thus the outlet for the surplus labor on the farms being closed, the size of the family rapidly declined. Families of eight and ten children were common in earlier days in New England, where now families of more than two or three childr>en are rare. As to the notion that foreigners have done the disagreeable work that Americans would not have done, it may be said that if there is any work unfit for respectable Americans to do, it better be left undone, if conditions cannot be improved; for the main business of society is to produce respectable human beiners rather than use them as mere tools for the production of wealth. But conditions surrounding disagreeable and dangerous work, such as mining, could be greatly improved, were we not so anxious to secure large divi- dends on capital. But even if conditions of such work could not be improved, there is no warrant for the assertion that Americans would not do it. Higher wages doubtless would have to be paid, and that is where the desire for immigrant labor originates. It is a very preval-ent notion that immigration forced the native Americans up into higher positions. Such a statement must mean either that a g^reater number of Americans are in high positions because of immigration or that a greater proportion of Americans are in high positions. If a greater number are in higher positions it implies either that some people other than Americans formerly filled ELEMENTS OF ECONOMICS 57 these high positions or that more high positions were created by im- mig^'ation for Americans to fill. The first inference is of course ab- surd, for none but Americans were here to fill the positions. The second inference is not true, since our industries would have developed as well with American labor as with foreign labor. All that the statement about forcing Americans up can mean, theJrefore, is that a larger percentage of Americans occupy high positions because of im- migration. This is perfectly true, but instead of Americans being forced into higher positions they have been forced out of the lower positions and in their struggle to maintain their standard of living, most Americans have smaller families. Thus, instead of immigration having conferred a blessing upon the country by relieving the Amer- icans of disagreeable work and giving them the higher positions, it has substituted foreigners for natives in tbs lower ranks of laborers. ^ We would not necessarily conclude from this that immigration since 1830 has on the whole been a bad thing for the country. Each nation has some good points which other nations may lack. The light hearted, quick witt-^ Irishman, the methodical, painstaking, economi- cal, substantial Grerman, the emotional, music loving Italian, and the patient Slav, added to the energetic, resourceful, practical, extrava- gant American, and blended ^to one nationality, will make the Americans of the future the most resourceful, powerful, and versatile race in the world. This great fact should not, however, blind us to the necessity at the present time of restricting somewhat and select- ing with more cai>8 the immigration now pouring in upon us, in order to prevent the threatened lowering of the standard of living of our working classes. 58 ELEMENTS OF ECONOMICS CHAPTER V. Efficiency In Production. 34. RICHNESS OF NATURAL RESOURCES. Efficiency in production depends upon the efficiency of each of the three factors of production and economy in their organization. The most important natural resource is the soil from which our food must be obtained. A nation with a rich soil and proper climatic conditions is blessed with the most indispensable elements of wealth. Next in importance are mineral resources, the two most essential of which are iron and coal. Without these a nation must depend upon other peopLes for the most of their tools and machinery. Copper is increasingly im- portant for various uses, but especially for the thousands of miles of teleg'iaph and telephone wires that cover the earth. Zinc, tin, lead and other metals are needed, each having its special uses, and petrol- eum is now indispensable. The precious metals are needed not only for money but in the arts. Timber is a most important resource, for firewood, for building purposes, for furniture, and for machinery of all sorts. Water power was a very important source of wealth in the infancy of the age of machinery, before steam largely displaced it. But water power has held its own in "certain industries, notably in the textile industries. With the increasing use of electricity waterpower will assume a new importance, for it is as good as steam and much cheaper for generating electricity. Not the least important of a na- tion's resources are the natural facilities for transportation, includ- ing navigable rivers and lakes and opportunities for building canals. In all these natural resources the United States is richly blessed. The great Mississippi Valley is one of the largest tracts of rich land in the world, and we are just beginning to develop through irrigation and dry farming the vast regions of the West. The variety of soil and climate also makes possible the cultivation of a great variety of crops. The United States is rich in mineral resources. It is estimated that our available coal supply is about three trillions of tons, which ELEMENTS OF ECONOMICS 59 is about a third more than the supply of all the remainder of the world, and in the annual production of coal this country leads all others. We produce about twice as much iron as Germany, more than three times as much as Great Britain, and five times as much as France or Spain. We produce more than half the copper supply of the world, nearly one-third the lead, about one-third the zinc, and two-thirds of the crude pertroleum. We did have abundance of tim- ber, but wasteful methods of lumbering and forest fires are rapidly exhausting that very necessary resource. Measures are being taken, however, to check the destruction and to reforest our depleted lands. With such an abundance of resources and splendid facilities for trans- portation, if properly developed, the United States is destined to be- come one of the richest nations in the world. 35. EFFICIENCY OF CAPITAL. Efficiency of capital depends upon the nature of the instruments of production and the nature of the improvements of the soil. It is highly important that a nation keep abreast of the times in these matters. In the great interna- tional struggle for the world's markets, success depends largely upon the efficiency of the productive apparatus. Nothing but the latest and best machinery will enable a nation to compete on equal terms with wide-awake, progressive competitors. Not only must its ma- chinery be up-to-date, but also its methods of farming. In the invention and use of effective machinery the United States stands in the front rank of nations, and in the application of large machinery for doing work on a large scale, this counti'y leads the world. Other nations equal us and probably excel us in the invention of machinery and processes of a more delicate nature, but for doing big things we stand without a rival. The causes of our success along these lines are various. The colonist, left largely to his own re- sources, developed ingenuity; and our liberal patent laws have greatly stimulated inventions, for a fortune awaits the successful inventor. The great size of the country and of the field of industry doubtless has had much to do with the direction inventions have taken in this 60 ELEMENTS OF ECONOMICS country, since the vastness of the industrial operations would invite inventions for doing big things. The United States has fallen behind the most progressive coun- tries of Europe, however, in the scientific cultivation and implrove- ment of the soil. The land has besn abundant, cheap, and of great natural fertility. Hence, it did not occur to our people that the jsoil needed any special care, and it begins to show signs of exhaustion. We have been doing extensive rather than intensive farming, partly because there has been mote profit in the former than in the latter method, and partly because it is characteristic of Americans to wani to do things on a large scale. As a result, we have been "mining" our soil, as one writer has expressed it, rather than farming it. That is,we have been taking elements out of the soil and putting nothing back into it. In the South during the slavery days this was especially characteristic of their agriculture, and today the South has vast tracts of exhausted soil, awaiting recuperation through scientific farming. We shall return to this problem in the following chapter. 36. EFFICIENCY OF LABOR. The efficiency of laborers de- pends upon their physical, mental and moral qualities. Physical ability depends upon inherited qualities and upon food, clothing, shelter and general environment, both during the time of the indi- vidual's growth and during the working period. If a people inherit from their ancestors strong, vigorous, healthy bodies, if theix children are properly fed, clothed and cared for, so that nature is assisted and not hindered in its work of perpetuating the good qualities inherited, and if as laborers they have proper food, clothing, and shelter, and this means proper homes, 'that people will be efficient workers. An under fed, poorly clothed, badly housed nation is a nation of weak- lings, and it is impossible for it to attain a high degree of civiliza- tion. It behooves us, therefore, as a nation to look to our "slums" and those in poverty everywhere. From the point of view of mere production, looking at our laboring population as mere instruments of production, to say nothing of the humanitarian considerations, it ELEMENTS OF ECONOMICS 61 would be a wise economy to eradicate such slums and give every normal human being a chance in life; for if our laborers are ineffi- cient the whole nation is poorer. But physical strength, endurance, and vigor are of little avail unless directed by an intelligent mind. To native intelligence must be added both general. and special training. We need general educa- tion to train all our powers in a general way, to make men and women capable of taking a broad view of life, to enable us to enjoy life, and to enable us to perform our part in the institutions of so- ciety, the home, the church, the state, the club; and then we need special education to fit us for the business side of life. The higher up the industrial scale we go, the more specialized is the knowledge and training r-equired. It has generally been considered that rough, "unskilled" labor needed no special knowledge or guidance; but re- cent investigations prove that in doing many kinds of work, consid- ered unskilled, there is much opportunity for improvement. It has been demonstrated, for example, that by handling bars of pig iron in the proper way workmen can do two or three times as much work in a day as they ordinarily do, and be no more exhausted at night than they are by doing less in an ineffective way. When such an increase in efficiency is possible in such rough work it shows at once the possibilities of improvement in other lines. In preparation for many kinds of work scientific knowledge is needed. Science and in- dustry are closely associated in the modern world. Chemistry,, physics, botany, biology, all the sciences of nature are involved in modern industry; hence scientific knowledge must be obtained for the workers higher up. For other kinds of work, such as carpentering, iron molding, and many others, some years of apprenticeship are necessary in order to learn the trade. Hence a nation should in some way provide opportunity for vocational training and education. Efficiency of labor depends, finally, upon the moral qualities of the people. Honesty, reliability, and willingness to do a fair day*s work are as essential as mental and physical ability. If working 62 ELEMENTS OF ECONOMICS men were perfectly honest, that is, willing to do a fair day^s work, whether under the eye of the "boss" or not, much less superintend- ence would be needed and .the cost of production would be much less. Wherever one sees small groups of men at work, even though there be but three or four, one man is set to watch the others to see that they do an honest day*s work while he does nothing. All this is an extra burden upon the people which they must bear in the shape of higher prices. 37. SOCIAL COOPERATION IN PRODUCTION. Let us now consider the organization of the factors of production. Organization of the factors of production includes at least five distinct phases, (1) social cooperation, (2) forms of business organization, (3) the size of the business unit, (4) the relative amount of the three factors used, and (5) organization of marketing. Social cooperation in- volves two varieties, division of occupation and division of labor with- in the occupation. Division of occupation occurs when some men become carpenters, others blacksmiths, others farmers, others cloth- makers, and so on through the long list. In division of labor there is cooperation, because each man is doing his special work in society and all are working towards one common end, the satisfaction of hu- man wants. Each satisfies his wants only to a small degree or not at all with the products of his own industry, but he sells most of his product, or all of it, and buys what he wants. Each man is dependent upon the rest of mankind for the satisfaction of most or all of his wants. Division of labor within the occupation or business is social co- operation, because each worker does only one small part of the pro- cess of making a certain thing or of rendering a given service, and all are doing their share in satisfying one want. The product is the result of the joint labor of all. We may place the workers in any business into two groups, those who are brain workers, and the labor- ers whom they direct. In a department store, for example, there is the general business manager, the department managers, the floor ELEMENTS OF ECONOMICS 63 managers, cashiers, bookkeepers and salespeople, but only the last are actually doing the work of selling goods to customers, and they are working under the direction of those above them. In many lines of business subdivision of labor is carried to a very high degree of minuteness. In making shoes, for example, there are scores of dif- ferent operations, each worker having only one operation to perform. The exact number of these operations would vary with the type of shoe and the methods of manufacture, but in any case each worker has a very small part of the process of making a shoe. S-averal are cutting out the different parts of the shoe, each of the several seams are sewed on a different machine by a different worker, and several are finishing and polishing. In our great meat packing establish- ments division of labor is carried far. In removing the hides, for example, there are several men at work, each removing only a cer- tain portion of the hide. 38. ADVANTAGES OF SOCIAL COOPERATION. Social co- operation has several advantages, three of which are especially im- portant, increase in skill, increase in inventions, and the opportunity of each to apply his special talents. Division of occupation leads to greater skill, because the frequent repetition of the same process, which results in an increase of product and an improvement in the quality. In the early ages of society everything man made was crude; but when a man gave his whole time to one thing, say making furni- ture, he would learn to work more rapidly and at the same time give grace and beauty to his product. With the more minute subdivision of labor, skill would be further increased because of more frequent repetition. In many cases, however, the improvement would be in quantity rather than quality, since no one person makes the article, and beauty would have to come from the imitation of a pattern or design of only a portion of the article, and the putting together might not be so artistically done as when one person makes the whole thing. Then, too, with the coming of the machine process, the sense of beauty of design would be cultivated only in the pattern makers. 64 ELEMENTS OF ECONOMICS Division of occupation and division of labor lead to inventions be- cause, when a man^s work is narrowed in its scope he can study more minutely the processes involved and new and better ways of doing the work can be studied, and new machines invented. Also, in this division of labor some will become men of science, and then inven- tions will multiply rapidly, since a knowledge of nature is essential to the inventor. This explains why through the long ages so few things were invented before the eighteenth century. Division of labor had advanced far long before that, but man's knowledge of nature was too limited to aid inventions beyond what had been blindly work- ed out centuries earlier. When men learned enough of the secrets of nature to see their application to machines, inventions multiplied, and the Age of Machinery began rather suddenly. A third advantage in social cooperation is that each person can do what he is best fitted for. Some can be great scholars and lead the world into higher realms of knowledge; some with great powers of organizing industry can bring capital, land and labor together and direct their efforts to larger results; each can turn to the industry he likes best, and those gifted chiefly with physical powers can do hard work, under the direction of superior minds. Thus all can cooperate in increasing man's material and also his higher welfare. All are working towards one great end, raising man to a higher plain of civilization. At this point the thought is borne in upon us that all honest work, however rough, uninviting and humble, is contributing to man's welfare, and all workers are to be honored and respected; and, too, we cannot escape the conviction that thus far in the world's history our humbler workers, our brothers in the toil for all human- ity, have borne more than their share of the hard work of society and received too little of the higher comforts of life. 39. DISADVANTAGES OF SOCIAL COOPERATION. Unfortu- nately there are several disadvantages resulting from cooperation. Division of occupation makes it possible for some lines of business to become overcrowded with capital and the less able men are driven ELEMENTS OF ECONOMICS 65 to the wall by severe competition. Also the division of labor may re- sult in some trades becoming overcrowded, especially with skilled labor. Young men may prepare themselves for a certain trad« and find that too many are in jthat trade. In that case they must be con- tent to do unskilled labor or else go to the expens-a of learning an- other trade. And evan the unskilled laborers may find it difficult to get work even at starvation wages; for with the division of labor and the machine process the mass of men must lose their industrial ind'3- pendence' and become wage earners. Thus increased social efficiency is attended with the loss of industrial independence for th-e individual. The more specialized each man's work becomes the greater is the danger that some cannot get work, or only at a wage too low to keep soul and body together. In order to minimize these evils society should undertake the study of the needs and opportunities in the different lines of industry so that young men with capital would have some general knowledge of the opportunities for investing capital in the different lines of business, and young men who wish to learn a trade would be able to choose with some knowledge not m-arely of their own aptitud-es but of the needs and opportunities in the different trades. Vocational guidance needs to consider both the characteristics of the individual and conditions in the different industries. Another class of evils resulting from cooperation is the monotony of the work. This is especially true of minute sub-division of labor, where a person hour after hour, day after day, year after year, has to perform one simple operation, like, for example, cutting out soles of shoes or sewing on a machine run by steam power or electric power one short seam in shoes. Such monotonous work not only fails to de- velop mind and body as work of a varied and more complex character would do, but body and mind are actually weakened from lack of ex- ercise. It is this monotony that is especially injurious to young chil- dren whose minds and bodies haye not yet fully matured. To coun- teract this deadening effect, society should provide proper oppor- tunities for amusement, exercise, recreation and study. Instead of 66 ELEMENTS OF ECONOMICS having one great library in the city, inaccessible to most laborers be- cause too far away, there should be other smaller libraries and read- ing rooms within reach of all. These could well be at the school houses, which should be made social centers for recreation and enjoy- ment. Because of this minute division of labor and the machine pro- cess, are the two evils of child labor and of mothers working in factories when they should be at home caring for their children. The work is often so simple and easy that women and children can do it as well as men, and since they can be hired for lower wages, the children and the mother of the family are at work while the father is idle, either because of laziness or because he cannot get work. This is such a large problem that we postpone its dis- cussion. 