A A 1 UTH ERNRI 1 2 1 3 2 9 o 5 LITY LIBRARY^ INIVEPS'TY OF CALIFORNIA SAN DIEGO I nun SOME PROBLEMS IN CURRENT ECONOMICS BY M. C. RORTY, M.E., E.E. PRESIDENT OF THE NATIONAL BUREAU OF ECON03IIC RESEARCH, INC. ; VICE PRESIDENT AND FBI LOW OF THE AMERICAN STATISTICAL association; assistant vice president OF THE AMERICAN TELEPHONE AND TELEGRAPH C03IPANY ; MEMBER OF THE NATIONAL RESEARCH COUNCIL, ETC. A. W. SHAW COMPANY NEW YORK CHICAGO LONDON COPYRIGHT, 1922 BY A. W. SHAW COMPANY PBIKTED IN THE UNITED STATES OF AMSBICA CONTENTS Preface 6 Chapter I. Industrial History 11 The Feud Spirit in Industry — The Problems of Business Management — What Men Live for — The Beginnings of Human Organization — The Industrial Revolution — The Present Situation — The Problems of the Future. Chapter II. Social and Industrial Organization 36 The Basic Viewpoints — The Purposes of Human Organization — The Origins of American Government — The Autocratic Idea — The Need for Compromise — The Possible Answer — The Gradations in Regulation and Control — Where the Real Gains May Be Made — The Final Problem. Chapter III. Production and Distribution. ... 59 The Going Machine — ^The Flow of Income and Ex- penditure — Making a Job for the New Worker — The Growth of Industrial Machinery — The Business Cycle — Credit Expansion and Contraction — The Quantity Theory of Money — How May Business De- pressions Be Prevented? Chapter IV. Some Pertinent Statistics 86 Statistics versus "The Statistic" — The Questions to Be Answered — The Increase in Physical Production — Tlie Increase in Real Wages — The Size of the National Income — The Distribution of the National Income Among Individuals — The Distribution of the National Income Between Factors in Production — Can the Share of Labor Be Increased? — Efficiency and Waste. Chapter V. Facing the Facts 113 A Recognition of New Conditions — Population and Natural Resources — Immigration — The Distribution of Income — The Average Rate of Profit — -The Profits of Marginal Concerns — The Relative Monopoly Power of Labor and Capital — A Special Viewpoint — A Con- structive Program. 3 PREFACE THE substance of tlie present volume of essays on industrial economics is taken almost without change from a series of economic, financial, and statistical studies undertaken by the writer as an incident to his connection with a large public utility organiza- tion. Each chapter is substantially complete in it- self. However, the first four follow a definite sequence, and the fifth, in a sense, completes the series by discussing the application to cur- rent proposals for the improvement of working conditions of the facts and points of view pre- sented in the preceding chapters. The volume, as a whole, makes no pretense to thoroughness from the standpoint of the trained economist. Such merit as it may claim as introductory reading in economics for the business man, and for the student who may or may not expect to make a more thorough study of the science, arises very directly from the manner in which the text originated. After nearly twenty years' experience as engineer and executive, the necessities of the writer's emploj^ment compelled him, as a very practical matter, to undertake a study of 6 6 CURRENT ECONOMIC PROBLEMS economic fact and theory. In nearly every case the initial study of theory was incidental to the pressing demands of some practical problem. Further study frequently followed as the result of natural interest, and in prepara- tion for other similar problems, but the initial impetus almost always arose from a definite business need. This peculiar background for the several essays, while explaining certain omissions, may also, it is hoped, give the vol- ume some degree of special usefulness to the practical man who feels the need for a general knowledge of economics, but lacks the time nec- essary for the reading of more technical and extensive treatises. Still a further word of explanation may be proper as to the writer's fundamental view- points. So far as it has seemed possible to do so, the various discussions have been based on fact rather than opinion or personal judgment. But the science of economics is not yet com- plete, and it is particularly incomplete in that range where human instincts and motives are involved. The writer yields to no one in his desire to see ideals of fair dealing, of public sei^ice, and of cooperation, increase their in- fluence in all lines of human activity, and par- ticularly in the great field of the production and distribution of essential commodities and services. Yet he sees nothing in economic or human history to indicate that sound progress PREFACE 7 can be attained in any way but through gradual evohition from our present capitalistic sys- tem. And he feels that such evolution can- not safely precede, but must always follow, the development of the knowledge and intelligence and practical ideals of the average man. So far, therefore, as he would take issue with his more radical and idealistic friends it would be on this ground — that they hope to introduce eco- nomic systems which, in his opinion, would be operative only in the hands of public spirited and specially intelligent men, while he would cling to that system which is the outgrowth of average ideals and motives until the average man has so progressed as to justify a forw^ard step in economic organization. Such differences in viewpoint must always exist — and it is desirable that they should exist. Nevertheless, among those of differing view- points Avho are sincerely seeking for the truth, there is a common meeting ground in the search for the actual, tangible facts which must un- derly all sound economic reasoning. These in- troductory notes