40. FORMS OF BUSINESS ORGANIZATION. A second group of forms of organization of the three factors may be called forms of business management. These forms are not concerned with the relations among the three factors so much as with the relations among those who manage the business. There are at least five forms of business organization, the- single manager system, the part- nership, the corporation, cooperation in management on the part of workmen or producers, and ownership and management by the govern- ment. The corporation is so important that we reserve it for special treatment. In brief, a corporation is a company having a charter making it a legal person, and with its capital divided into shares. The simplest form of organization is the single manager system, where one man owns and controls the business. The only coopera- tion in the management is that between the owner and his hired help, which is included in division of labor. But the one man is legally and industrially responsible for the success of the under- taking, and he alone gets the immediate benefit of such industrial conditions as make his profits large, and he alone is the one who suffers reverses, unless they are so severe as to make it impossible ELEMENTS OF ECONOMICS to keep his employees at work and pay them the accustomed wages. In the partnership there is real cooperation in the business man- agement, besides that between the managers and employees. The partners may cooperate in various ways. Sometimes one man furn- ishes great organizing ability and experience, with no capital 'or only a small amount, and another may furnish most of the capital, with little ability or experience. Again, the partners may unite their abilities in determining certain large questions of policy and each act as head of a special department of the business. The ad- vantages of the partnership form over the single manager system are (1) a large capital, which may be needed in certain kinds of business, (2) united wisdom in counsel, (3) greater interest in the success of the business as heads of departments than hired helpers would have. Cooperation in management, as the term is used by economists and business men, is really a form of partnership. A partnership is cooperation in business management, and the names of the two forms of organization do not indicate their differences. Cooperation, as used in this connection, does not in fact refer so much to the form of organization as to the character of the persons cooperating. Originally, cooperation meant the ownership of the business by the laborers themselves, who employ their own business managers. Later, farmers cooperated in establishing and managing creameries, grain elevators, and associations for marketing fruit or other products The form of organization might be the partnership or the corporation, or indeed any other form th*t might be devised. The purposes of these cooperative organizations are to secure the profits of middlemen and managers. In the jcase of laborers establishing co- operative retail stores the purpose is to get commodities cheaper, and the farmers desire to reap some of the profits that otherwise would go to middlemen. Such organizations may or may not be more efficient than the forms of business they displace. The signifi- cant thing about cooperation in this narrow sense is not increase 68 ELEMENTS OF ECONOMICS in efficiency but the diversion of profits from one class of people to another. The fifth form of business organization is government owner- ship and management. In this case there is no special form of organization; the essential thing about it is that the managers are government officials. The government might appoint a single head to manage the business, it might manage it through a commission^ which would approach the partnership form, or it might organize it after the pattern of a _ corporation, with stock owned by the public. Government ownership may or may not be more efficient than private ownership, owing to circumstances. The greater or less efficiency would not depend upon the forms of organization, since these could be the same in private as in public ownership, but upon relative ability of public or private managers. The question of public or private ownership is not so much a question of efficiency as it is a question of distribution, that is, whether the profits of the business shall belong to a few managers or to the public. The three essentially different forms of business organization are there- fore the single manager, the partnership and the corporation. 41. CORPORATIONS. There are at least five characteristics of corporations which must be clearly understood, for out of these characteristics come the advantages and the evils of this form of organization. As stated above, a corporation has a charter granted by the government, making the company a legal person, capable of acting as a natural person in business affairs. It can conduct busi- ness, sue in the courts, inherit and bequeath property. Its charter gives the corporation continuous life. In some cases the charter is given only for a term of years, usually twenty years or more, but in such cases the charter is usually renewed before the expiration of the time limit. More often there is no time limit to the charter. In case of the single manager system the business terminates with the death of the owner unless his heirs are desirous of continuing it. The partnership may have a more ELEMENTS OF ECONOMICS 69 continuous life than that of the single manager system, but with the death of a member the business must be re-adjusted, and is therefore less permanent than the corporation. The capital of the corporation is divided into shares, usually of one hundred dollars each. This is often referred to as the joint- stock principle. When an investment is made in a corporation evi- dence of such investment consists of stocks or bonds, which are pieces of paper certifying the amount invested. Stockholders are the real owners, as they alone can take part in governing the busi- ness. Bondholders are creditors. From the business point of view, bonds are safer than stocks, since bondholders receive a stipulated rate of interest, and in case the interest is not paid they can take possession of the business. Stocks are often divided into common and preferred. The preferred stock is guaranteed a certain rate of interest, usually one or two percent higher than that paid on bonds; but the bondholders are more secure than preferred stock- holders, since in case of reverses interest on bonds must be paid before interest on preferred stock caii be paid. The common stock is the least secure and the most speculative form of investment. If the business is prosperous, all earnings above what is necessary to pay interest on bonds and preferred stock go to the holders of common stock; and in times of adversity interest on common stock, that is dividends, may be very low or nothing at all. The corporation is managed by a small number of the owners. Usually about half the capital consists of bonds, and in a corpora- tion, therefore, those who virtually own one-half the property have no voice in the management. Another corporation could buy up one share over half the stock and control four times as much capital as it owned. Then a small number of men might own, one share over half the stock of the second corporation and by controlling its action control eight times as much capital as they own. In extreme cases one man might own the controlling interest in the second corporation and ownership and management would be still more 70 ELEMENTS OF ECONOMICS widely separated. Even when there is a large number who own. the controlling interest in the business, the management is in the hands of a few, usually called the board of directors, elected by the stockholders. The fifth characteristic of business corporations is the prin- ciple of limited liability. In a partnership each partner is liable for the debts of the company, even though only a small fraction of his wealth may be invested in the business. In a corporation stock- holders are usually liable only to the amount of their investment. That is, if a man buys a hundred dollar share in a corporation he may loose it if the company fails, but creditors cannot take any of his property not invested in the business. 42. ADVANTAGES OF CORPORATIONS. Owing to these var- ious characteristics, corporations have several advantages over other forms of business organization. Continuous life enables it to look far into the future and pursue a continuous policy. The death or withdrawal of members need not interfere in the least with plans looking many years ahead. A railroad corporation, for example, might lay its tracks and adjust its rates so as to develop the re- sources of a certain region, which might take twenty years or more. The region to develop might be uninhabited, and to induce settlers to gather and develop the country would be a work of many years. The private individual or the partnership concern would seldom look so far ahead, and if it did the death of one of the leading members might upset the plans. Such a result might be brought about by the death of a leading man in a corporation; but it is not apt to do so, since the life of the corporation is continuous and its policy is determined by the will of a number of individuals, as a rule. A second advantage of the corporation is the large capital it is enabled to gather from the ends of the earth. Continuous life, joint- stock, and limited liability make the corporation very attractive to investors, both great and small. Investors usually desire to place their money in a business that is permanent. The joint-stock prin- ELEMENTS OF ECONOMICS 71 ciple makes it a convenient form of investment. As one's income accrues from month to month or from year to year, savings can be invested as soon as they amount to one share of stock. Investors can take their choice of preferred or common stock or bonds. And the limited liability makes it safe for a man with other property to in- vest as much as he desires in the corporation, for he runs no risk of losing more than his investment. Stocks or bonds of a good corporation furnish a good investment for those who have not enough capital to enable them to go into busi- ness for themselves, or who for any reason do not wish to engage in business. Widows, orphans, workingmen, all find in the corpora- tion a suitable and convenient place for the investment of their small fortunes, or their small savings, A fourth advantage of the corporate form of business is, that it is more likely to undertake new lines of business than are other forms of organization. The joint-stock principle and limited liability make the corporation venturesome. New companies may be formed in which each investor risks but a small amount, and it may venture into un- tried fields without bringing any great disaster to the investors if it fails; and if it succeed, handsome dividends may be realized. Thus new fields of industry may be explored and the resources of a coun- try developed. A fifth advantage of the corporation is its ability to secure able managers. With a large number of members from which to choose officers, able men may be secured. And with the large capital it can employ men who may not be stockholders but who possess great executive ability, because it can afford to pay large salaries. Thus it will be seen that the corporation is the best known form of business organization for large undertakings. Modern business could hardly exist without the corporate form of organization. Large capital and continuous policy are most essential to many kinds of business. Railroads, the steel industry, and many others that might 72 ELEMENTS OF ECONOMICS be enumerated, must have large capital, continuous life, and able management. 43. EVILS OF CORPORATIONS. Unfortunately these advan- tages of corporations may result in serious evils to society. The cor- poration may become so large that it is a monoply, and all its ad- vantages as a superior instrument of production will be enjoyed only by the owners of the business, while th-e other members of the com- munity are injured by extortionate prices. Stock-watering is another evil which results from the division of the stock into shares, because these pieces of paper can so easily be multiplied and disposed of in such a way that the amount of the capital stock is much larger than the amount of money actually invested. There are several methods of stock-watering. A stock dividend may be declared, by which the amount of each person's stock is increased automatically. In the consolidation of several companies their values may be placed too high, and the stock of the consolidated company issued to the full amount of the false valuation. Another device is to accredit repairs to new construction in their system of bookkeeping and then issue new stock to cover it. Another way to over-issue stock is to sell it for only a fraction of its face value. Speculative promotors, for instance, in order to float stock of a new company, sometimes put into the concern about one-tenth as much money as the number of shares would indicate, then by judicious ad- vertising sell the stock to an unsuspecting public for full face value. Stock-watering is an evil because it may deceive investors and because it may deceive the government which may be attempting to regulate the earnings of the company or the prices it may charge. If the stock is half water and the government should allow a rate or price that would net the company six per cent on its capital stock, it would in reality be earning twelve per cent on the money actually invested. Speculative promotion is another evil characteristic of corpora- tions. A. band of schemers get a charter, organize themselves into a ELEMENTS OF ECONOMICS , 73 company, appoint themselves the board of directors at handsome salaries, sell a lot of stock, make a show of establishing the busi- ness, but pocket most of the money by paying themselves big salaries and by other fraudulent means, and the investors receive little divi- dends. The federal gov-ernment reports that the American people are thus cheated out of millions of dollars annually by bogus com- panies with get-rich-quick schemes. The joint-stock principle and the limited liability, which invite the public, and the opportunity for a small knot of individuals to manage the affairs of the company for their own benefit are responsible for the formation of companies m-erely for the purpose of selling worthless stock. A fourth evil, closely connected with th-e last, is the misman- agement by the few for their own benefit and to the injury of the mass of the stockholders. This may be done not only in starting bogus companies but in managing an old and profitable corporation. A small body of men who together own the controlling interest in the holding company may elect themselves officers of the company with salaries far beyond their earning power and thus reduce the dividends below what they ought to be. Also by manipulating the books, or by other means, they may increase their income at the -ex- pense of the small stockholders. A fifth evil and by no means the least which may result from the corporation is the industrial crisis. The venturesome spirit of the corporation is apt to lead into fields that turn out to be un- profitable. If this is done on a large scale by many large corpora- tions, an industrial crash is bound to follow. If the dividends are re- duced, banks and other corporations that may hold the stock of the failing companies suffer loss and may fail; and thus one company after another is pulled down, resulting in a "run" on the banks and a general collapse of credit and the cessation of many kinds of business. 44. ECONOMY OF LARGE-SCALE PRODUCTION. The third phase of organization concerns the size of the business. Each indus- 74 ELEMENTS OF ECONOMICS try or line of business has its peculiar characteristics which deter- mine the natural size of the business unit. In some kinds of business^ as the retail drug store or the retail grocery, the unit is naturally small, while in the steel and iron manufacturing business the unit is very large, and in the railway world the natural unit is much larger still. In each line of business there is a certain si^ which repre- sents the maximum of efficiency. If the business is either larger or smaller than this maximum size it will he less efficient. This means that the product of the larger or the smaller unit will be less in proportion to the amount of labor and capital expended. This is known as the law of large-scale production or the law of economy in organization. The latter name is hardly appropriate, since there are several laws of economy in organization. Each phase of social co- operation involves a law of economy in organization. Division of oc- cupation or of labor is more economical or more efficient than letting each man supply all his own needs. Also in connection with the forms of business organization several laws of economy in organization may he stated. For example, the corporation is the best form of organiza- tion, that is the most efficient form, for large undertakings where the business should be permanent. When the law of economy in or- ganization concerns the size of the business, it is usually stated as follows: Increasing the size of the business increases its efficiency until the point of maximum efficiency is reached. This is correct. But a more complete statement of the law would be as follows: In each line of business there is a certain size which represents the maximum of efficiency. This statement of the law implies that if we start with a unit too small, efficiency increases with size up to the maximum, and after that point is reached efficiency decreases. This law is true for several reasons* If the grocery store is too small, for example, it is impossible to keep a sufficient variety of goods to suit all kinds of customers, and if it is too large much of the stock lies idle a long time, and it also is too expensive to deliver to such a wide circle of customers. In the manufacturing business, if ELEMENTS OF ECONOMICS lb the plant is too small it is impossible to make good us-e of all the machinery. Many expensive machines might have to be idle part of the time while the other machines ara getting work ready for these special machines or finishing up the work where these machines left it. In a factory for making hoisting elevators there are many differ- ent machines, each making a different part of the elevator. The fac- tory must be large enough to include all these different machines and enough of the different kinds to keep them all running constantly. This might require but one machine of some kinds that turn out their parts of the work rapidly while of other kinds of machines several of each might be required. This is called the economy in the use of fixed capital. A large concern can also employ the best technical experts or the ablest managers because it can afford to pay the high salaries to get such talent. Also the relative cost of fuel in a large plant would be less than in a small one. A fourth item is in the ability to make use of by-products. In a small concern it would not pay to establish factories for making into marketable products things that are merely by-products, hence these things are wasted, while in a large establishment it pays to make them into marketable products. A large meat packing 'establishment, for example, can utilize all parts of the animals. A fifth item to consider is the possibility of estab- lishing subsidiary industries. A large sugar refinery can make its own barrels, a large oil refinery can make its ov^n cans, barrels^ pumps and other supplies, and a great railroad may make its own en^ gines and rails from iron from its own mines, transported on its own ore-roads, and make its own ties and the lumber for its cars from trees cut from its own forest lands. 45. SOME RESULTS OF THIS LAW. From this law important results follow. One of the most important of thes-e results is mo- nopoly. In case the unit of greatest efficiency is large enough to supply the market monopoly is inevitable. The largest concern has the advantage of its rivals and can undersell them and drive them out of business. This would be a good thing for the public if it were 76 ELEMENTS OF ECONOMICS the final result. But unfortunately it is not. When all rivals are disposed of the successful company raises its prices above the com- petitive level and thus reaps exorbitant profits. If a rival appears prices will be put down until the new com-er is crushed, and then prices go up again. In case the rival proves as strong as the old company, a period of savage competition will ensue until both com- panies, tired of making no profits at all or only very small profits, vdll voluntarily consolidate. . The size of the market which one company may monopolize de- pends upon the nature of the business. In the ease of a street rail- way the unit of greatest efficiency is so large that one company can serve a whole city more cheaply than two or more companies can. In the steel manufacturing business the unit of greatest efficiency is large enough to supply a large portion of the country, the size of the region depending upon several circumstances, among them being cost of transportation. In most if not all lines of retail trade the unit of greatest effi- ciency is so small that it is reached before even the local market is isupplied; hence, we find numerous groceries, shoe stores, drug stores, clothing stores, and other lines of retail business in small cities. In farming, the unit is so small that monopoly is impossible in produc- tion. It is possible, however, for farmers to unite and create a mo- nopoly in marketing certain products. Thus the fruit growers of the Pacific Coast seem to have formed a very effective monopoly in the marketing of citrous fruits. In some cases the tendency to monopoly is off&et by smaller con- cerns uniting to do certain things while remaining separate in the main line. For example, several small companies might unite in es- tablishing subsidiary industries or in establishing plants to utilize by-products. And with the increasing use of water-power to gener- ate electricity one great electric plant, such as that at Keokuk, Iowa, can supply power to small companies, and thus make it cheaper than for the small concerns to generate their own power. ELEMENTS OF ECONOMICS 77 A second important result of the law of large-scale production is that an increase in population, resulting in an increased demand for goods, might lower the price of goods. If establishments had not reached their maximum size, increased sales would enable them to produce more cheaply. 