would not be complete with- out some special acknowledgment to the direc- tors of the National Bureau of Economic Re- search, Inc. During its existence of less than three years, this Bureau has demonstrated that labor leaders, socialists, professional econ- omists, and business men can cooperate with mutual tolerance and good will in the effort to 8 CURRENT ECONOMIC PROBLEMS agree upon a common body of economic facts and ''for impartial investigations in the field of economic, social and industrial science. ' ' Under the procedure which the Bureau fol- lows, findings of fact must be divorced from conclusions or propaganda, and, in addition, any director may express dissenting analyses of the facts by appending foot-notes to any report that is approved by a majority of the directors. Individual directors are not pre- cluded from publishing their personal opinions. Nevertheless, the writer, in view of his present incumbency as president of the Bureau, has hesitated to publish the present volume (for which, of course, the Bureau assumes no re- sponsibility) without some special effort to avoid what might seem to be an ultra-conser- vative viewpoint. Perhaps a partial solution has been found by submitting the text to cer- tain of his more radical friends, including active labor leaders, and socialists, and inserting the substance of their comments as foot-notes. The bulk of this comment has been supplied by a specially well-informed and temperate- minded socialist, who is also a strong sup- porter of the labor union movement. It is not at all certain that the reader may not find special value in this opposition of viewpoints as expressed in the text and the comment. Acknowledgments are particularly due to Edwin F. Gay, Wesley C. Mitchell and Harry PREFACE 9 W. Laidler for many helpful comments and pertinent criticisms. Much of the good in the volume is theirs — the errors are mine. Special thanks must finally be offered to Messrs. S. L. Andrew and R. S. Coe among the writer's busi- ness associates, for much detailed assistance and many constructive suggestions. M. C. Rorty. 195 Broadway, New York City. August 1, 1922. CHAPTER I INDUSTRIAL HISTORY THE FEUD SPIRIT IN INDUSTRY AFEAV years ago, a company operating out of Pittsburgh became rather un- willingly involved in a three-cornered business deal where the other two corners were occupied by opposing factions of West Vir- ginia mountaineers. The situation soon became heated, and then more heated, until, in despair of any other solution, an ex-judge of the county was called upon to secure a court order to re- strain one of the groups of mountaineers from interfering with the arrangements made by the other. The preliminary order was secured in due course, but, a few days before the date set for the hearing, the Pittsburgh company's elderly attorney sent word that he wished to withdraw from the case. He was promptly reached by telephone and asked to explain, "Well," said he, ''there'll be shootin's, an' murders, an' burnin's for three generations over this affair already, and I've got to live with these folks." There was no answer to this statement, so the matter was compromised by agreeing to drop the legal proceedings if the old judge would get the opposing groups together and attempt to bring about a friendly settlement. This he 11 12 CURRENT ECONOMIC PROBLEMS did, and his speech on the occasion of the joint meeting, while it touched very lightly indeed upon the original source of the difficulty, was nevertheless declared by those present to be the most profound and masterly discussion of proper and improper reasons for starting a feud that had ever been heard in the State of West Virginia. At any rate, it had the result that both factions agreed that their differences did not justify ''shootin's, an' murders, an' burnin's for three generations," and the mat- ter was finally settled in amicable fashion. The point of this incident, as applied to the present economic situation, is that no one has yet drawn, for employer and employee, or for business organizations and the general public, a clear dividing line between what should be the basis for a feud and what the basis for a temperate and constructive difference of opinion. At the present time the air is filled with conflicting proposals for the cure of the many real and imaginary economic ills that afflict us. If we took all of the medicines prescribed, we should soon be in the position of a man who tried to cure the colic by beginning at one end of the drug store shelf and sampling liis way, way do^vn the line to the other end. The need today is, therefore, specially great, in the interest of all business and industry, for a full and dispassionate understanding of the real facts. INDUSTRIAL HISTORY 13 THE PROBLEMS OF BUSINESS MANAGEMENT In the pioneer days in this country, the prob- lems of business and economics were relatively uncomplicated. These paragraphs are being written in a back country farm house, so far from the railroad that coal is an unknown lux- ury. Only a few years ago a Chinese wall might have been built across the mouth of the valley, with little change in the life of the peo- ple. In fact, if such a wall were built today, the old equipment — spinning-wheels, hand- looms, smoke houses, slaughtering frames, sap houses, blacksmith's forges, and wood-working tools — is still at hand and many items are in daily use. Fertile land can still be had for $10 an acre — barely the value of the standing tim- ber. Here the problems of wages, profits, and rents are simple and elementary. After heavy rains, a few fine days have given a chance for hay cutting. The writer has helped his host cut and load the valley hay. There are still difficult