46. RELATIVE AMOUNT OF THE THREE FACTORS:— LAW OF DIMINISHING RETURNS. A fourth phase of organization of the productive forces is concerned with the relative amount of the three factors used in the business. Not only must the business be of sufficient size to obtain the best results, but the factors must be used in certain proportions. This truth may be stated as a general law, thus: In order to secure the best results, the three factors must be combined in certain proportions, the proper proportions depending upon the nature of the business and the qualities of the three factors. If the factors are combined in any other proportion, diminished re- turns is the result From this latter fact economists have generally called this the law of diminishing returns. In fact if any of the great principles of organization are violated, diminishing returns result. The law as stated above will cover every phase of the law. Under some circumstances we would have increasing returns, as when we start with the three factors out of proportion and then proceed to ad- just them properly. This law is true because of the very nature of the three factors. This can best be understood by taking several examples. Suppose a certain amount of labor and capital is invested in the cultivation of an acre of land and the yield is only ten bushels an acre, which is a very poor yield. This would show that too little labor and capital were in- vested, supposing the season to be favorable. Doubling the amount of labor and capital would more than double the crop, possibly pro- ducing thirty or forty bushels. But a point would be reached where an increase of labor and capital would not give an increased yield in proportion to the labor and capital expended. This is true because there is a limit to the capacity of the soil. Each growing plant needs 78 ELEMENTS OF ECONOMICS B, certain amount of moisture and sunlight, and crowding the plants will diminish their size, however fertile the soil, and labor spent in xiultivation beyond a certain point is labor wasted. Land used for office buildings or factories obeys the same law, hut for different reasons. A building two, three or four stories high may be much more economical than a building only one story high but spread over more ground. Even twenty or forty stories might be more economical than fewer stories. But as the height is increased certain items of cost increase that offset the advantages of a higher building, and a point is reached where it is more economical to buiM another factory or office building rather than increase the height. Among the items of increasing cost would be for elevator service and the increasing cost of the walls of the lower portion of the building in order to make it strong enough to support the immense weight of the walls above. Again, suppose a factory has too few laborers to keep the machin- ery running in good order. Increasing the number of men will in- crease the output per laborer. But when there are enough laborers to keep every machine running in good order, a further increase of la- borers might increase the total output a little, but the output per la- borer would be diminished. This results from the nature of man and the nature of the tools and machines. Man's capacity for work is limited and if he tries to look after too much machinery he cannot do it well. Each machine requires so much attention, according to the nature of it, and if too few or too many laborers are set to work with it there is a waste of labor. 47. SOME RESULTS OF THE LAW. The results of this law are of the utmost importance to society. It is because this great law is true that the great law of Malthus is tru-e. If the earth would yield in proportion to labor put upon it, and do so continuously, population would not increase faster than the food supply. Scientific agriculture may long offset the working of the law, and for a time enable man to ELEMENTS OF ECONOMICS 7^ obtain more and more for a given outlay of capital and labor. But if the population of the world increases as fast as it has during the past hundred years, not many centuries hence the capacity of the soil of the whole world will be taxed to its utmost, and no scientific im- provements could possibly destroy the workings of the law of dimin- ishing returns. Hence, an increasing population may find it in- creasingly difficult to feed itself. But we do not need to look into the future to see the results of this law; for the increasing cost of agri- cultural products proves that the law is now at work, making* it harder for the lower classes to get a living. The law of diminishing returns as applied to land used for office buildings or factories is of far less importance to society than the law as applied to agriculture. It might mean much to an individual manufacturer who finds it necessary to buy more land to increase the capacity of his factory. If he could simply keep on increasing the height it might be much cheaper. And since it would be cheaper, the public would also be able to get goods cheaper, if the manufacturer were not under the necessity of buying more land. But if the popula- tion of the United States should be doubled or quadrupled during the next century, it would not be difficult to get land enough to increase the factories in proportion to the increased demand for goods, for only a small fraction of the land would be needed for factories. But to increase the land used in agriculture would be quite a different thing. The law of diminishing returns as applied to labor also has grave consequences. This will be considered more fully when the subject of wages is reached, hence we need only indicate briefly here the im- portance of this phase of the law. In case the laboring population is increasing faster than capital, that is, the tools and machinery with which laborers must work, the law of diminishing returns to labor will be brought into operation if there is an attempt to use all the labor supply, consequently, wages will fall. 48. ORGANIZATION OF MARKETS. A fourth phase of organ- 80 ELEMENTS OF ECONOMICS ization of industry relates to marketing products. The discussion of this phase of efficiency is quite recent. Investigation and experiment show that there is immense waste in present methods of getting goods from producers to consumers. Investigations show that farm- ers get about half the price, on many articles, that the consumer pays. One investigation conducted in the year 1915 shows that in a certain community the farmers ^received 18 ^/^ cents a pound for but- ter, and the consumer paid 32 cents; potatoes cost the consumer $1.10 a bushel and the farmer got 53 cents; eggs sold for 25 cents a dozen to the consumer and the farmer got 11 cents; sweet corn in the ear sold for 40 cents a dozen to consumers and the farmer got 15 cents. When it costs more to market goods produced within a few miles of the consumers than it costs to produce them, it would seem to indi- cate that som.ething is radically wrong with the system of marketing. In the fall of 1915 fish was selling in the private markets of Wash- ington, D. C, at prices ranging about 192 per cent higher than in the Municipal market. On the whole, those engaged in the mercantile trades do not seem, according to these investigations, to be making extra high profits. The conclusion must be, therefore, that there is a great social waste somewhere. Among the possible causes for this waste two are especially em- phasized. One is that there are often entirely too many middlemen. The jobbers and the wholesalers and retailers must have their profits, and sometimes it seems that no real social service is rendered, and hence, many goods might go direct from producer to consumer. This would apply especially to farm and garden products which are pro- duced near the place of consumption. Another cause of social waste is the system of delivery from retailer to the consumer. Goods are ordered in very small amounts, quick delivery is demanded, and sev- eral stores cover practically the same territory. The result is that half a dozen delivery wagons may be seen most any time covering about the same portion of the city, each carrying about a wheelbar- row load of goods; and the consumer pays the cost of this wasteful ELEMENTS OF ECONOMICS 81 system. But it is much easier to find fault with the system than it is to find a remedy for these faults. In the mercantile world is about th-e only field, outside of farming, where competition yet prevails. For the last century or more the world has relied upon competition to pro- duce social and economic efficiency. The result seems a little dis- couraging. One of the oldest remedies is the cooperative store. In England this idea has been most fully developed. Cooperative retail stores are established in each community, these retail stores combine to establish wholesale stores, and the wholesale stores combine to es- tablish mills and factories and steamship lines. The result is that the majority of the workingmen in England and Scotland buy the major- ity of their goods at cooperative stores and save some of the profits that would go to the manufacturers, wholesalers and retailers, and get their goods about twenty or twenty-five per cent cheaper than the competitive price. Other countries in Europe are following the English example, and in the United States the idea is beginning to take root, especially in the Northwest among the Scandinavian popu- lation, who are familiar with it in their own country. A newer remedy suggested is the municipal market, which has been established in sev- eral cities. Possibly a combination of the two plans would be ad- vantageous, the municipal market for the garden produce and co- operative stores for more staple goods. The importance of bringing about a more economical method of marketing is coming to be recognized and various agencies are at work on the farm-to-consumer problem. Several states have organ- ized bureaus to look after this work, local post office authorities in some cities have entered the same field, and within the last few months, under the stimulus of the paiicel post and the reduction of rates by the Interstate Commerce Commission, the large express companies have entered the field on a large scale. Buying clubs are organized in cities, marketing experts are sent out to instruct the farmers, and goods are carried direct from the farm to the consumer. 82 ELEMENTS OF ECONOMICS CHAPTER VI. Problems of Production. 49. INTRODUCTION. In our last chapter we were concerned mainly with the great principles that govern the efficiency of the productive forces of a nation. Incidentally, several applications of these principles were pointed out, showing their bearing upon human welfare. Many large practical problems of production were only hinted at or omitted for the sake of brevity in treating the theoreti- cal phases of the subject. In the present chapter we shall consider several of these great practical problems that face us as citizens and helpers in society. These problems of production are concerned largely with the conservation of our natural resources. Nature has bestowed upon us abundance of resources. Our forefathers, in America, being so few in numbers and facing a vast continent of apparently inexhaustable wealth, fell into careless habits in their use of the resources of the country without thought of future generations. As a result, our re- sources begin to show signs of exhaustion while our nation is yet young. Within the last twenty years there has been an awakening to the fact that this usekss waste must be stopped, that our soil, our forests, and the elemental resources of our country may be trans- mitted unimpaired to future generations, and thus preserve the foun- dation of our future greatness, material and intellectual. 50. FOREST PRESERVATION. The most notable example of thoughtless waste is the destruction of our forests. When America was first settled, the eastern half of the country was one vast wilder- ness. Most of this was burned to get it out of the way. And still the destruction continues, but from different causes. It was estimated a few years ago that our forests would be gone in thirty years, unless the useless waste were checked. The two great causes of the de- struction of our forests are wasteful methods of lumbering and forest fires. Great tracts of forest lands are bought by the lumbering com- ELEMENTS OF ECONOMICS 83 panies who have no interest in preserving the young trees for a future generation. As a result, everything is cut that is worth cut- ting, big and little, and the underbrush left scattered over the ground. Fires get started in the brush when dry and the young trees are destroyed. Fires also break out in foirests not yet cut and immense tracts are burned over. Instead of replanting these lands with trees, the companies sell them cheap to individuals who culti- Tate them. In many if not in most cases the land is better adajpted to timbett* growing than to farming, but few wish to wait for a forest to grow before realizing on their investment. The evils resulting from this destruction of our forests are many and serious. Lumber is getting scarce and high in price. On the hill sides, the soil is washed away and lodged in the rivers, where it in- terferes with navigation. With the destruction of the forests around the head waters of our rivers, in the Rocky Mountains and in the Appalachians, and in the northern pine forest states, the snow melts early in the spring and the waters rush down into the valleys, causing destructive floods. And the rains of early spring also rush down the hill sides causing floods, because the leaves, roots and loose soil no longer take up the moisture and allow it to work its way gradually down into the valleys, thus steadying the flow of streams. When the forests are destroyed, rivers are at times swollen torrents and at times nearly dry. The fourfold result is hindrance to navigation, a destruction of life and property in floods, the conversion of fertile land into swamps, and the loss of water power, for there must be a steady flow of water to afford continuous water power. Indirectly, the work of irrigation is made more difficult, since it requires more work to hold the water back by dams when it all comes down at once. Thus a whole group of problems is bound up together, forest restora- tion and preservation being a main element in the solution of all of them. The people of this country are beginning to realize the necessity of preserving our forests yet remaining and of restoring them on 84 ELEMENTS OF ECONOMICS lands better adapted to raising trees than other things. Most of the states are showing an active interest in increasing forest areas, and in over thirty states laws have been passed to encourage tree plant- ing. Reforested lands are sometimes exempt from taxation for fifty years, and elaborate systems are devised for the prevention of for- est fires. Fourteen states are actively cooperating with the federal government in preserving the forests at the head waters of navi- gable streams. Even private owners of forests are awakening to the need of preserving forests, and in Montana, Idaho, Oregon and Wash- ington alone over 20,000,0€0 acres of private forest lands are patroll- ed to protect them from fires. The federal government is doing much to restore forests on* lands suitable for timber, and its efforts are especially directed towards the reforesting of the lands around the head waters of navigable rivers. In the Rocky Mountains and the Far West region are several forest reserves. These forests are care- fully guarded from fires and the cutting of the trees is under the supervision of government officials. Forest reserves are also being established in the White and Appalachian Mountains, about 1,000,000 acres having been purchased under the Weeks Act. This vigorous and united activity of lumber companies, the states and the federal government ought soon to check the further destruction of our forests and in course of time reestablish them on a firm and enduring basis. The total area now included in National Forest Reserves amounts to over 186,000,000 acres. 51. FLOODS. Another serious problem is the prevention of the annual floods which inundate large tracts of lowlands. Hundreds of lives are lost annually and it is estimated that the damage to property amounts to about $50,000,000 yearly. Cities are inundated, cellars are filled with water, buildings are damaged or destroyed, bridges and railway embankments are swept away, live stock on the farms is destroyed, and the lowest lands are so late in drying out that the crop yield is considerably lessened. Both the Atlantic and the Pacific slopes experience these floods. ELEMENTS OF ECONOMICS 85 but the Mississippi Valley suffers most. The wide-spreading branches of the Father of Waters gather the water from the snow and rain of half a continent and annual high water is inevitable. But when the snows of winter are heavy and spring rains come in great sheets, as they did over Ohio and Indiana in 1913, great floods result. From the nature of the causes of these floods it would seem im- possible to prevent them entirely, and all that can be done is to de- crease the height of the tide. Reforestation of the watersh-eds and building of great reservoirs would hold back the waters, thus lessen- ing the height of the flood; and channel deepening would enable the rivers to carry a larger volume of water. But all these remedies com- bined would probably not be adequate. Congress has made feeble attempt to build levees along the lower Mississippi, which help a little; but they are not high enough nor strong enough to hold the greatest floods. And practically nothing has been done on the Upper Mississippi or its branches. The problem is still unsolved. Some have suggested a system of dykes on the Upper Mississippi and its branches and a great spillway from Cairo, Illinois, to the Gulf. It is suggested that this spillway be ten miles wide or more, with dykes high enough to hold the waters of the greatest possible flood, and with cross dykes or dams every two or three hundred miles. At these dams electric plants could be established, the imprisoned water in the spillway furnishing the water power, and electric power could be supplied to the whole region of the lower Mississippi for lighting, transportation and manufacturing. But whatever is done, some uni- form plan under the control of the federal government is necessary. Wherever local communities have undertaken the solution of the problem space between embankments have been made too narrow in order to gain valuable land, and as a result the height of the floods have been increased above the points where the channel has been narrowed. 52. WATERWAYS. The United States has a splendid oppor- tunity for internal waterways. With 25,000 miles of rivers and lakes ELEMENTS OF ECONOMICS that could be made navigable, and with lands suitable for digging- canals to connect the river systems, this country could easily take front rank among the nations in the efficiency of its internal water- ways. But as yet we have no general system of internal water transportation. Transportation by water costs about one-third as much as transportation by rail, including original cost and the up- keep. We ara just beginning to realize our opportuninties and vast systems of waterways are being discussed and beginnings have been made.. An ideal system of inland waterways would include (1) Lakes- to-the-Gulf waterway from Chicago to New Orleans, (2) improve- ment of the main branches of the Mississippi so as to connect with the main trunk from Chicago to New Orleans, (3) canals connecting the Ohio with the Great Lakes, (4) the improvement of the Erie Canal route, (5) an inland waterway parallel with the coast from Boston to the Mexican border, cutting across the peninsula of Florida, (6) the improvement of the Columbia River, and (7) the Panama CanaL Such a system would make seaports of Chicago, St. Louis, Min- neapolis and St. Paul, Duluth, Cincinnatti, Buffalo, and other Inland cities. The special advantages of the inland waterway along the Gulf and Atlantic Coasts would be the avoidance of the dangers from the stormy sea and the immense shortening of the distance between the different cities along the coast. The Panama Canal will give cheaper transportation between the Atlantic and the Pacific coasts, between North and South America, and bring the United States into closer communication with all other continents. Why have we neglected our opportunity? For several reasons- The rapid development of railways before the waterways were de- veloped checked the latter movement. It costs less to build railroads than to build canals and canalize rivers, and the country took the line of least resistance. In recent years the railroads have opposed the development of a system of waterways, but to what extent this influence has retarded the progress of waterways cannot be definitely ELEMENTS OF ECONOMICS 87 known. The wasteful and unbusinesslike financial methods of Con- gress has stood in the way. From the beginning of the present gov- ernment of the United States up to the end of the fiscal year 1913 Congress has appropriated the sum of $746,927,946.61 for the im- provement of rivers and harbors. If half that amount had been spent in the proper way the country would have had a fairly good system of waterways. Instead of selecting a few great projects and putting them through so that the country might get the benefit of their use, Congress has acted upon the principle that each Congres- sional district must receive some of Uncle Sam's money. Innumer- able little .projects all over the country have been undertaken and millions of dollars have been spent in dredging harbors and improv- ing rivers where there is little or no commerce, and the only tangible result of a large part of this expenditure has been to furnish jobs to the political friends of Congressmen. And the same "pork-barrel" methods of appropriation have been followed in selecting and carry- ing forward the really important projects. Under the pressure of public condemnation and the vigorous protests of our presidents since the Civil War, Congress is now going about its large projects with more businesslike wisdom than in previous years. Instead of spread- ing out its efforts all over the Mississippi River work is now concen- trated on certain portions so as to get them finished. Portions of the ideal plan sketched above have been completed and most of the other portions are under way. The Panama Canal is now completed. The canalization of the Columbia from its mouth to Lewiston, Idaho, is under way. The great New York State Barge Canal is about two-thirds finished. The Mohawk River is to be canalized to a point near Rome, from there the string of lakes and rivers is utilized until the old canal is reached in the western part of the state, and th^ remainder of the course is along the old route. The new canal will be able to accommodate barges of 3,000 tons capacity and it m^kes possible twenty-five times as much traffic as the old canal could handle. The Ohio River is to be made navi- 88 ELEMENTS OF ECONOMICS gable for small boats by the construction of 54 dams and locks be- tween Pittsburg and Cairo, and 11 dams and locks are now com- pleted. The improvement of the channel of the Mississippi from Minneapolis to the Gulf is under way, dams, dredging, and levees being the means employed. The inland waterway along the Atlantic and Gulf Coasts is well under way, several links in the chain having been completed. The Cape Cod Canal from Cape Cod Bay to Buz- zard's Bay is finished and will shorten the distance between New York and Boston about 70 miles. The Chesapeake and Albemarle Canal from Norfolk, Va., to Beaufort, N. C, is being constructed by the federal government. A chain of waterways is being con- structed the entire length of the Gulf Coast, excepting along the Florida peninsula. Thus it seems that at last the United States is to have a system of inland waterways commensurate with its needs. 