mountain fields of poorer hay to be cut. Hay can be bought for $10 a ton. A hired man can be had for $3 or $4 a day and board. The balance is very even. There is little chance for argument between the farmer and his employees. The profit to my host will be very doubtful if he must pay a hired man. Probably the mountain fields will be cut if the 14 CURRENT ECONOxMIC PROBLEMS writer volunteers to help — otherwise they may not be worth the cutting. If all of modern industry were organized along such simple lines and the relations be- tween wages and pi'oductivity were equally simple and direct, many of our present-day con- troversies would vanish. Yet in many respects the problems are still the same. Each owner of a competitive business seeks to expand his operations until he reaches a point where added wages and added costs for borrowed money leave his margin of profit in doubt. Wages, in the end, are still determined by pro- ductivity. The individual worker may not al- ways have his choice of employment, or of working for himself, but on the whole there is still an effective mobility of labor and no one occupation can for long pay greater or lesser rewards than another for equal skill and effort. Changes, readjustments, progress, and the elimination of abuses are required — but an even greater need is for clear understandings. In the regulated public utilities the relations between the employees, the investors, and the public are particularly simple. There is no absolute measure of what wages of public util- ity employees should be. Such employees con- stitute, however, a selected and specially com- petent group of workers. They have special responsibilities. And the public should furnish the revenues necessary to enable them to be INDUSTRIAL HISTORY 16 paid at least as well as workers in comparable occupations in the localities they serve. Similarly as to payments to bondholders and stockholders, the bonds and stocks of public utilities represent real money invested. The occasional "watering" of former days has, in most, if not all cases, been wiped out by the recent shrinkage in the value of the dollar. In many instances premiums paid for new stock issues have caused the actual money invested to exceed, by substantial amounts, the face value of outstanding securities. Many millions of dollars worth of public utility stocks are owned, or are in process of purchase on easy terms, by public utility employees. It is, there- fore, not only right, but necessary, that the investors in public utility securities shall re- ceive returns reasonably comparable with those that they might receive if they invested in other businesses. Furthermore, the public utilities must grow. They have no choice as to this. Many addi- tions must be made as a matter of public neces- sity, if for no other reason. The utilities can- not grow, however, without securing large sums of new money each year. Some new plant can be built out of amounts set aside for the re- placement of worn-out and obsolete equipment. A little can be built out of surplus earnings. But the bulk must be built out of new money secured in the open market in competition with 16 CURRENT ECONOMIC PROBLEMS every other business that needs new money, and with governments, states, and municipal- ities as well. To secure such money, the utili- ties must not only offer attractive inducements to new investors, but, as an assurance to such new investors, must also pay reasonable re- turns to present stockholders and bondholders, and must give further evidence of financial soundness by showing their ability to lay aside each year a substantial surplus, after all re- quirements for labor, materials, interest, and dividends have been met. These, then, are the special problems of pub- lic utility management — to secure adequate wages for employees; to secure adequate re- turns for old and new investors; and, by fur- nishing good service and proving economy in management, to secure from the public the rates necessary for both requirements.* As indicated in the prefatory note, the pres- ent volume is the outgrowth of a series of studies by the writer bearing directly and in- *The socialists and advocates of public ownership of utilities claim that interest charges and dividends could ultimately be largely eliminated under such ownership. The public utility managers claim, on the other hand, that such savings are theoretical rather than real, that actual experience indicates a greater probability that governmental operation would result in continually growing deficits to be met by taxation, and that in any case, without radical improvements in the management of public affairs, the wastes under governmental or socialized control would much more than offset any possible savings in capital charges. INDUSTRIAL HISTORY 17 directly upon these and other problems — upon the economic relationship between employees and owners in public utility service and in in- dustry as a whole, and upon the mutual rela- tions of both employees and owners to the general public. Liberal references have been made to books, periodicals, and pubhshed re- ports and documents, in order that those who wish to do so may gain, through further read- ing, a more thorough knowledge of those basic principles which must determine any sound solution of current industrial and economic problems. WHAT MEN LIVE FOR Political economy, like everything else affect- ing the lives of men and women, must finally be tested by the aid it gives to normal human beings in securing the things that they desire. For the average man these desires are sim- ple — life and health; comfort and security for home and family; regularity and certainty of employment ; work that can be done