53. GOOD ROADS. The three main means of transportation are railroads, wateirways and roads. Railroads have been well de- veloped by private companies, and the great railway problem is how to control them for the public interest. Our waterways problem is on the road to solution. But the problem of good roads is yet confronting us, though some progress is being made. With all our nervous energy in getting rich we have neglected one of the most essential sources of wealth, good roads, and the United States has poorer roads than any of the great nations of western Europe. The causes of this backward condition are various. The nation is yet young and we have been spreading rapidly westward over wild territory. Under such conditions road building must of necessity wait for the country to develop to some extent. To build anything but dirt roads is costly, and a new country may have plenty of natural resources, but it takes time to accumulate wealth. Another reason for not building good roads is the lack of material in most parts of the country, and paving material must be shipped long distances. A third great cause for the poor condition of our roads is that until recently road building and maintenance has been under the exclusive ELEMENTS OF ECONOMICS 89 control of local governments, the township or the county. We might have had at least good dirt roads, if th-ere had been proper coopera- tion among the different governments, national, state, and local. But farmers are usually busy and the roads have always been much neglected. If one district neglects its roads, there is not much use for the other adjoining districts to build good roads. Hence, there has been a tendency for the roads to sink to the level of th-e poorest. To get a good system of roads all concerned must pull together. Some roads should be great national highways leading from one end of the counto-y to the other; others should branch out from these and connect the main cities and social centers; local roads serve as the feeders. It is plain, therefore, that all grades of government, national, state, county or township, should cooperate. The main roads cost more than the local roads, and the burden must be born not by the local community but by the nation and the states. The advantages of good roads are many and well recognized. The most obvious advantage is the cheapening of the cost of trans- portation. It is estimated that the cost of getting goods from the farm to the railroads in the United States is greater than the cost of railroad transportation. Easier means of communication and trans- portation enable the, country people to get together more and thus reduce the loneliness of rural life; the movement for consolidation of rural schools would be aided, since one of the main obstacles to con- solidation is the difficulty of getting the children to and from school every day. The "Stay on the farm'' and the "Back to the farm" move- ments would be helped along, since country life would be more profit- able and more attractive with good roads to facilitat-e transportation for economic, social, educational, and religious purposes. It is encouraging to observe the nation-wide awakening to the need of good roads. The automobile, rural mail delivery, and agi- tation by the wide-awake portion of the community have at last moved the masses. "Good roads" days are set aside for public ob- servance by w^orking the roads, commissions of inquiry are being ap- 90 ELEMENTS OF ECONOMICS pointed to make a scientific study of the whole problem, in its finan^ cial, political and engineering phases, and state laws are being enacted giving the state governments a larger voice in road affairs. The federal government has built several small bits of road in different parts of the country to serve as examples, and certain principles of roadmaking have been worked out. It has been demonstrated, for example, that it is better to have a long, level road around a hill than a short, steep graded road over a hill. It has been demonstrated also that in most cases, for a country road, a dirt road is hard enough if it is kept dry; hence if anything but a dirt road is to be built the main thing is to make a waterproof covering or "roof." The very best and most expensive material may be used to little purpose if it is not waterproof; for if water gets through to the dirt foundation the dirt becomes soft and the paving becomes uneven or broken and is worse than a poor dirt road. The general principles of the new state-road laws are the establishment of state road commissions to cooperate with county officials in building certain roads, the sharing of the burden of the work jointly by state and county, and the general su- pervision of the work of construction by state officials. Several bills have been introduced into Congress authorizing national aid in road making; but the feeling that such matters belong to the states, and that the "pork-barrel" spirit would defeat the main purpose of na- tional aid have thus far prevented the national government from doing anything in this direction. 54. IRRIGATION. Another great problem of production is the utilization of large tracts of our arid lands. With a few local ex- ceptions, the whole region west of the hundredth meridian is arid and for most crops needs irrigation. This region comprises about half the area of the country. But owing to the limited amount of moisture from rain and snow only a small fraction of this vast region can be irrigated. Some can be irrigated from artesian wells, but how much is not definitely known. It is estimated that about 150,- 000,000 acres or 235,000 square miles can be irrigated ftom streams.. ELEMENTS OF ECONOMICS 91 The irrigated lands are very fertile and 40 acres makes a good sized farm, hence, there will be room for 4,000,000 farms, or about 20,000,- 000 people, not including those in villages and cities which will grow up. Though only a small proportion of our arid lands can be irrigated, the amount is by no means small, being larger than either France or Germany. In 1910 about 20,000,000 acres were ready for irrigation from streams. About 40 per cent of this was irrigated by private individuals, 16 per cent by irrigation companies, 32 per cent by co- operation among the landowners, 6 per cent by state governments and 6 per cent by the federal government. The irrigation of our arid lands is a national problem, and its general solution should have been under the control of the federal government. Private individuals cannot afford to construct reser- voirs and ditches on a larga scale, and cooperation on a large scale cannot be undertaken until the country is fairly well settled. More- over, if left to private enterprise wasteful methods are employed and the amount of land that can be irrigated is much smaller than it would be if the water were used economically. Litigation also results, for late settlers go higher up the streams and divert the water, in wasteful fashion, upon the lands above, leaving an insufficient amount for those who have been using the water. If corporations get control of the water rights a monopoly is created, and extortionate rates for water are charged. Even states cannot properly control the matter, since most of the main streams that furnish the water run through more than one state, and litigation among the states results. If all these difficulties had been foreseen provision might have been made for supervision by the federal government before it disposed of its lands. In 1902 the federal government entered the field. A law was passed setting aside the proceeds of the sale of public lands to be used in constructing irrigation works. Thus a continuous fund for irriga- tion is created and maintained. When irrigated lands are sold the proceeds go into the fund for irrigating more lands. The government is pursuing a liberal policy that will make of ^2 ELEMENTS OF ECONOMICS the irrigated regions a land of small farms. The land is sold only to actual settlers, in tracts ranging from 10 to 160 acres, according to the value of the land and what it is suited for, at 'a nominal sum of from 50 cents to $1.50 an acre and whatever it costs to irrigat-e it. This includes perpetual water rights. The average cost thus far is about $16.00 per acre for constructing reservoirs and ditches and $1.07 for maintenance. The cost of the government projects, however, is much greater than that, bemg about $68.00 an acre, because lands easiest to irrigate were the first to be taken by private individuals, and because of the more permanent character of the public irrigation works. The average value of the crop on the irrigated lands in 1910 was $25.00 an acre, which shows that money spent in reclaiming our ^arid lands is well invested. Irrigation and "dry farming" are converting the land of the cow- boy, the buffalo, and the miner into a rich agricultural country with some advantages other agricultural sections cannot enjoy. The rich- ness of the land and the assured water supply make it possible for a small tract of land to support a family in good condition. The density of the population enables it to secure many of the advantages of city life, without its nervous strain, filth, and overcrowding. School sys- tems may be established rivaling those of the cities; roads can be well paved and the dam near by will furnish power for electric light and transportation. On the whole, the industrial, political, and intel- lectual life of the Far West will be transformed and it will become one of the most intelligent and progressive portions of the country. 55. SWAMP LANDS. Another great source of national wealth lies in our swamp lands. We have done much less to utilize this source of wealth than has been done in the arid regions. Most of the land has passed into private hands, hence there has not been the op- portunity for the government to take the initiative, drain the lands, and sell them. For private individuals to do anything worth while, cooperation among the owners is necessary. This is being done to some extent, but to reclaim the main part of the swamp lands action ELEMENTS OF ECONOMICS 93 by the state and in some cases by the nation is necessary. Not only must great ditches be dug but the annual floods which inundate the lowlands must be prevented. There are in the United States about 75,000,000 acres of swamp lands that could be drained. The most of this land lies along the Missippi River, around the Great Lakes, in Florida, and in the States on the Pacific Coast. The land is extremely fertile and would support a farming population of at least 10,000,000. It costs form S6 to $9 an acre to drain the land and the valu-e of the crop would be at least $50.00 an acre. Hence the cost is about half that for irrigation and the value of the crop is about twice as great as that of irrigated lands. Evidently money spent in swamp drainage would be a good investment. In addition to the great increase of our food supply, drainage of our swamps would increase the healthfulness of these regions and of the country around them. Several states have within the last few years passed laws on the subject of swamp drainage and appointed commissions to take charge of the drainage works. 56. SCIENTIFIC FARMING. One of the most important prob- lems of the day is how to improve our methods in agriculture. There is much need of such a study, for our soil is rapidly becoming ex- hausted by unscientific methods of cultivation. Abundant proof of this exhaustion is found in the large amount of land formerly under cultivation that is now abandoned. Any traveller in the older sec- tions of the country can find in any community many abandoned farms. According to the census reports the amount of unimproved land in New England and New York increased from 14,000,000 acres in 1880 to 19,000,000 acres in 1900. In those seven states about 30,- 000,000 acres were under cultivation in 1880 and only 23,000,000 acres in 1900, which shows a loss of about 23 per cent in twenty years. Some writers have attempted to show recently that our soil is not being exhausted, because, they claim, there has been a slight in- crease in the yield per acre of most crops in the United States during the past ten or fifteen years. But the rise in prices during those 94 ELEMENTS OF ECONOMICS years would naturally lead to more intensive cultivation, and in that case an increased yield per acre would not prove that more intelligent methods were used or that the soil is not being slowly exhausted. In the second place, there 'has been no increase in the yield per acre of the great staple crops during the last half century. The average yield of wheat during the ten year period, 1866-75, was 11.9 bushels per acre, and for the ten year period, 1901-1910, 13.9 bushels per acre. The average yield of oats for the two periods was 28.1 bushels and 29.7 bushels respectively; of rye, 13.6 bushels and 16.1 bushels; of harley, 23.1 and 26 bushels respectively. These four crops show an increase of from one and one-half to three bushels per acre, a very small increase when one considers the great improvements in farm machinery. On the other hand, the yield of corn, whose acreage is nearly twice that of the other four crops combined, declined about two bushels per acre, being 28 bushels per acre for the first perilod and 25.9 bushels for the second. The net result seems to be that there has been no general increase or decrease in the yield per acre during the last half century, in spite of th-e improvements in farm machinery and the stimulus of rising prices during the last fifteen years, which would naturally lead to more intensive cultivation. There are at least four great causes of the exhaustion of our soil. (1) The abundance and cheapness of the land led to extensive rather than intensive cultivation. (2) Increasing amount of tenant- farming. A tenant naturally has little interest in maintaining intact the producive powers of the soil. His purpose is to get as much out of it as possible during the short time he has possession of it. Conse- quently, the soil is "mined" rather than cultivated. (3) During slavery days the soil of the South became exhausted because of the wasteful methods pursued. But one or two great crops were culti- vated, no rotation of crops was possible, no fertilizers were used, and when one piece of land became exhausted it was abandoned and an- other piece taken under cultivation. (4) The individual farmer does mot lose very much by the slight exhaustion of the soil, when it is ELEMENTS OF ECONOMICS 95 widespread, because the rise in the prices of th-e products will make nip for shortage in the yield. Hencfe, the non-agricultural portion of the community bears the chief burden of the exhaustion of the soil, :and the farmers are willing to pursue their easy-going ways and their unscientific methods. The general results of this exhaustion of the soil are the rise in prices and the decline in the relative importance of the United States as a source of the world's food supply. The rise in prices has been produced by other causes also, especially the increase in the supply of gold and the increase in population, which makes it necessary to bring into cultivation lands more distant from the main markets. But investigators are pretty well agreed that the exhaustion of our soil is playing an important part in the rise of price of agricultural products. The second result is shown by our imports and exports of food stuffs. In 1900 the United States exported $545,473,000 worth of food stuffs and imported $230,916,000 worth; in 1913 the exports amounted to $502,094,000 and imports, $406,000,000. In other words, our exports of food stuffs actually decreased while our imports nearly doubled. Formerly we were one of the world's chief sources of supply for bread stuffs and meat; but during the last few years we have begun to import meat. The rapid increase in our population is to a large extent responsible for this sudden change in our economic position in the world's markets, because the increase in population has been chiefly urban. But with our naturally fertile soil this coun- try could easily support a population several times as large as ours, with proper methods of cultivation, and the shortage in food supply that threatens us in the near future is unnecessary. It is this situa- tion that is greatly stimulating the movements for more scientific agriculture. 57. GOVERNMENT AGENCIES FOR STUDYING AGRICULT- URE. Th-e farmers have done much of their own initiative in intro- ducing more scientific agriculture, but the national and state gov- ernments, viewing the subject from the standpoint of national pros- 96 ELEMENTS OF ECONOMICS perity for all classes, have undertaken the task of studying agriculture and of disseminating the knowledge among the farmers, in the hope that self-interest will prompt them to apply the knowledge gained. This work affords a good example of social cooperation; for the in- dividual farmer could not possibly do what the national and state governments are doing for him. The main governmental agencies for studying agriculture and disseminating the knowledge are (1) the National Department of Ag- riculture, (2) state agricultural colleges, (3) experiment stations, and (4) demonstration farms. The Department of Agriculture, through its various bureaus, conducts all kinds of investigations and experi- ments, employing in its great laboratories a large body of experts. The results of its experiments, together with the results of the work done at the experiment stations, are published in books and pamphlets and sent into all parts of the country. The state agricultural colleges are doing work similar to that done by the bureaus of the Department of Agriculture. They conduct experiments in their laboratories and on their farms and publish the results for dissemination among the farmers. In addition to this work is that of instructing young men and women in the principles of agriculture, horticulture, dairying, and all branches of farming. The colleges also hold farmers' institutes where short practical courses are given to farmers, old and young. Lecturers are also sent out, and demonstration trains tour the country to .get farmers interested in new ideas. There are now about 60 experiment stations established by the national government, there being at least one in each state. These ure large practical laboratories where theories worked out in the agri- cultural colleges and by the bureaus of the National Department of Agriculture are put to the test in the actual cultivation of crops. Both the colleges and the government bureaus experiment with grow- ing plants; but the experiment stations are not so much concerned in discovering new principles as in testing these principles to find out ELEMENTS OF ECONOMICS 97 whether or not they are of any practical value. For conducting this work Congress appropriates $30,000 yearly to each experiment station. The numerous demonstration farms, as the nam-e implies, are for the purpose of carrying to the farmers in a practical, convincing way, the general knowledge gained from all the various sources. These farms are conducted on a paying, business basis. The value of the new ideas is shown in better crops and larger profits than the ordinary farm can show. Nothing convinces like seeing a thing tried. And each farm serves as an object lesson to the farmers around. 58. LINES OF INVESTIGATION. Experiments and investiga- tions are condutced along various lines, six of which are of special importance, (1) soil analysis, (2) defects of soils, (3) plant adapta- tion, (4) dry farming, (5) plant development, and (6) diseases of plants. Soil analysis is the basic study which naturally leads to the other lines of investigation, especially defects of the soil, plant adapta- tion, and dry farming. Soils vary greatly in character. Some are sandy, some are clay and some are black loam. Most soils contain all three of these elements, but the predominant element gives the name to the soil. Other elements are needed, such as potash, nitrogen, phosphates and other minerals. Different soils are studied and classified. Sot! analysis not only shows the elements of healthful, normal soils, but it discovers defects in soils. One of the most important defects of soils is the lack of one or more elements essential to plant growth. The chief cause of the absence of these elements is that the same kind of crop has been grown year after year and nothing put back into the soil. Such soil is said to be "worn-out" and is not to be confused with poor soil. Worn-out soil may be rich in all but a very few elements, while poor soil is lacking in most of the elements essential to plant growth, and .consequently worn-out soil is more 98 ELEMENTS OF ECONOMICS easily made fertile than poor soil is. One of the most important ele- ments taken from the soil by growing plants is nitrogen. During the days of the Roman Empire it was discovered that by growing leguminous plants, such as beans, peas and clover, worn-out soil would be recuperated. This discovery led to the practice of rotation of crops, that is, planting alternately leguminous crops and other crops. But the causes of the recuperation of the soil by such rotation remained a secret until modern science revealed the fact that certain forms of bacteria gather around the roots of leguminous plants and draw into the soil nitrogen from the air. Scientists have learned how to grow these bacteria, and by spreading them over the field the soil is "inoculated" with the nitrogen forming bacteria, thus assisting nature in her efforts to restore the soil to its natural fertility. It has been shown that land lacking in nitrogen chiefly can be restored to fertility at a nominal cost of a few cents an acre by the process of "inoculation" and that the results are as effective as when com- mercial fertilizers are used costing $30.00 an acre. If worn-out soils lack other elements besides nitrogen, other fertilizers must be used. Soil analysis also prepares the way for the study of plant adapta- tion. Different kinds of soil are suited to different kinds of crops. Some crops do best on sandy soil, others need a rich black loam, others do fairly well on clay lands that are not fit for other kinds of crops. Again, some kinds of plants do well on wet lands and others will grow well on dry lands not fit for ordinary crops. Two notable examples of plants suited to dry soils are alfalfa and durum wheat. Alfalfa, sending its roots many feet into the soil, is fast becoming an exceedingly valuable crop on our semi-arid plains of the West and it is transforming that formerly uninhabitable region into one of the most wealthy farming sections of the whole country. A fourth line of investigation which the various governmental agencies are conducting is plant development. Some phases of plant development are quite simple, and farmers can do much to improve ELEMENTS OF ECONOMICS 99 the quality and quantity of crops. By using proper methods of selecting and testing seeds, crops may be increased by one-third or more at practically no extra cost. Other phases of plant develop- ment require the scientific knowledge of the expert. The little sour apple has been developed into numerous varieties of excellent flavor, large and prolific. Grapes