with pride and self-respect; proper leisure for reading and recreation; and, above all, the feeling that the conditions that affect him are just and that he has a reasonable voice in determining them. In the past, political economy has been called the "dismal science," for it began and ended 18 CURRENT ECONOMIC PROBLEMS in a fog of theories which rarely, if ever, gave workable answers to the real problems of hu- man life. Today, the economists are speaking in plain language of the things that directly concern the lives of ordinary men. So far, then, as the present volume shall show the way to better living conditions, and shall indicate when and to what extent protest is justified and w^here and to what extent there should be con- tentment with things as they are, it shall have served its purpose. And just to the extent that it falls short of this end, it shall have failed. THE BEGINNINGS OF HUMAN ORGANIZATION The practical science of economics does not begin w^ith the cave man, or vnth the wander- ing savage, but with men who have learned that they can better satisfy their needs by gather- ing together in organized nations and business enterprises. The beginnings of such organ- ization are, however, hidden in the days be- fore written history began. The long ages of slow development and the sudden flowering of our modern civilization are well brought out by one writer* who says: "In order to understand the light which the dis- covery of the vast age of mankind easts on our pres- ent position, our relation to the past, our hopes for the future,. ... let us imagine the whole history *Page 239, The New History, by James H. Eobinson. INDUSTRIAL HISTORY 19 of mankind were crowded into twelve hours and we are living at noon of the long human day. . . For over eleven and one-half hours there is nothing to record. We know of no persons or events; we only infer that man was on earth, for we find his stone tools, bits of his pottery, and some of his pictures of mammoth and bison. At twenty minutes before twelve the earliest vestiges of Egyptian and Baby- lonian civilization begin to appear. The Greek lit- erature and philosophy to which we owe so much are not seven minutes old. At one minute before twelve Lord Bacon wrote his 'Advancement of Learning,' and not one-half a minute has elapsed since man first began to use the steam engine to do his work for him." Human organization undoubtedly had its be- ginning through the grouping together of indi- viduals and families into tribes for self -protec- tion. With this grouping together for protec- tion, there undoubtedly came also the begin- nings of barter and trade and of specialization of work. Some men became hunters, others fishermen, and others herdsmen and tillers of the soil. But organized production on a large scale was unknown. Work was specialized only to the extent that the use of hand tools made such specialization possible. Political organization was primarily of a military type. Measures begun for protection were later per- verted to the uses of aggression. When famine and pestilence did not keep numbers down, the more populous tribes, from time to time, swept over their natural boundaries and invaded their 20 CURRENT ECONOMIC PROBLEMS neighbors' lands. The leaders elected by the free will of a tribe assumed hereditary rights, and their descendants became despots to main- tain their power. With the crude tools and methods employed in production, even the free man could barely earn for himself the rudest kind of food, shelter, and clothing, while large elements of all populations were held in actual or virtual slavery. These conditions existed in Egypt and Babylon 5,000 years before the Christian era began, and with only brief and rare exceptions they continued through all the years of re- corded history until the beginning of the eight- eenth century. It is even possible that condi- tions were worse, in some respects, at the end of this long period than at the beginning. Cer- tainly there cannot have been much improve- ment, if we may trust the British historian*, writing in the year 1848, when he describes the days of 1685 as ''times when noblemen were destitute of comforts the want of which would be intolerable to a modern footman, when farm- ers and shopkeepers breakfasted on loaves, the very sight of which would raise a riot in a mod- ern workhouse, when men died faster in the purest country air than they now die in the most pestilential lanes of our towns, and when men died faster in the lanes of our to^fvns than they now die on the coast of Guiana." •Page 397, History of England, by T, B. Macaulay. INDUSTRIAL HISTORY 21 THE INDUSTRIAL REVOLUTION During all the years of this first stage in in- dustrial history, up to the middle of the eight- eenth century, progress in practical science and in manufacturing methods had been very small. Gompowder and the mariner's compass had been invented. Shipping and commerce had de- veloped, and much attention had been given to the implements of warfare. But agriculture was as it had been for generations. Buildings were erected as in the days when Christ was a carpenter; and the carpenter's chisel of Eng- land was still made by the same crude methods as the Roman sword. Even the fundamental art of weaving cloth had seen little advance and, as stated* by one writer, ''In the textile industry . . . but two changes in the methods of doing work had been made between the time of the Greek civilization and the latter part of the eighteenth century. Penelope, who worked at her loom while awaiting the return of Ulysses, would have found nothing very strange in the art of weaving, could she have made a visit to the home of a textile worker in the be- ginning of the