have been developed from the little sour fruit of the forest; and most wonderful of all is the development of the cactus plant. Burbank, the wizard of the plant world, has taken the prickly, worthless cactus of the desert and developed it into a spineless fruit with little apples good for man to eat and with a fibrous part that makes good food for cattle and horses. Some day our barren deserts may blossom with this new wonder, and happy millions may dwell in the now desolate regions. Closely related to plant development, plant adaptation, and rem- edying the defects of the soil, is "dry farming." Some plants, like the cactus, alfalfa, and durum wheat, have by development been adapted to our dry soils. Dry farming also includes methods of cultivation suitable to a semi-arid region. Lack of moisture is also one of the defects of soils; hence this subject is related in several ways to the other lines of investigation. Dry farming is also a special phase of the wider subject of scientific cultivation. Each kind of soil must be handled differently. Where there is plenty of moisture farmers can learn fairly well by experience how to handle different kinds of soils; but where there is not enough moisture to grow crops by the ordinary methods of cultivation known to farmers there is special need of government aid in working out proper methods of cultivation, for farmers cannot make their living while learning by experience. The vast region lying between the 99th meridian and the Rocky Mountains is semi-arid and most of it cannot be irrigated, and if it is reclaimed it must be done by dry farming. The land is naturally very fertile and if crops could be grown proportionate to the richness of the land it would support a dense population. Some portions of the country west of the Rocky Mountains are also suited 100 ELEMENTS OF ECONOMICS to dry farming. Dry farming is therefore one of the most important agricultural problems in the United States. The national government and the various state governments of the West are studying methods of farming suited to the semi-arid regions and a few principles have been established, though as yet no complete science of dry farming has been worked out. Among the principles thus far discovered, three are interesting and important. (1) The seed bed must be fine and mellow, but fairly compact, to se- cure proper germination of the seed; (2) the soil must be in a recep- tive condition, so that what little rain does fall will not run off; and (3) the soil must be in a retentive condition, so that the moisture will not quickly evaporate. Beyond these few principles nothing is yet established and no universal rule can be laid down applicable to all kJnds of dry soils. It was once thought that all dry lands should be plowed deep and cultivated shallow so as to create a dust mulch. But it has been proved that these are not universal rules. A fine dust mulch, for example, is not always best since a light rain may cause it to "puddle'' and not allow the water to sink down into the ground. A sixth line of investigation is to. discover the causes of diseases of plants. This is a vast subject, as it is coextensive with agricul- ture. "Parasitic insects of many kinds kill forest trees, fruit trees, and many other plants; various kinds of weevil destroy grain, fruit, cotton, and other plants; the Hessian fly destroys the wheat; grass- hoppers sometimes become so numerous that they eat up all vegeta- tion over wide areas. Some progress has been made in discovering means of destroying these and numerous other pests that annually destroy millions of dollars' worth of grain, fruit and other crops. Much, however, remains to be done in this great field. 59. CHILD LABOR. It is not harmful but beneficial for chil- dren to labor, if the work is healthful, not too severe, and does not interfere with their main business of getting an education, for such labor develops the child physically, gives him a, right attitude to- ELEMENTS O^F ECf(>NOiV!?C/S 101 wards labor and trains him in habits of industry. The child labor problem is concerned with conditions that are harmful. Probably over a million children in the United States, under 15 years of age, are working under conditions that are very injurious. In mines, factories, canneries, and other establishments children are being stunted, mentally, physically, morally. In order to develop properly, children must have proper play and exercise, but hard, monotonous work prevents normal development. Long hours, unhealthful condi- tions, and evil companions work a greater harm to children than to adults. Lack of education is an attendant evil. Recent investi- gations by the National Child Labor Committee show that 44 per cent of the white children in the mill districts of Georgia are illit- erate. The worst evil of child labor is probably the destruction of all ambition. Ruined in mind and body, robbed of the birth right of every American child, an education to fit him for the battle of life, ambition, the mainspring of human energy, destroyed, thousands of children are yearly turned out of our factories to become a prey upon society, for at the age of maturity they are unfit for any occu- pation and they become tramps, robbers or invalids. The country is beginning to realize the seriousness of the situa- tion and states are passing laws to restrict child labor and prevent evil conditions. These laws limit the age at which children may be employed in certain industries, limit the hours of labor, and pre- scribe certain regulations protecting the life and health of the chil- dren. In many states the age limit is 14, which is entirely too low, for children of that age are too young to stand the strain of modern industry, nor have they sufficient education to prepare them for life's work. Many states have fairly good laws, but owing to defective machinery of government, the dishonesty of parents, and the trickery of employers, these laws are not well enforced. A public registry of births would prevent the parents from understating the ages of their children. But the defective machinery of government is not so easily remedied. The factory inspector is too often the appointee 102 , ELEMENTS OF ECONOMICS of the employers, since the employers have such a powerful influ- ence in the government. If the school authorities had charge of the enforcement of factory laws in so far as they are applied to children of school age, such laws would be better enforced, for school authorities are not usually subject to political control and they are anxious to keep the children in school as long as they can. In addition to such laws, properly enforced, remedies are needed which remove the causes of child labor. The wages of the father should be sufficient to enable him to support his children, and widowed mothers without proper means of supporting their children should receive pensions, as they do in some states. Our educational system should be adjusted to the needs of the times so that both parents and children will feel that the school will help them in the practical work of getting a living; and finally all states should have laws requiring children to attend school until they have reached a cer- tain age. The subject is a difficult one for the states to deal with and is properly a national problem. The standards of the states are very different and the state with the lowest standard has an advantage over the other states. Where the age limit is low and employers can get children at low wages, there certain kinds of industries will gather, deserting states with higher standards. And sometimes when a state is trying to protect its children by a good system of laws, the children are taken to other states and exploited a portion of each year. For example, hundreds of workers between the ages of 6 and 7 are taken from northern cities to work in canneries in cer- tain southern states during the winter season, when by the laws of their home states the children should be in school. Congress, hav- ing control of interstate commerce, could help secure uniformity in child labor laws among the states, or at least correct the evils of the lack of uniformity, by passing a national child labor law and exclud- ing from interstate commerce all goods produced under conditions contrary to that law. Bills of this character have at various times ELEMENTS OF ECONOMICS 103 been introduced into Congress but as yet have failed to pass. 60. INDUSTRIAL EDUCATION. A problem of vital importance that has quite recently begun to receive attention is industrial edu- cation. Modern industry demands that a certain proportion of its workers have special training. In modern universities and profes- sional schools society trains men for the professions. Commercial and business courses in high schools and private business "colleges" are preparing boys and girls for office work. Until recently, how- ever, the great mass of industrial workers who must receive training have obtained it under the apprenticeship system. But many trades are more readily learned in a technical or trade school than under the apprenticeship system, because they learn the science underlying the practice and rules of the trade. It has been demonstrated that in trades that must be learned largely by the apprenticeship system there is a gain in efficiency by previous study of the general principles of the trade in school. The United States has fallen behind the great nations of Europe in facilities offered for vocational training. Our numerous pri- vate business schools and business courses in high schools prepare for office work and our universities give courses in science that prepare for the professions. But we have neglected the masses of the peo- ple. A national Commission on Vocational Education appointed by act of Congress to investigate the needs of vocational education in the United States reported in 1914 that of more than 25,000,000 workers in agriculture and industry, less than one per cent have had adequate training. Our rich natural resources have enabled us to hold our own in competition with other countries. But our business men have been greatly hindered by the scarcity of skilled workers and they have to some extent train their own employes by establishing schools for them in the factory, shop or store. European countries, feeling the need of training their workers to enable their business men to com- pete with America, with its richer natural resources, have established vocational schools for the common people, and now American indus- 104 ELEMENTS OF ECONOMICS try, to hold its own, is importing skilled labor from Europe. Several states are taking steps to supply the growing need of vocational education in this country and technical and vocational high schools are being established. For six years efforts have been made by a few interested in the subject to get a bill through Congress giving aid to the states in establishing vocational schools. The bill failed to pass the 62nd Congress, but a commission was appointed to investigate the subject. Theoretically, there is no question as to the wisdom of establish- ing vocational schools for the masses, providing the cultural and social phases of education are not neglected. But the problem pre- sents great practical difficulties. One of the chief problems is, Shall trade schools be established which actually prepare pupils for taking up a trade without apprenticeship, or shall the foundations of several allied trades be learned so that the boy can more intelligently choose his vocation when he gets through school and can learn it with a short apprenticeship? If we attempt to teach the trades fully in school, two difficulties at least are encountered. One difficulty would be to provide at a reasonable expense instruction and practice in all the trades. There are hundreds of trades in modern industry, and in each community there are usually a large number. In small cities instruction would be offered in only a few of the main trades of the locality, which would result in an oversupply of skilled labor in some trades and a scarcity in others, with the consequent waste of social energy. In the second place, there is danger of increasing the num- ber of misfits in life if boys choose their occi:^pation too young. If they have an opportunity to learn the elements of several trades in school they choose their vocation more wisely after they have finished this prevocational education. Other practical difficulties present themselves, but enough have been given to show that the problem should be studied with care before establishing any elaborate system of vocational schools. : ELEMENTS OF ECONOMICS 105 CHAPTER VII. Monopolies. 61. DEFINITION OF MONOPOLY. In the strict meaning of the term, a monopoly is a company that controls the whole supply of a commodity. Absolute monopolies, however, are rare, and for all practical purposes a monopoly may be considered as any company that controls enough of a commodity to enable it to control the price. The proportion of the supply that a company must control in order to raise prices above the competitive level depends upon the nature of the commodity. In .case of a necessity, for which no substitute can be found, only a small percentage of the supply need be controlled, while in case of a luxury or where a substitute can be found, a large percentage of the supply must be controlled in order to raise prices above the competitive level. 62. CLASSES OF MONOPOLIES. Monopolies may be classi- fied as natural, legal and artificial. There are different ways of classifying monopolies, but this lolassification is helpful, as it is based upon the fundamental causes of monopoly. Natural monopolies are of two kinds, those that own the source of supply of the commodity controlled and those that are able to drive out competitors by the advantages of large-scale production. An exami)le of the former is the anthracite coal monopoly, a vast combination of companies con- trolling practically all the hard coal in the country. Examples of the latter kind of monopolies are, (1) municipal monopolies, such as street railways, gas and electric lighting -companies, (2) telephone and telegraph companies, and (3) railroads. These are monopolies because the unit of maximum efficiency is so large that the whole market is supplied more cheaply by one company than by two or more. Legal monopolies owe their power to a patent, a copyright, or a monopoly charter. A business owned and conducted by the gov- ernment is also a legal monopoly, such as the postoffice. Natural monopolies, such as railroads and street railways, frequently possess 106 ELEMENTS OF ECONOMICS certain patent rights that help them maintain their monopoly; also . the ownership of especially advantageous terminal facilities may help a railroad in its fight with rivals. Artificial monopolies are those that maintain their monopoly power by means of some unfair advantage over rivals. It may be a high tariff rate which shuts out competition from foreign coun- tries and enables home producers to combine and raise prices above the competitive level. A special favor from a railroad in the form of low rates may enable the favored company to undersell rivals and drive them out of business, and then prices are raised above the normal rates. If any rival threatens to come into the field it can easily be driven out because prices may be temporarily put so low that the new comer cannot make any profits and still the favored company can make a fair return on its capital. Again, if a company is very large it may use "unfair" means to keep competitors out. Among the "unfair" means is that of temporarily lowering prices until the rival is ruined. A large company may have many estab- lishments in different parts of the country and it could afford to run one establishment at a loss in order to drive out a small rival. Just what kinds of business come under the head of artificial mon- opolies is not an easy matter to decide. No monopoly may be wholly artificial, for all may have some element of legal or of natural monopoly. The most important practical problem before the country at the present time regarding monopolies is whether or not the great manufacturing monopolies are natural or artificial or a combination of the two. 63. FORMS OF COMBINATION. In the growth of monopolies, both natural and artificial, various forms of combination arose. The most complete union of competing companies is actual consolida- tion into one company. But as a rule, at least when combining com- panies were large, each constituent company has maintained its own identity, having its own officers, and to a certain extent pursuing its own policy. The more important forms of this class of com- ELEMENTS OF ECONOMICS lOT binations are the friendly agreement, the pool, the trust, the hold- ing company, the community of interest, and interlocking director- ates. There have been two periods in the growth of combinations re- sulting in complete consolidation. The first was the consolidation of small concerns into large ones, seemingly to secure the advantages of large-scale production. Usually these consolidations did not result in monopoly. This was the first step in the fierce competition among manufacturing firms in the '80's that resulted in the pool, the trust, and other forms of combination. 'The second period in the growth of consolidation is, according to Professor Taussig, the last stage in the development of monopoly, during which the more loosely organized monopoly becomes a giant corporation. Attempts of law- makers to prevent the looser forms of organization have sometimes driven the companies into this form of organization; and it is yet an open question whether or not such a combination can be attacked through the courts, since there may be no rivals, hence it cannot be shown that competition is stifled. The loosest form of combination is the agreement to main- tain rates or prices or to act in harmony in other ways. This form of combination also has had two periods of development. Dur- ing the first period there were many competitors and it was hard to compel them to keep their agreement, since their contracts were illegal and each gained an advantage by breaking his contract, pro- viding others kept theirs. The second period of growth resulted from attempts to break up the more tangible forms of combination,^ and today many of the greatest monopolies are apparently of this form. It has become easier for the few great companies that re- main after the smaller ones have been crushed to keep their agree- ments than it was for many companies to keep them, and moreover, they have learned by experience that it is best for all in the long run to keep their agreements. The pool is much like the fri-endly agreement, the only distin- guishable difference being the existence of an informal joint com- 108 ELEMENTS OF ECONOMICS mittee to see that agreements ^re maintained. Each company main- tains complete control over its own affairs, fixing prices, hiring its own help, appointing its own officers, and possessing the legal power to ignore agreements with other companies that create monopoly. The essence of these agreements were either to divide the territory, to divide a certain percentage of the profits, or to limit the output and maintain certain prices. In any of these agreements monopoly is secured. Pools were made illegal either by court decisions or by law, both state and national, and the trust sprang up. The trust is a c6m- bination formed by each competing company placing the majority of its stock in the hands of a common board of trustees who issue to the stockholders certificates of stock held by the board. Each company maintains its own organization but the board of trustees holds the majority of the stock of each company and can thus con- trol the policy of each; hence )Competition is absolutely suppressed. There is in reality but one company, though in form there are several. The trust was declared illegal both by state and national law, the Sherman Anti-trust Act of 1890 expressing the will of the nation that monopoly in any form should not exist. Straightway the captains of industry got their heads together and the holding company sprang into being. In this form of combination a charter is obtained from some state allowing the new company to pur- chase and hold stack of other companies. On the surface there is no voluntary agreement on the part of the combining companies to enter into a combination, as there was in the case of the trust. The monopoly appeared to be the accidental result of an outside party buying up the majority of the stock of companies that happened to be in the same line of business. And to buy property seemed to be the natural right of every one. In reality there is no essential difference between the trust and the holding company, the new corporation performing the same functions that the board of trustees performed, and in both cases the leading men controlling the com- ELEMENTS OF ECONOMICS 10^ bination were not an outside concern, but the leading men in the combining companies. It seemed for a time that the holding com- pany would not be open to attack through the courts, but after some hesitation the courts brushed aside legal subtilities and de- clared a holding company contrary to law if it actually created a monopoly. A newer and more subtle form of combination is secured by in- terlocking directorates. There is no combination in form, and no company or body of persons that represents any formal combination. Real unity, however, is secured by the men on the boards of directors of the different companies being practically the same group. Hence, while there is no record of union or of united action, this group of men would not pursue a policy for one company inconsistent with their policies for all the others. The union is just as real through this latter form as through any other and is just as effective. Con- gress has recently declared this form also illegal, and what the cap- tains of industry will do next remains to be seen. The most subtle and the most dangerous form of combination is the "community of interest" in which a group of men own the controlling interest in several concerns that are supposed to h& rivals. This group of men, instead of appointing themselves direc- tors of the different companies, thus forming interlocking director- ates, appoint different men on the different boards of directors who carry out their orders. These "dummy" directors of the supposed rival firms will act in harmony simply because they execute the orders of the small knot of m-en who are their common masters. The federal courts have definitely sanctioned this form of combina- tion, on the ground, apparently, that all individuals have a right to own stock in as many companies as they wish and to vote for whom they wish for directors of the different companies. In a