reign of George III. The spin- ning wheel had taken the place of the distaff, and a rough contrivance like the water wheel had come into use for fulling cloth. Outside of these two inventions, the processes of carding, *Page 88, Description of Industry, by H. C. Adams, 22 CURRENT ECONOMIC PROBLEMS spinning, dyeing, weaving, and finishing cloth were, in England in 1760, what they had been the world over, time out of mind. ' ' Yet the seeds of change had been sown. The printing press was invented about the year 1451, and through its agency the scattered frag- ments of ancient sciences were gathered to- gether and made available to a constantly in- creasing circle of readers. Under this influence there began in Italy, about the year 1500, the Renaissance, or Revival of Learning. The progress of pure science thereafter was rapid. Astronomy moved forward with quick strides from the invention of the telescope by Galileo to the discovery of the laws of gravitation by Isaac Newton. Physics and chemistry were es- tablished as definite sciences, and mathematics in the hands of Descartes, Leibnitz and Euler became a powerful tool ready for the hand of the engineer and designer. This new knowledge did not add directly to human comfort, but practical applications soon followed. The invention of the spinning jenny by Hargraves in 1765, and the ''mule" (a tex- tile machine), by Crompton in 1779, with va- rious modifications and improvements, soon completely revolutionized the industry of weav- ing. The invention of the steam engine, which was first patented as a pumping device in 1769 and was applied to the propulsion of machin- ery 13 years later, proved the essential factor INDUSTRIAL HISTORY 23 in making possible the rise of the factory sys- tem, which brought about that change from lim- ited production by hand to quantity production by machinery which is known as the ''Indus- trial Revolution." The effects of this revolution in increasing the productive power of mankind have perhaps nowhere been described better than by Marx and Engels, in the ''Communist Manifesto" of 1848*, when they said that the capital newly organized to meet the changed industrial con- ditions "during its rule of scarce 100 years has created more massive and more colossal productive forces than have all preceding gen- erations together. Subjection of nature's forces to man, machinery, application of chem- istry to industry and agriculture, steam-navi- gation, railways, electric telegraphs, clearing of whole continents for cultivation, canalization of rivers, whole populations conjured out of the ground — what earlier century had even a pre- sentiment that such productive forces slum- bered in the lap of social labor?" A further direct effect of the industrial rev- olution was to bring about a very great in- crease in population in the countries where fac- tory methods were introduced. This increase is strikingly indicated by the chart (page 25) of the population of England and Wales from 1100 to 1900, on which is shown a population *Quoted on page 10, Socialism in Thought and Action, by H. W. Laidler. 24 CURRENT ECONOMIC PROBLEMS very slowly increasing from about 2,000,000 in the year 1100 to about 6,000,000 in the year 1750, with a rapid upsweep to 14,000,000 in 1831, when the factory system had become well established, and with a further increase to about 33,000,000 by 1900. With this rapid increase in population, it appeared for a time that the increase in mouths to feed and bodies to cover would absorb all of the increased production that science had brought about. So real was this fear that in 1798 Malthus published his famous essay on ''Population" in which he attempted to show that there was a tendency for population to increase up to the limit of subsistence, and that this tendency would always prevent any sub- stantial improvement in the standard of living of the masses of the people. Subsequent de- velopments have shown these extreme forebod- ings to be unwarranted. Daily wages of car- penters and masons in England between the years 1766 and 1800 averaged little more than the price of one-third of a bushel of wheat. By the year 1882 they had risen until a day's wage would buy three times this quantity;* and ap- proximately the same increases in real wages had taken place throughout the entire range of industrial employment. While, therefore, the rapid increases in population that arise out of modern industrial developments may have a '•Page 313, History of Money aiid Prices, by J. Sehoenhof, POPULATION IH MILLIONS rooj oiNNcj — •-^ — -- o o o ^" 2 O QC m U. n r (/) LU ilj $1 Q % Z -K ^ Textile Inventions Mechanical Power Improvements in AgricjlLure ~ ^ > \, 1 I 1 1 1 J The Black Death \ \ — \ \ OCOCMOJCMMOJ*-— •-•-- POPULATION IN MILLI0M3 25 26 CURRENT ECONOMIC PROBLEMS tendency to restrict the improvements in stand- ards of living that might otherwise take place, the evidence of the past 100 years is clear that production of the means of subsistence has in- creased in much greater ratio than human numbers. A more serious problem, on the other hand, was that arising out of the concentration of workers in large cities and their entire depen- dence upon industrial employment, combined with what seemed to be an increasing tendency toward periodic business crises with accom- panying long periods of unemployment and distress. The first rapid sweep of the industrial rev- olution may be said to have ended \vith the nineteenth century — leaving these and other problems unsolved. It brought about a vast improvement in the living conditions of ordi- nary men. It gave them many luxuries. But it left them with a feeling of helplessness and insecurity in the grip of an economic organiza- tion