later case, however, the Supreme Court of the United States held that inter- corporate relationship through individual stockholders was contrary to the Sherman Act. In 1913, in its decree dissolving the union be- 110 ELEMENTS OF ECONOMICS tween the Union Pacific and the Southern Pacific railroads the Su- preme Court laid down this principle and the U. S. District Court in carrying out the decree of the court above enforced this principle to the extent of denying individual stockholders the right to vote in both companies if they held stock in both. There seems to be no reason why this principle should not hold in the case of manufactur- ing corporations as well as of railroads. If the courts adopt this jiew principle and apply it to all corporations it will again illustrate the recent tendency of the courts to prevent monopolists from evad- ing the spirit of the law while seemingly complying with the letter of the law. 64. MUNICIPAL MONOPOLIES. Public service corporations, such as street railways, gas and electric lighting companies, and telephone companies, are natural monopolies. Two or more com- panies in any of the&e lines of business would require an unnecessary duplication of the distributing plant and could not be run as cheaply as one company. The law of large-scale production applies in each case and the saving is due to economy in the use of fixed capital, salaries of head officials, and various other items. Being natural monopolies, the welfare of the public is endangered, if the companies are not under effective public control. High rates and poor service result in unduly large profits; street cars are over crowded; the city water is often dangerous to the health of the people; gas is poor in quality and of low pressure. From the nature of the case, therefore, municipal monopolies must either be owned by the city or under public control. Either policy has its weaknesses. If the city government attempts to con- trol these corporations and keep their profits at a reasonable rate, the corporations naturally attempt to evade control by influencing either the legislative or the executive departments of the municipal government, and if unsuccessful in controlling these departments, the corporations sometimes obtain relief from the courts whose judges are unduly influenced. Some investigators assert that the municipal ELEMENTS OF ECONOMICS 111 corporations have been the most powerful cause of the corruption in our city governments. On the other hand, municipal ownership has its dangers. Cor- ruption of the governm-ent by the corporations is apt to be ex- changed for graft and dishonesty among city officials. There are other causes of dishonesty in city governments besides the influence of public service corporations, "boss" rule being the most important. If a political "boss" rules the city, the addition of these other activi- ties to the ordinary duties of the city would multiply the opportun- ities for graft and corruption. In that case the management of these affairs would be inefficient and the people would get no better ser- vice and probably the taxpayers would have to help pay expenses. The vital point in the whole controversy is whether or not the city government is honest and efficient. In European countries, where city governments are more honest and efficient than those in Amer- ica, municipal ownership seems to have been a success. But until American municipal governments can make a much better showing, both of efficiency and of honesty, than they have in the past, munici- pal ownership does not offer a very encouraging solution of the problem of municipal monopolies. Owing to this condition of affairs and the natural individualistic tendencies of Americans, our statesmen are turning to another method of solving this problem, namely, state control. Within the past three or four years twenty states have enacted laws establish- ing a state commission to control all the public service corporations within the state, including railroads, telegraph and telephone com- panies, interurban transportation lines, and all municipal monopo- lies. The Illinois law, passed in 1913, may be taken as a good exam- ple of this new experiment. The law establishes a state board with power to control all public service corporations within the state. Among the vast powers of this board three are of special import- ance, (1) the regulation of rates, (2) establishing a uniform system of accounting, and (3) regulating the issuing of stocks and bonds. 112 ELEMENTS OF ECONOMICS Thus three of the most vital matters in any business is placed in the hands of a government board, and a long step is taken towards social control of private business. It remains to be seen whether or not our state governments will prove more -effective in their control of these monopolies than municipal governments have been. This increase in the duties of the executive department of our state governments may result in strengthening this weak branch of government. Some critics think that this is a movement in the wrong direc- tion, since it centralizes in the state things that belong exclusively to each city. If the city allows itself to be cheated and robbed by these public service corporations, say these critics, it is the fault of the city, and the best way to get good city government is to let the people of the city struggle with the problem until it is solved. But whether this movement is wise or unwise, it is growing rapidly. 65. MANUFACTURING MONOPOLIES. Economists and statesmen alike agree that railroads, telegraph and telephone lines, and municipal public service corporations are natural monopolies and that they cannot be destroyed, but must be either owned or con- trolled by the government. It is agreed also that if the policy is to be public control, rates and prices are among the things that must be regulated. But there is no agreement, either among economists or statesmen, as to the nature of the manufacturing, or, as they are often called, capitalistic monopolies. Some believe they are artificial and ought to be destroyed, others think they are natural and cannot be destroyed, and others think they combine elements both of arti- ficial and natural monopolies, and that the public policy towards them should be to take such measures as will destroy the artificial props that sustain these monopolies and then subject them to rigid regulation. How far this regulation ought to go is a question, but a few of our leading public men advocate the regulation of prices of goods made by monopolies, while others hold that such a policy would be socialism. None but the socialists advocate public owner- ship of these monopolies; and indeed if the public were to own all ELEMENTS OF ECONOMICS 113 the natural monopolies and all the manufacturing monopolies it would very nearly constitute socialism, since there would be left to private enterprise only farming, retail mercantile business, and the small manufacturing establishments. But it may not follow that if manufacturing monopolies are artificial they can be destroyed. It may be possible that the forms of combination to secure monopoly are so subtle and so secret that the existence of monopoly cannot be proved in a court of law. If such should prove to be the case, regula- tion of prices may become necessary. It is clear that we need more evidence before any final decision is safe. And what is the nature of the evidence required? The main points around which controversy centers are the following: When companies combine to form a monopoly do they permanently maintain the producing plants of the constituent companies or do they build a plant large enough to turn out the total supply? If the lat- ter policy is followed it is good evidence that the monopoly owes its power to the advantages of large-scale production and is therefore natural. If the former policy is followed it proves that the monop- oly is not due to large-scale production, using the term production in the most limited sense, meaning merely the manufacturing part of the process and not including the marketing. There may be va- rious economies in marketing, such as saving the cost of advertis- ing and of cross-shipments, or obtaining lower rates by shipping in larger quantities. Where several rivals exist there is much waste in cross-shipments, while under monopoly control goods would be sent from the plant nearest the consumer, thus saving in the cost of transportation. If monopolies owe their existence to unfair com- petition, the tariff, or railway rate discrimination, it is proof that these monopolies are artificial. Another point in controversey is concerned with the industrial condition that produced the monopo- lies. Some -contend that most of the capitalistic monopolies were formed in times of industrial depression and that low profits, result- ing from competition, drove rival firms into combination in order 114 ELEMENTS OF ECONOMICS to secure the advantages of large-scale production. Others contend that most combinations were formed in times of prosperity, and conclude from this that the monopolies are artificial. But this point would prove nothing, for, whether in times of industrial depression or in times of prosperity, firms might combine either to convert losses due to unnatural competition into the high profits of natural mo- nopoly, or to convert moderate profits into higher profits from ar- tificial monopoly. Thus it appears that before we can decide whether the manufacturing monopolies are natural or artificial there must be more investigation to ascertain the facts and a proper interpretation of the significance of the facts discovered. 66. EVILS OF MONOPOLIES. Before, considiering remedies for monopolies it is well to look briefly at their evils in order to ap- preciate more fully the importance of the problem. The chief evil is the increase in prices. In the absence of general investigation along this line it is impossible to give any general estimate as to how much above the competitiye rates monopoly prices are. But occa- sional investigations reveal exorbitant prices. It is claimed, for ex- ample, that the cost of mining anthracite coal is about two dollars a ton, while it sells for six dollars a ton and upward; and the presi- dent of one of the coal roads asserted that if competition prevailed anthracite coal would sell at two dollars a ton. In some industries prices are raised and at the same time the quality is deteriorated. In order to maintain high prices it is necessary to diminish the out- put. Thus is the consumer thrice robbed. Another grave evil of monopoly is the lowering of the rates of wages. Where any industry is controlled by one company or by a few companies who practically work in unison, the individual laborer is at a disadvantage in bargaining and must accept whatever wages are offered him. The easiest way for monopolists to increase profits is to reduce wages, and unless a strong labor union creates monopoly of labor the natural result of monopoly of capital is to reduce wages. This is especially true in case of skilled or semi-skilled labor which ELEMENTS OF ECONOMICS 115 cannot readily move from one industry to another without sinking to the ranks of unskilled labor. Another evil is the crushing out of rivals and the consequent suffering this entails. If they are natural monopolies, this would be only a temporary evil during the stage of formation, and the ulti- mate effects would be beneficial, if the monopolies are kept under proper control, since one concern can produce the goods cheaper than several firms. But if they are artificial monopolies society gains nothing in the way of a lowering of the cost of production, and the result is an unmixed evil. A few men gather into their hands the best fruits of modern industry. In 1912 the Stanley committee, ap- pointed by Congress to investigate the "trusts," submitted a report which shows that 23 men were in control of corporations represent- ing a capital of $35,521,143,000, which is nearly one-fourth of the to- tal wealth of the United States. 67. THE SHERMAN ANTI-TRUST LAW OF 1890. In the de- cade from 1880 to 1890 the movement towards monopoly under the form of the trust became rapid, and many states passed laws to for- bid the formation of monopolies. These laws had little effect, be- cause the trusts either reorganized under forms that evaded these laws or obtained charters in states that had no anti-trust laws. In 1890 Congress passed the Sherman Anti-Trust Law, which prohibits all combinations in restraint of interstate commerce. For a number of years the Supreme Court of the United States interpreted the law so as to make it apply only to the transportation and sale of goods, and not to the process of manufacturing. But recent decisions have interpreted the law so as to include manufacturing establishments whose products enter into interstate commerce. Many important decisions have been rendered within the last few years concerning manufacturing monopolies, four of which are especially instructive. In the Standard Oil case of 1911 the govern- ment had no difficulty in proving that the holding company of New Jersey which controlled the oil interests was a monopoly, and it was 116 ELEMENTS OF ECONOMICS dissolved and the stock handed over to the constituent companies. But the price of oil was not reduced, and the common opinion is that a gentleman's agreement and interlocking directorates prevent com- petition now as effectively as ever. The Tobacco Trust case had similar results. The companies were reorganized, but prices did not fall and no competition seems to exist. One of the most remarkable cases was the suit against the Beef Trust. The government spent nine years accumulating evidence of monopoly, but the evidence did not convince the jury that a monopoly existed. In this case there seems to have been a gentleman's agreement, but it could not be proved. Yet all who know anything about it seem to believe that a monopoly does exist. In 1913 came the Coal Trust case in which the government failed to prove that a monopoly existed, though the com- mon belief has been that for years a vast network of holding com- panies and interlocking directorates had held in its grasp practically all the coal mines, railroads, and several other industries in the an- thracite region. And the president of one of the coal roads declared that competition among the coal companies did not exist. Stated briefly, the results of these four cases were either that the government could not prove that monopoly existed or else it compelled the companies to assume other forms of monopoly. Thus for over a quarter of a century both the state and the national gov- ernments have attempted to destroy monopoly and, as Professor Taussig says in his Principles of Economics, published in 1912, "To all intents and purposes, this policy of repression has been a flat failure." Monopoly is steadily growing in spite of all this repression.. To quote from the same eminent authority, "Far-reaching plans and ultimate results play a greater and greater part in industry. Still more important is the fact that, as large-scale production spreads, the number of individual establishments diminishes, and the entrance of new competitors grows increasingly difficult. The attempts at combination become more persistent and ingenius, and the efficacy of a policy of non-interference becomes more uncertain." ELEMENTS OF ECONOMICS 117 68. RECENT ANTI-TRUST LEGISLATION. This failure of the Sherman Law to accomplish its purpose led Congress in 1914 to enact two anti-trust laws known as the Trade Commission Act and the Clayton Act. These two acts merely supplement the Sherman Act and seek to destroy monopoly. The main provisions of these acts are to prevent unfair competition, to forbid interlocking direc- torates and holding companies where the effect is to create a mo- nopoly, and to create a commission to enforce anti-trust laws. What would be included under unfair competition is to be determined by the commission, subject to review by the regular courts. One form of unfair competition, however, is specially mentioned, namely, dis- criminations in priees in favor of purchasers who promise not to deal with rival companies. The form of combination known as the com- munity of interest is not forbidden. Congress doubtless agreeing with the courts in their earlier decisions that such combinations cannot legally be forbidden. A federal commission of five was created with general power of enforcing anti-trust laws. It can investigate the financial condition and the management of corporations engaged in interstate commerce, inspect their books, compel the companies to make reports of their conditions, and publish such facts as it sees fit, except trade secrets. The purpose of making public the general conditions of the companies investigated is to invite competition in case unusually high profits are revealed. No penalty is named in these acts for violation of the provisions prohibiting interlocking directorates and holding companies, and apparently the only means of enforcing these prohibitions is to fine or imprison offenders for contempt of court. Some critics doubt the effectiveness of such a penalty and predict that our jails will not be overcrowded with of- fenders against the anti-trust laws. To what extent does this new legislation supplement or amend previous anti-trust laws? In the first place, no new policy is adopted; it is the policy of repression rather than regulation. The 118 ELEMENTS OF ECONOMICS three factors 'relied on to crush monopolies are legislative prohibi- tion, publicity in order to invite competition, and the removal of certain artificial props that support monopolies. The Sherman Act of 1890 prohibited all combinations in restraint of interstate com- merce, and properly interpreted would forbid holding companies and interlocking directorates. The federal courts in several decisions have expressly announced the principle that interlocking directorates and holding companies that tend to create monopolies are contrary to the Sherman Act. It would not appear, therefore, that anything has been added to the Act of 1890 in this direction. A real addition has been made, however, in an effort to secure publicity, which may invite competition. In 1913 Congress revised the tariff with the purpose, among other things, of removing the features that fostered monopolies, and several acts since 1887 have endeavored to prevent personal discrimination in railway rates. The new anti-trust laws seek to remove a third artificial prop supporting monopolies, by preventing unfair competition. What these laws do not do is significant. They do not attempt to regulate the prices of the trust-made goods nor prohibit commun- ities of interest. If monopolies still continue to make secret friend- ly agreements, or if groups of individuals owning stock in different companies still continue to appoint "dummy" directors of these different companies, and if firms do not see fit to compete but pre- fer monopoly profits, it is difficult to see why this new legislation to kill the trusts will be more successful than previous laws have been. Time will show the effects of these new laws. 69. MONOPOLY VALUE. Monopoly prices are determined by the laws of consumption and production and the greed of the mo- nopolist. The main law of consumption involved is the law of elasticity of demand. The monopolist wishes to secure the greatest possible net returns. If the article controlled is a luxury of fairly wide use among the masses, the law of elasticity of demand would induce the monopolist to keep the price moderately low, possibly only ELEMENTS OF ECONOMICS 119 slightly above the normal competitive rate, since a high price would greatly reduce sales and diminish net returns. In case of a neces- sity, however, for which no substitute can be found, the monopolist has the public at his mercy, and the price may go as high as the monopolist dares to put it, for there is the danger of government interference if the wrath of the people is aroused. It is now and then discovered that some monopolies are making from 40 to 50 per cent profits and sometimes more. The monopolist also takes into account the laws of production, especially the law of large-scale production, if the commodity is one for which the demand is elastic. In that case the greatest net return will be secured by setting a fairly low price and increasing the sales. The interests of the public and of the monopolist coincide only when the commodity controlled is a luxury and the law of large-scale production applies to it. Unfortunately the chief monopolies con- trol the necessities of life, such as anthracite coal, kerosene oil, lumber, sugar, farm machinery, steel and iron goods, and many others. CHAPTER VIII. Railroads. 70. IMPORTANCE OF RAILROADS. Because of their great importance we have reserved the railroads for special treatment, though they belong with natural monopolies considered in the last chapter. Both from their size and their industrial and social im- portance railroads are by far the most important single group of industries in the country. The railroads of the United States have 245,000 miles of single track, over 61,000 locomotives, over 2,200,000 cars, and they employ 1,910,000 men. The capitalized value of the railroads is $20,000,000,000, or about one-seventh of our total national wealth. The industrial and social importance of railroads arises chiefly from three characteristics, the enormous size of the business unit, 120 ELEMENTS OF ECONOMICS the cheapening of the cost of transportation, and monopoly. The enormous size of the business unit, together with the monopolistic character, results in the concentration of wealth and power in the hands of a few. The cheapening of transportation directly lowers the cost of living and indirectly produces the same results by allow- ing the greater extension of territorial division of labor than would be possible without the railroad. In former ages industries were of a local nature and only the most costly goods were consumed far from the place of production. Now we can obtain in great quantities the most common articles from the most distant parts of the world. The cheapening of the cost of transportation has produced a new industrial revolution as important as the first one, which began in England in 1760. This new industrial revolution is typified in the giant manufacturing corporations made possible by securing cheap bulky materials from distant sources and wide markets for their products. Another phase of the new industrial revolution is the lo- calization of industries and the growth of great cities at a few favor- ed spots, such as New York and Chicago. Localization of industry may result from natural advantages of location or it may result from the artificial advantage of lower rates. If railroad managers wish to build up any city in which they have a personal interest they can usually accomplish their purpose by giving that city lower rates than other cities are given. Thus railroads involve problems both of production and distribution. Owing to the nature of the railroad business it results in the concentration of railway capital and power in a few men's hands and it aids in the concentration of wealth and power in other lines of industry, and entirely too large a portion of the world's products goes to our industrial kings and princes. 