that neither they nor any others fully un- derstood. And, in creating comfort for the masses, it created also concentrations of wealth in individual hands that were a constant chal- lenge to the justice of the distribution that was taking place. INDUSTRIAL HISTORY 27 THE PRESENT SITUATION Now, in these early years of the twentieth century, the stage seems to be set for another great act in the drama of economic evolution. As the first act came the pre-historic and his- toric struggle of man for the simplest necessi- ties of existence — equipped with inadequate tools ; lacking the resources of science and me- chanics ; handicapped by imperfect political in- stitutions; oppressed by despotism; harassed by almost continual warfare; and periodically decimated by famine and pestilence. As the second act came the industrial rev- olution — with its amazing growth in the sciences and the mechanical arts; with un- dreamed of increases in commerce and produc- tion; with very great and real improvements in the material and political conditions of the masses; and yet mth want still prevalent, and with even the best informed of men helpless to control the new forces that science had set loose and largely ignorant of their ultimate meanings and of their ultimate reactions upon human life. And today the scene stands ready for the further unfolding of the play through the in- telligent harmonizing, for human welfare, of the knowledge that the years have given and the powers that the years have brought forth. 28 CURRENT ECONOMIC PROBLEMS Political freedom we have in this country in large measure. Education is T\ide-spread. The forces of science and mechanics are being sys- tematically developed and applied. Forms of political and industrial organization are well established and their limitations are known. Management is becoming more efficient, and those in charge of large enterprises are coming in constantly better faith to recognize their ob- ligations to employees, to the public, and to in- vestors alike, as trustees of great social instru- ments. These are foundations upon which the fu- ture may be built. These are possessions too great to be carelessly or impatiently sacrificed. It is true that with all these agencies at hand for the satisfaction of human needs, there is still discontent. It is true that recurring cycles of business depression bring unemployment and distress. It is true that there are wastes in pro- duction and wastes in distribution. It is true that there are questionable inequalities in the distribution of wealth. Yet with all the faults of our present indus- trial organization, the fact remains that it is a going machine — powerful beyond any that man has ever before developed on a large scale to satisfy his needs, and flexible enough in design to adapt itself to whatever demands the fu- ture may make upon it. Adjustments may be needed here, a drop of oil there, new parts INDUSTRIAL HISTORY 29 in still another place, perhaps even a gradual transformation — but the machine as a whole must be preserved in continuous and certain operation. And there is, furthermore, one great out- standing difference between the present times and the past. Until very recently, economic laws were almost wholly a matter of theory and speculation, and for this reason it was dif- ficult to say what were serious and what were minor defects in any economic plan. But now, to a large degree, we can measure and weigh and give a value to each factor in our social and industrial organization. If the question is how the total of all in- comes is distributed between labor, land rents, interest and profits, we can answer ''approxi- mately 68% to labor, 8% to land rents, 16% to interest, and 8% to profits in excess of a nor- mal interest rate." If the question is what increase might the lower jDaid workers receive if all high salaries were reduced to $5,000 a year, we can answer "not more than 2%."* *Our socialistic critic of these paragraphs, in speaking of the demand for a fundamental change in the economic system, says that this demand "is not primarily concerned in the re- duction of high salaries based on service, although many of these salaries could probably be reduced -without injuring the incentive." He says further that such demand "is con- cerned rather with the elimination of property income, which accrues from mere ownership, and with the elimination of great competitive wastes. ' ' 30 CURRENT ECONOMIC PROBLEMS Similarly, if questions are raised as to the causes of business cycles and the possibility of their control, as to the effect of an eight- or six- hour day on wages and prices, as to the causes of high prices, as to the necessary relations between general wages and the cost of living, as to the relation of interest and dividend pay- ments to wage payments in typical industries, or as to scores of other points that bear directly and indirectly upon the living conditions and welfare of ordinary men — to all of these ques- tions answers can be given, sujoported by de- tailed facts that are wholly or in large part convincing to any reasoning man who will ex- amine them. Many of these questions will be discussed in succeeding chapters of the present volume. For present purposes, however, the significant point is that, whatever may be the evils and defects in our present industrial system, it does not give to men of great wealth more than a fraction of the useful goods that are produced, and the great balance remaining is distributed with reasonable fairness among the masses of men and women — as wages, as rents on small properties they own, and as interest and divi- dends on their savings. Furthermore, of the fraction that goes to the wealthier families, much is taken by the Government in income and inheritance taxes, while other large sums INDUSTRIAL HISTORY 31 are not consumed, but are reinvested in neces- sary productive enterprises.