71. A NATURAL MONOPOLY. A railroad is a natural mo- nopoly resulting from the advantages of large-scale production. The chief advantag-e of large-scale operations lies in the more economical use of a large fixed capital. The cost of constructing and maintain- ing the roadbed and track is about the same, whether there are two ELEMENTS OF ECONOMICS 121 trains a day or twenty, for among the important causes of wear and tear of the track are rains, which wash away embankments and bridges, the rusting of the rails, and the rotting of the ties. And the cost of running a train of ten cars is not much greater than the cost of running a train of thirty cars, for the small train would re- quire an engineer, a fireman, a conductor, and one or two brakemen, and the large train would require only one or two more brakemen and a little more coal. And since about half the capital of a railroad is in the form of bonds, interest charges remain the same, whether the traffic is heavy or light. The cost in salaries for the higher officials also would be about the same regardless of the density of the traffic. The traffic on a single track might easily become so dense that it would not pay to increase it; but another track can be laid without increasing the expense in several items, notably, the cost of super- intendence, terminal facilities, and right of way. If two tracks are not enough, four, six, eight, or more tracks may be laid, and the advantages of large-scale production still applies. Hence, one rail- road company could handle all the traffic that could conceivably exist between two cities or localities. As a result of these characteristics, if two or more roads run between two cities fierce competition results. If one road can carry all the traffic at a cheaper rate than it can carry half of it there is a temptation to lower the rates to get the traffic of rivals. By lowering rates, say one or two per cent, the volume of the traffic might be increased, say, one-third, and the net receipts be greatly in- creased. But the rival road in order to hold its traffic lowers its rates and possibly goes below the rates of the other road. Then there is another drop. This may continue until profits are wiped out and one or both roads become bankrupt, and maybe go into the hands of receivers. The only way to prevent these disastrous results is to form some kind of consolidation by which competition is elim- inated, and then rates may be raised above the competitive level, and large dividends result. Thus competition seems to be impossible 122 ELEMENTS OF ECONOMICS in the railway world" and monopoly is the inevitable result. In an address before the American Economic Association at Minneapolis^ December 29, 1913, Mr. B. F. Meyer of the Interstate Commerce Com- mission said, "There are survivals of the competitive rate, but the merest novice in the railway history of the leading countries of the world knows that competition alone has nowhere permanently se^ cured to the public reasonably adequate service at reasonable rates, and in consequence practically the world over the competitive theory of railway rate-making has been abandoned." 72. RAILWAY DEVELOPMENT IN U. S. TO 1850. A brief review of the railway history of the United States will reveal the natural t endency of railroads to grow in size until a single road or combination of roads monopolizes the traffic of a large ter- ritory. During the first twenty years of their existence railroads were small local affairs and built largely with local capital. The pos- sibilities of the railroad were not known and every undertaking was an experiment, hence only a small amount of capital would be invested in any one venture. There were, for example, about twelve roads between Albany and Buffalo, each with a track of different width. Consequently, railways were very inefficient as compared with great trunk lines and systems with their through-freight and passenger traffic. Engines were also small and ineffective. Owing to this inefficiency of the early railroads it was not sup- posed that they could ever compete with waterways in carrying cheap bulky goods. As late as 1850, the main use of railways was to connect different systems of waterways. Buffalo was the only city west of the Atlantic Slope that had rail connection with the Sea Board. In the West there were but a few short roads connecting- lakes, canals or rivers. Pittsburg, Chicago, St. Louis, New Orleans, were without railway connections with the outside world. 73. DEVELOPMENT OF COMPETING SYSTEMS— 1850-1870, Between 1850 and 1870 three great movements stand out prominently, a great increase in mileage, the development of the railways as a ELEMENTS OF ECONOMICS 123 system of transportation independent of waterways, and the con- solidation of short end to end lines into a continuous line. The causes of this expansion of the railways were improvements in lo- comotives, cars, the track, and better business management. In 1853 Chicago was connected with New York and the East by a con- tinuous chain of separate roads. In 1859 New Orleans was connected with Chicago and the East, and by 1869 there were three lines be- tween Omaha and Chicago, and the Union Pacific and the Central Pacific together spanned the immense distance between Omaha and San Francisco. Thus was developing a vast system of railroads in- dependent of waterways. Between the Atlantic Coast and Chicago four lines of railroad were developing, now known as the New York Central, the Erie, the Pennsylvania, and the Baltimore & Ohio. Vanderbilt, one of the first great railroad kings, got possession of the eleven short lines between Albany and Buffalo in 1853, and in 1869 added to the system the Hudson River Railroad, thus securing one system between New York and Buffalo, and during the same year connection was secured with Chicago. During the same eventful year in the railway world the Pennsylvania Railroad secured connections with Chicago, and within four or five years the Erie, the Baltimore & Ohio, and the Grand Trunk were competitors for through traffic between the Mis- sissippi Valley and the Atlantic Coast cities. With five competing lines in the eastern field and three between Omaha and Chicago, and with a traffic sts yet comparatively light, conditions were favorable for railway rate wars in different parts of the country. 74. POOLS, 1870-1887. The first part of this period was char- acterized by destructive competition and the last part by the forma- tion of pools. • In 1868 the rate on first-class freight from Chicago to New York was $1.88 per hundred pounds and the rate on fourth- class goods was $0.82. When the New York Central and the Pennsyl- vania roads entered Chicago the rate dropped to 25 cents a hundred on all classes of freight. Such a low rate was ruinous and a truce 124 ELEMENTS OF ECONOMICS was patched up. But when the Baltimore & Ohio and the Grand Trunk reached Chicago the war began the second time and first- class rates fell to 25 cents a hundred and fourth-class rat-es to 16 cents. All the roads became exhausted and a pool was formed in 1877. Other pools had been formed in other parts of the country, the earliest of importance being the Chicago-Omaha pool. The general results of these pools were to establish fairly low rates at competitive points, but very high rates at non-competitive points. The farmers throughout the northwest felt that the rail- roads, which had been granted immense tracts of land and often voted sums of money to help them build their roads, were unjust and ungrateful. In the meantime farmers* organizations, called Granges, had been formed for general improvement of the condi- tions of rural life. These organizations turned their energies against the railroads and the so-called Granger laws were passed in several states. Rates were usually fixed so low that the roads were ruined and the laws had to be repealed or modified. Then state commis- sions were established, some with power to fix rates, others merely with power to investigate and publish the general condition of the railroads. These commissions were, not very effective and different systems of regulations in different states interfered with interstate traffic. This made it necessary for the national government to regu- late interstate traffic and the next year Congress passed the first great national law regulating railroads. Before taking up the study of that act and its results it is necessary to consider the general subject of rate-making and certain evils that had developed in con- nection with it. 75. RATE-MAKING. Experience has shown that a uniform rate per ton-mile on all kinds of goods does not bring the highest net re- turns. If a high rate is established cheap bulky goods will not be shipped long distances and light valuable goods will not afford suffi- cient income. If the rate is low, cheap bulky goods will be shipped in great quantities, but less will be obtained from the light valuable ELEMENTS OF ECONOMICS 125 goods, since a low rate will not materially increase the volume of such traffic. This leads to the classification of goods and establish- ing a different rate for each class, the rate varying with the value of the goods. This is a discrimination against the valuable goods, but since the freight charges on such goods would be but a small portion of their price, the burden does not seem great, and is not a serious hindrance to business. This policy is often called charging what the traffic will bear. This is usually taken by the public to mean an unjust policy by which the people are robbed. If properly pursued, however, charging what the traffic will bear is beneficial to the country, because cheap bulky goods can be brought from distant parts of the world, the available supply increased and prices lowered. Another form of discrimination is also beneficial both to the railroads and to the people, and for reasons similar tp those that make discrimination between different classes of goods beneficial to botli*the railroads and the people. This is called market discrimina- tion and means giving lower rates per ton-mile to goods far from the market than are charged for the same kind of goods produced nearer the market. This might be called distance discrimination. This policy allows the wheat and other products from the far northwest to be shipped to Chicago, New York, or even London, and the railroads make more profits and the people get cheaper food. And even the farmers near the market may get lower rates with discrimination than without it, because, without the additional traffic the low rates on the long haul bring, rates would be higher on the shorter haul in order to earn dividends, for it must be remembered that a railroad obeys the law of large-scale production. The farmers nearer market would, however, lose by the fall in prices resulting from the increase of the supply of farm products, but the majority of people would be gainers. A third form of discrimination is known as place discrimination and is usually referred to as the long- and short-haul evil. When railroads are competing at certain points for through traffic or agree 126 ELEMENTS OF ECONOMICS to maintain a fairly low rate at such points, each road will naturally charge high rates at non-competitive points. To illustrate. Several roads run between Omaha and Chicago, but places between these two cities may have but one railroad. Rates from Omaha to Chicago were lower than from, say Atlantic, Iowa, to Chicago, not only lower per ten-mile, but the total freight charges were less. This policy is injurious to all sections of the country discriminated against and tends to build up great overgrown cities at the favored points, and is on the whole harmful to the country, since it means monopoly gains at the expense of a portion of the community without necessarily benefiting the country as a whole by increasing the available supply of goods. Another evil that developed was personal discrimination. Low rates were granted to some company and this favor enabled the com- pany to undersell its rivals and build up a great monopoly. When rivals were disposed of, prices went up to monopoly rates. Sonf^ of the greatest monopolies were thus built up, the Standard Oil Com- pany being a good example. A third evil that grew up, also closely connected with rate- making, was stock-watering. When legislatures and commissions be- gan to fix rates, the railroads sought to evade the results of this regulation by concealing real profits and making them appear much less than they were. In various ways the amount of capital stock was increased without increasing the amount of money invested. Rates must be high enough to allow a reasonable profit, and if the capital can be made to appear twice as great as it really is, what would appear as a reasonable rate would be much higher than it ought to be. 76. THE INTERSTATE COMMERCE ACT OF 1887. These evils and the Supreme Court decision of 1886 preventing the states from regulating interstate commerce led to the passage of the Inter- state Commerce Act of 1887. The three main purposes of the act were to prevent monopoly and discriminations and to regulate rates. ELEMENTS OF ECONOMICS 127 In order to prevent monopoly the railroads were forbidden to form pools, and in order to induce competition, rates were to be published. Rates were to be reasonable, and unreasonable discriminations of all kinds, personal, place, market, and between commodities,* were pro- hibited. The long- and short-haul evil was especially aimed at by pro- viding that no common-carrier subject to the act should charge more for a short-haul than for a long-haul, if the short-haul were included in the longer and if substantially the same conditions prevailed. A commission was established with the power and duty of enforcing the act. The general principle upon which this act is based is that com- petition can and should prevail. If Congress had accepted the prin- ciple that railroads are natural monopolies and that consequently competition is out of the question, pools would not have been pro- hibited but welcomed as a means of preventing useless rate wars; and in order to prevent pools from resulting in injury to the public the pools would have been placed under the supervision of the Com- mission. In other leading countries of the world, unless the railroads are owned by the public, railway combinations are not only allowed but required, and the combinations are under government supervision. This is the most effective way to prevent the various forms of in- jurious discriminations. If the roads of each natural division of the country are combined, the big shipper cannot extort special favors from the railroads by threatening to ship his goods over another line. The long- and short-haul discrimination would also be more easily prevented, because with combination there is no special reason for favoring any locality, unless the railway managers have a personal interest in that locality. Congress did not wholly rely on competition, however, as is shown by the provision that rates should be reasonable. It would seem, however, that a better policy would have been to allow combinations to take their natural course and then give the commis- sion adequate power to regulate rates and other phases of the rail- way business where there is danger of injury to the public. 128 ELEMENTS OF ECONOMICS 77. RESULTS OF THE ACT. The act was much less effective than its authors anticipated, partly because the courts interpreted the law in such a manner as to prevent the commission from exercis- ing certairf powers that were supposed to have been conferred upon it. It was intended, for instance, that the commission should have full power to decide the facts in any case and that the courts could review only the points of law. The courts, however, reviewed both law and facts, and even allowed the railroads to introduce new evi- dence. The railroads took advantage of this and purposely withheld part of their evidence in cases before the commission and thus often secured in the courts a reversal of the decision of the commission, • which greatly weakened its power. Owing to this practice and other causes of delay cases were often dragged on for eight or nine years. With such delays shippers had little hope of securing justice. The Supreme Court also limited the power of the commission in fixing rates. The commission undertook to establish what it consid- ered reasonable rates. But the court decided that the act conferred upon the commission power to decide when a rate was unreasonable but not to say what the rate should be. This practically nullified the power of the commission to regulate rates. By interpretation of the courts all the meaning was taken out of the long- and short-haul provision. The law allowed the railroads to charge more for a short-haul than for a long-haul where conditions were sufficiently unlike to justify it. The Supreme Court decided that competition with other roads was a condition that justified charging more for a short-haul than for a long-haul. This destroyed the power of the commission to prevent this evil and enabled the railroad to fix rates as they chose where any competition existed. 78. RECENT LEGISLATION. Several acts have been passed by Congress within the last few years greatly extending the powers of the Interstate Commerce Commission. In 1906 the Hepburn Act subjected the railroads, and other common carriers, such as express companies, private-car companies, pipe lines and sleeping-car com- ELEMENTS OF ECONOMICS 139 panies, to which the jurisdiction of the Commission was extended, to more strict regulation. Among the most important provisions four were of special significance as showing the tendency of public opinion towards increasing governmental control of monopolies. The powers of the Commission were increased so as to secure honest and uniform methods of accounting, rebates and all other special favors were specifically prohibited, railroads were forbidden to carry ar- ticles of their own production except timber, and, most important of all, the Commission was empowered to fix maximum rates. The pro- hibition on carrying goods of their own production was intended to prevent such a monopoly as has developed in the coal districts of Pennsylvania, where the railroads were gaining control of the coal mines. The Mann-Elkins Act of 1910 further increased the powers of the Commission. An advance in rates can be suspended by the Commis- sion, pending investigations as to reasonableness. The long- and short- haul question was put completely under the control of the Commis- sion. In order to prevent delay in the courts a new court was es- tablished called th^ Commerce Court. It was supposed that such a court would be more familiar with the railroad business than are the regular courts and, since the new court would give its time exclus- ively to such cases, appeals from the decisions of the Commission would not cause injurious delay of justice. The new court, however, proceeded to curtail the powers of the Commission, deciding, among other things, that the Commission could not work out any general rate schedule but must decide only individual cases. The Supreme Court reprimanded the Commerce Court for exceeding its powers, and the Commission continued to administer the laws as Congress intended. The action of the Commerce Court in this and other mat- ters brought it into some disfavor and the climax was reached when Judge Archibald of that court was impeached for high crimes, and in 1913 Congress abolished the Commerce Court, its work being given to the Circuit Courts of Appeal. 130 ELEMENTS OF ECONOMICS In 1913 Congress passed an act authorizing the Commission to undertak-e the physical valuation of railroads. This will take several years, and the use that will be made of such a valuation is a matter of speculation. Some think that rates will then be based upon physical valuation rather than on the amount of stock issued; others think this will not be done, since it is generally supposed that rail- roads have been greatly overcapitalized. Some observers believe the physical valuation may be the first move towards government ownership of the railroads. 79. THE PRESENT SITUATION. The effect of all these laws has been to make the Commission a real power in the railway world. The marked success of the Commission led to the establishment of the Trade Commission to regulate monopolies in manufacturing and commercial industries. Discriminations of all sorts seem to have been abolished to such an extent that they are no longer a serious evil. Power to regulate rates and some other matters has been made ab- solute and complete by this recent legislation and decisions of the Su- preme Court. Thus the main evils of monopoly have been abolished. All the laws of both state and nation have not been able, how- ever, to prevent combinations and agreements of various kinds that practically eliminate competition. This has helped the Commission and the courts in their fight against discriminations and to that ex- tent monopoly has had beneficial results. The power of the Commis- sion to regulate rates enables it to prevent the main evil resulting from monopoly, but other evils of monopoly still remain, especially the lack of competition in giving good service. There has been several spectacular dissolutions of railway com- binations since the passage of the Anti-Trust Laws, which applied to railroads in so far as they prohibited monopoly. In the famous Northern Securities case (1904), the Supreme Court decided that the holding company formed in order to combine the three great roads that serve the Northwest, the Northern Pacific, the Great Northern, and the Burlington, was illegal and the Northern Securities Company ELEMENTS OF ECONOMICS 131 was dissolved. Competent observers declare, however, that no com- petition exists among these roads, which are controlled by the Hill interests. Another famous dissolution case was that involving the Union Pacific and Southern Pacific roads (1913), in which the court held that both interlocking directorates and the community of in- terest were illegal. The formal connections between the two roads have been severed; but the same men that were associated in the con- trol of the two roads are in control of each company, and there seems to be no reason to suppose that the two roads will compete in the future. One of the latest cases is that in which the New York, New Haven and Hartford was compelled to dispose of the stock of the Bos- ton and Maine railroad. These two roads had long controlled the transportation business in New England, and some years ago they were united by the purchase of stock. The dissolution is too recent to enable us to judge of results. Despite these and other attacks on railroad combinations, con- solidation and combination have steadily continued up to the present time. In 1913 there were in the United States ten or eleven well de- fined systems. Of the 245,000 miles of railroad in the country, eleven systems controlled 200,000 miles. There is a strong tendency for consolidation to proceed on a territorial basis. Northern New England is controlled by the Boston and Maine, southern New England by the New York, New Haven and Hartford; the Vanderbilt system con- trols the northern portion of the Middle States and westward to Chicago, the Pennsylvania system the southern portion of that terri- tory; the territory north and west of Chicago to the Pacific Coast is dominated by the Hill interests; and in other parts of the country each natural division is coming under the control of some single sys- tem. The same results have been reached in other countries where the railroads are privately owned, which is additional proof that rail- roads are natural monopolies. Two changes in policy have b-een strongly urged and bills em- bodying them have been at various times introduced into Congress. 