* These facts are far from justifying a ''stand pat" attitude in respect to the natural and in- evitable desire of every American for improved living conditions for himself and his children; but they do indicate that we have little to quar- rel about, even if we have much to work for. As the old judge pointed out, there may be both proper and improper reasons for starting a feud. Barn burning may be a matter for pow- der and shot, but a raid on the jam closet is a matter for family discipline. THE PROBLEMS OF THE FUTURE If, then, it is admitted that present industrial conditions do not justify the reckless tearing down of all that we now have, what is the hope *Our socialist commentator, who does not criticize this paragraph as a whole, is, nevertheless, not willing to rely upon inheritance taxes or the tendency to pass "from shirt- sleeves to shirtsleeves in three generations" to prevent the maintaining of great family fortunes. He objects less to the building up of such fortunes by "captains of industry" than he does to their subsequent control by less capable and less useful descendents and writes: "This condition ***** is both unhealthy and unreasonable. It permits many sons of the rich, without any effort on their part, to live in idleness throughout their lives and yet to be richer at the end of their years than at the beginning. Often the only mental energy that they need expend is tlie selection of an efficient trust company, lawyer, broker, or administrator to take charge of their investments, or their decision to retain their investment in industries selected by their predecessors." 32 CURRENT ECONOMIC PROBLEMS for the future? How may the conditions of ordinary men be improved? How may their comforts and their luxuries be increased? How may they have security of employment, and the feeling that they are something more than helpless cogs in a machine over which they have no control? First, the real facts must be told, fully and exactly, without any *'be good and you'll be happy" platitudes, and with a very clear recog- nition that fine arguments go a small way when it is a question of shoes for the children. For the public utilities, as previously stated, the problem is well defined — it is to produce earnings sufficient to enable them to pay the liberal wages for money and the liberal wages for men and women that are equally essential to the maintenance and extension of an effi- cient service. This, however, is only one part of the story. Wages are simply the counters with which the real things of life are purchased. The ratio of wages to prices finally determines living con- ditions, and prices are determined by the effi- ciency of the whole industrial organization, of which any particular industry can form only a small part. The employees of any single in- dustry have, therefore, in addition to a pri- mary interest in their own wages and in the success of their own business, a second equally INDUSTRIAL HISTORY 33 vital interest in the operations of the whole producing and distributing organization that supplies them with the tilings they consume. What, then, is the way in which prices may be reduced? How may the efficiency of the in- dustrial organization be increased? Lenin and Trotsky in Russia believed that the answer lay in overturning the whole existing order of things. They preached the millennium — a four-hour working day and luxuries for everyone — as the result of proletariat control. But, if the press reports may be believed, they have wound up by permitting or enforcing work- ing days of from eight to twelve hours, by offer- ing high salaries to competent industrial man- agers, and by going out into the markets of the world in an attempt to borrow, at high interest rates, the money they need to build new indus- trial plants. Some philosopher has said that the great art of pontics lies in giving new and attractive names to old and disagreeable truths. If this is so, a great opportunity lies open today for some new master of words to gild and sugar- coat the old copybook maxims, — for regardless of what soap-box orators may say, and regard- less of occasional large business and industrial profits, the hard fact remains that, in the long run,* seventy-five cents out of every dollar we *Note: This figure becomes 68 cents out of each dollar, as indicated on page 29, when house rents and other items of family expenditure are averaged with purchases of commodities. 34 CURRENT ECONOMIC PROBLEMS spend for commodities represents wages paid. The balance represents interest, profits, and land rents. There are ways in which the charges for these items may gradually be re- duced, and some of these methods will be dis- cussed in succeeding chapters. But the major item is wages. Here is where the great gains and losses may be made. Here is where those who work as managers and those who work as beginners in the ranks of industry have a joint responsibility. Under free competition, if wages remain fixed, and production increases, prices will fall. If wages remain fixed, or rise, and production falls off, prices will rise. The bricklayer who cuts down the number of bricks he lays in a day, raises the rent of the weaver's house. The plough- man who loafs in the furrow raises the price of the bricklayer's bread. And the weaver who slows the loom raises, in turn, the price of the ploughman's coat. During periods of unsettled j^rices, the gen- eral levels of wages and prices tend to rise and fall together, although not wholly in unison. But, in settled times, wages