132 ELEMENTS OF ECONOMICS These changes are to allow railroads to combine under the super- vision of the Interstate Commerce Commission, and secondly, that the Commission be given power to control the issue of stock. The feeling is prevalent among the people that railroads have been over- capitalized, and that dividends are being paid on stock that is half "water." If this is true it is an unjust burden upon the people. Even if rates are to be based upon physical values when they have been estimated, the issue of stock would seem to be a proper subject of regulation as a protection to investors. The question of permitting combinations has already been discussed. Most of the states have established commissions with large powers, among them being the power to fix maximum rates of traffic within the state and the power to control stock issues. These regula- tions are not uniform, and control of stock issues by the National Government is needed for this reason also. The power of these com- missions has been considerably curtailed by recent court decisions. Two cases will illustrate this tendency. About two years ago the Supreme Court decided that the laws of Congress requiring certain safety devices applied to a railroad lying wholly within a state, on the ground that all railroads are .practically a part of the great national system, since goods transported over roads lying wholly within a state enter into interstate commerce. In another case the court decided that a two cent railway rate was invalid since it dis- criminated against interstate passengers, a higher rate having been allowed on interstate commerce by the Interstate Commerce Com- mission. The governors in their next annual conference protested against these decisions as invasions of state rights. 80. PUBLIC OWNERSHIP. Owing to the marked success of government regulation, there is less agitation than formerly for pub- lic ownership of railroads, but there is a strong undercurrent of opinion in favor of that policy, many high railway officials recog- nizing this current of opinion and even welcoming it as a relief from the vexation of stringent regulation. Labor unions are demanding ELEMENTS OF ECONOMICS 133 higher wages, stockholders demand larger dividends and the Inter- state Commerce Commission insists on keeping rates low for the welfare of the public, and railroad officials find themselves in a difficult position. The arguments for and against public ownership of railroads are much the same as those previously considered under municipal ownership. Under public ownership the constant struggl-e between the government and the railroads would cease and under a wise and efficient government railroads would be made to serve the public. The relative efficiency of government management and private management is yet an open question, but the weight of opinion seems to favor private management, on the ground that a more effective civil service system can be employed by a private company than by the government, and because the hope of securing large profits is a greater stimulus to invention and enterprise than any rewards the government will offer. Many believe that until Congress shows less inclination to practice log-rolling m-ethods and to emphasize local rather than general interests, it would be extremely hazardous to place the management of railroads completely under the control of the government. 134 ELEMENTS OF ECONOMICS CHAPTER IX. Value. 81. INTRODUCTION. We have thus far considered two of the four main divisions of economic science, consumption and distribu- tion, and we now take up the third division, exchange, which involves value, money, credit, banking and international trade. The central topic in exchange is value, which we have previously defined as power in exchange. The problem in value is to determine why one thing exchanges for another thing in certain proportions, why, for exam- ple, one pound of sugar is worth about twice as much as a pound of flour; why a yard of silk of a certain quality is worth so many pounds of sugar, or why a ton of hay is worth three or four tons of coal. Money, credit and banking are the instruments of exchange. Value involves the laws both of consumption and production, and some economists treat of value not as a separate topic but in con- nection with production and consumption and other subjects. Nothing is gained in clearness by such treatment, however, since value is a topic distinguishable from other topics and having its own laws, though the elements of those laws lie in other fields. 82. ADVANTAGES OF EXCHANGE. The main economic ad- vantages of exchange are the same as the advantages of the division of labor, since exchange results from the division of labor. Exchange allows division of labor both at home and between different countries. Moreover, since people have different tastes, exchange allows each person to dispose of things of little value to him but which may be very useful to others, and thus, by exchange, value is increased. It is often assumed both by individuals and by nations that exchange is a one-sided affair, since only one of the two parties involved de- rives any benefit. And, curiously enough, it is assumed that the person that sells rather than the one that buys gets the chief benefit. This notion is reflected in the laws of trade during the last three or four hundred years, which seek to restrict imports and encourage ex- ELEMENTS OF ECONOMICS 135 ports. Since the one who sells disposes of what he does not want and the one who buys gets what he wants, it would follow that if either of the two parties to an exchange is the chief gainer it is the one who buys. But on the whole there is no reason to suppose that either party is the chief gainer, since exchange allows the seller to dispose of what he does not need and get what he needs. Exchange is also a great civilizer, since in the course of inter- national trade ideas are also exchanged. In ancient days the trader found his way across the desert between Egypt and Chaldea and set the world a-mixing. The Phoenician of the ancient world carried the ideas of the East to the rising West, and the progress of the New World of that day was hastened. Medieval traders carried the Renaissance from the South and East to the North and West, and the vigorous, half-barbarians of newer regions became more re- fined and enlightened by the best ideas of the race, ideas that had survived many an empire and that still survive, and to the end of time will help to make man more noble. 83. MARKET VALUE AND NORMAL VALUE. The term mar- ket has various meanings. In one sense it means a certain place ^vhere things are bought and sold, usually a certain city, as the Boston Market or the New York Market. In another sense it means the commercial world in general, as when we say a commodity is put on the market. But when we speak of marlfet price, both a place and a condition are included. It implies a place, either local or general, where goods are bought and sold and where conditions are such that each commodity sells at a uniform price. This ideal condition is, however, only roughly realized, especially in the case of retail trade. In the wholesale business both buyers and sellers are keen, and a slight difference in price on large sales might make or mar one's fortune, hence, wholesale prices must be quite uniform in any locality. In the retail trade, however, only one party to the bargain is usually keen and fully alive to changes in industrial con- ditions, buyers often paying what is asked without question, and 136 ELEMENTS OF ECONOMICS not a very close watch is kept upon the prices of different dealers. Market value is simply the price at which a commodity sells in the market. Normal value is the value or price that gives a normal rate of profit. For long periods of time the normal value and the market value would tend to coincide; but for short periods the mar- ket value may go above or below the normal value. In times of in- dustrial depression market prices often do not pay expenses, while in "boom" times that follow an industrial depression market prices rise above the average, and more than ordinary profits are made. There is much indefiniteness about "normal" profits, because differ- ent men are making different rates of profit. There is, therefore, much indefiniteness about normal value; but for all practical pur- poses the terms normal value and normal profits are sufficiently defi- nite t& be understood. The average business man would probably consider from five to eight per cent normal profits, and in fixing prices would attempt to secure at least that rate. Market value and normal value are usually treated separately by economists, and the general impression conveyed is that the twa are governed by different forces, market value being governed by demand and supply and normal value- by cost of production. But both sets of forces are at work all the time governing the price of a com- modity, whether we consider the price as the market or the normal price. The price of everything that sells in the market is determined to some extent by its cost, except in a few rare cases, as antique furniture, the paintings of the great masters, and things of similar character. The force of demand and supply, or of marginal utility^ may cause the price for a time to go far above or far below the nor- mal, but both buyer and seller, especially in the wholesale trade, keep the factor, cost, constantly in mind and are governed by it. Hence, it seems best to disregard the distinction between market value and normal value when the forces governing value are under con- sideration. 84. COMPETITION. Competition is assumed to exist, for, with- ELEMENTS OF ECONOMICS 137 out it there is a monopoly. There are two kinds of competition, mar- ket and industrial. Market competition is the competition among buyers and sellers of the same commodity, including not only mer- chants and consumers, but manufacturers, who also buy and sell. There is only one condition of true competition, and that is when there are several buyers and several sellers. If there is one seller and several buyers, or one buyer and several sellers, or one buyer and one seller, there is a monopoly, and true competition does not exist. Industrial competition is competition among industries by which profits in different lines of business tend to be uniform. This com- petition has two phases, one being th-e competition among different industries to sell their products. This is similar to market competi- tion, especially when the different lines of business are producing commodities that may be used for the same purpose, as gas or elec- tricity. There is anoth-er variety of competition between companies producing commodities that do not serve the same purposes but the demand for which is elastic. The buyer has a certain amount to spend, and each industry is trying to sell him as much of its products as it can, and this tends to lower prices in proportion to the severity of the competition. Industrial competition has a second phase, pro- duced by capital flowing from one industry into another. If profits tend to be especially low in any industry, new capital ceases to flow into it and some capital may withdraw, Leaving a larger field for the capital that remains. If profits are unusually high in any indus- try, new capital flows into that industry and market competition in that line of business becomes more severe, resulting in lower prices, smaller sales for each firm, and lower profits. Thus industrial com- petition and market competition, while distinct in a way are never- theless closely associated. 85. DEMAND AND SUPPLY. Demand means desire coupled with ability to pay. Supply may mean that which is offered for sale, or it may include the portion temporarily withheld from the market, or it may include the supply of the near future. The amount actually 138 ELEMENTS OF ECONOMICS offered for sale most powerfully affects the price, because both tbuyer and seller are more fully aware of the relation between the amount offered for sale and the amount the consumers demand. The portion withheld from the market will influence the price only in so far as the business world is aware of its existence and of the likeli- liood of its being thrown upon the market. The supply of the near future also exerts its influence upon price. This is illustrated every year by the fluctuations of the prices of farm products with the vary- ing prospects of the growing crops. A change in the supply, demand remaining the same, results in a change in price because marginal utility is affected and because ious charges socialists bring against capitalistic society, (1) the laboring men are robbed of a large part of their product, (2) this leads to a perpetual struggle between capital and labor, and (3> capitalistic production is planless and wasteful. These charges are bound up with the socialists' theory of modern economics. They hold that labor, being the only active agent, creates the whole product. Capital helps to be sure, but, they say, since labor pro- duces the capital, the whole product is due to labor. The present organization of industry robs the laborer of most of his product, and the two chief robbers are the rent receiver and the interest receiver, because they are purely economic parasites, since neither contribute anything to society. But since they own two of the in- struments of production they can levy tribute upon the remainder of society. The employer or profits receiver also robs labor by the ELEMENTS OF ECONOMICS 23L "iron law^' of wages. This iron law, is, briefly stated, the law of Malthus. The increase in population constantly keeps wages down to the minimum of subsistence, no matter how much power man gains over nature. Hence the laborer is always on the verge of starva- tion while 'the rich are growing richer. But laborers are Becoming more intelligent through universal education and are beginning to recognize their rights and are strug- gling to secure a larger share of the product. This struggle is bound to last as long as capitalism lasts, because the three robbers wish to maintain their aristocratic positions and will always refuse to give the laborer even a fair share of the product, and on the other side, thie growing intelligence of labor will make it more powerful and more unyielding in its demands. Thus the struggle will con- tinue until capitalism is abolished. In the third place, say the socialists, the present system is plan- less and wasteful. The producers merely guess at the amount needed by society, each producer struggling to sell all he can. No one plans the production so as to meet all the needs of all the people. .In marketing there is again much waste in advertising, in cross-ship- ments, in retailing. 157. CRITICISMS. There is no doubt of the fact that there is much truth in the socialists* charges against modern industry; but parts of their theory are false and the remedy they propose may be like jumping out of the frying pan into the fire. In the first place, it may be true in a sense that labor produces the whole product, since it produces the capital and gets the land in shape for production. But that is a different proposition from what the socialists mean, which is, that the wage earning classes produce the whole product. Saving is an essential part of the process of cre- ating capital; but the wage earners have not been the ones who have saved, else they would have been the capitalists and landlords. Also, the work of management is as truly productive as manual labor, and wage earners cannot claim that the active capitalists, the employer,. 232 ELEMENTS OP ECONOMICS does not produce a part of the product. It is not true, therefore, that wage earners create the whole product. In the second place, there is no iron law of wages. The social- ists have misinterpreted the law of Malthus. By the right interpre- tation of that law man is master of his own destiny. If laborers will but use good judgment there will be no oversupply of labor;, and the middle and upper ranks of labor have enjoyed a considerable share of the improvements in modern industry. With proper educa- tion, general and industrial, the oversupply of unskilled labor will be checked and the present degraded condition of unskilled labor will be improved. In the third place, labor wars will not necessarily continue. In some countries where the state has stepped in to regulate these wars they are becoming a thing of the past. If society can take over the whole industrial process, production and distribution and all, it surely can superintend a part of the process when things are not running smoothly. .In the fourth place, there is plenty of industrial waste. But in this struggle to satisfy the wants of society lies the progress of the race along industrial lines. Much of the waste may be elimin- ated by wise social cooperation. By good banking systems panics can be minimized; by proper regulation of monopoly, including the regulation of prices, much harm can be prevented, still leaving room for private initiative. More social control may prove effective, and render unnecessary the radical remedy of socialism. Even now the marketing problem is being attacked and on every hand the spirit of cooperation and helpfulness is beginning to get possession of the governments of the world, and there is no reason to believe that society cannot cooperate to correct social ills as well under capital- ism as under socialism, without encountering the dangers of gov- ernment ownership and management of every industry and without losing the advantages of private initiative and enterprise. 158. SOCIALIST PRODUCTION. It would appear that social- ELEMENTS OF ECONOMICS 233 ists propose to retain the general organization of productive enter- prises now existing, but they will be directed by committees or com- missions of the government. The hiring of labor, deciding what to produce, how much to produce and prices to charge must all be de- termined. Now the question arises. Will everything run smoothly, or will there be more trouble for society under socialism than under social control of private industry? The first suggestion that arises is. Who will decide what each man shall do in this industrial Eden? Will each man decide for him- self or will the government decide for each man? If each man decides for himself the government will be confronted with the prob- lem of finding work for men when it does not need them, for there is no assurance that the number choosing a certain line of work will be in proportion to the number needed. In that case the gov- ernment Would be forced to take all who offer themselves, for under socialism the government would be absolutely compelled to employ all who want work, and that includes all but the young or the aged, for there is to be no private business. And suppose men "soldier on the job?" Who is to compel them to work? On the other hand, if the government decides what each man shall do, the thing reduces itself to slavery. It is necessary to point out the marked difference between gov- ernment ownership of a few industries and government ownership of all industries. In the former case the government is under no obli- gation to employ all who offer themselves, but it can select whom it wishes, at wages measured by prevailing rates in private business, and if employees prove really unfit, they can be dismissed. Before we adopt socialism it will be well to think seriously of these matters and decide whether or not the remedy offered for social diseases may not make those diseases worse or else bring other and more serious disasters upon us. Until it can be shown that the majority of mortals are unselfish, strictly honest, and anxious to work for the general welfare, socialism will not improve the 234 ELEMENTS OF ECONOMICS material welfare of the race; and when the time comes that most men are ideal men there will be no social ills for socialism to remedy. 159. SOCIALIST DISTRIBUTION. Socialists are not agreed on their plan of distribution, that is, on their wage scale, but several plans have been suggested. One is equal pay for all. This plan would manifestly be disastrous, for it would offer no reward for su- perior merit or ability, and hence the spur to advancement of society would be lacking. Another plan is pay in proportion to needs. But what is the test of needs? If it is the size of the family, the increase in popu- lation would ere long impoverish the whole race. Others advocate pay according to merit. Theoretically this plan looks workable. But what is to be the test of merit? According to present day standards among day laborers, mental labor is ranked little above manual labor. Unless mental achievements are rated above the physical, the progress of the race is doomed, for if mental effort is not rewarded above the physical, and considerably above it, few will struggle through the years of study necessary to prepare for high intellectual work. Thus when we look closely at the plans of distribution offered l)y the socialists we see that each has its serious dangers. And so many possible dangers are presented by socialism that it would seem unwise to adopt it until we have more thoroughly tested less radical jneans of curing the evils in industrial society. ■ k— / V-/ _> \^ v-> I rv: 364747 / , "73 UNIVERSITY OF CAUFORNIA UBRARY :,4-X>>'.«-^^*' ■i5