may rise as the re- ward for individual effort — while a fall in prices will be the measure of collective ejQS- ciency. Yet the whole tale is not to be told in terms of direct human labor. Business organizations INDUSTRIAL HISTORY 86 must be improved. Wasteful processes and methods must be eliminated. New machines must be devised. Business depressions must be checked. And, above all, there must be be- tween employer and employee, between indus- tries and interests, between all factions and groups of men, that spirit of intelligent adjust- ment and compromise which Edmund Burke so well described in his great speech on Con- ciliation with America: — "All government, indeed every human benefit and enjoyment, every virtue, and every prudent act, is founded on compromise and barter. We balance inconveniences ; we give and take ; we remit some rights that we may enjoy others; and we choose rather to be happy citizens than subtle disputants. As we must give away some natural liberty, to enjoy civil advantages, so we must sacrifice some civil lib- erties, for the advantages to be derived from the communion and fellowship of a great empire." CHAPTER II SOCIAL AND INDUSTRIAL ORGANIZATION THE BASIC VIEWPOINTS A RECENT writer* has revived, in very interesting fashion, an old discussion sts to whether man, as we know him, origi- nated from animal ancestors of a solitary or of a social type. He argues, rather convincingly, from evidences of language and primitive cus- toms, that the ancestors of man must have been highly socialized animals living much like the bee and the ant, and that the solitary man-like apes were not the progenitors of human kind, but represent instead merely side branches, or outlaws, from the evolutionary tree. This discussion, aside from its purely scien- tific interest, has its very practical aspects. We shall have one very definite attitude toward present-day political evolution if we believe that society is developing from a primitive in- dividualism toward a highly socialized form; and we shall have quite a different viewpoint if we see in human evolution a steady progression from a primitive and excessive socialism to- ward a scientific individualism which shall com- bine a large measure of personal freedom of *The Natural History of the State, by Henry Jones Ford. 36 ORGANIZATION— SOCIAL, INDUSTRIAL 37 initiative wita the advantages of collective effort, where collective effort is required. Although these two viewpoints are funda- mental in their bearing on individual liberty and on the development of a social organization of the highest effectiveness, their relationship to our current economic problems is indirect. The purposes of human organization are one thing. The forms through which such purposes may be accomplished are quite another. And in these days of hectic emotions and tangled thinking, when the world shoots first and rea- sons afterward, there is great danger that hu- man progress may be retarded, if not actually set back, by failure to make the distinction clear between purposes and methods. THE PURPOSES OF HUMAN ORGANIZATION To avoid such confusion it is necessary to reduce to simple terms the demands that think- ing men may make upon the social and indus- trial system. Such a system must permit each man to develop his own freedom and his own powers to the utmost, provided only he does not infringe upon the equal rights of his neigh- bors. It must be highly and continuously pro- ductive of the things that satisfy normal and proper human desires. And it must secure a just apportionment of this output among those that contribute to its creation. 38 CURRENT ECONOMIC PROBLEMS These demands are not antagonistic. It is not necessary to sacrifice any true individual liberty to secure social ends. Rather may social ends he served by stimulating individual pow- ers. It is not necessary to tear down all the tried forms of human association and organiza- tion, that the years have slowly built up, in order to secure the productivity that our needs require. Rather may we use these forms as the most effective agencies in such production. It is not necessary to deprive capital of a due reward, or savings of their incentive, in order to assure a just recompense to labor. Rather may the labor of today gain by granting freely to the stored-up labor of j^esterday, which is capital, that fraction of the increased output from new industrial processes and machinery which is necessary to stimulate savings and thereby promote business enterprise. The Industrial Revolution has brought spe- cial problems and difficulties that are pressing for solution — and that must be solved. But these problems and these difficulties are, never- theless, only a few among many that humanity has struggled with or surmounted in the past. Back of the scant one hundred years during which modern industrial developments have dominated human activities, lie many centuries of continuous struggle for individual liberty. During these long years man might live free as a nomad, with all the penalties of nomadic ORGANIZATION— SOCIAL, INDUSTRIAL 39 life. But if he chose to live with his fellows, in tribes or cities or organized nations, he paid the price of subjection to arbitrary authority in many forms. This authority might be that of the tribe and of ironclad tribal customs. It might be the authority of the church and of an organized priesthood. It might be the author- ity of kings, or of military despots. But, in whatever form it came, individual liberty was sacrificed or abridged. These arbitrary restrictions of individual liberty were not, however, in all, or even in most, cases fundamentally blamable. Society could not exist without authority. Authority had to be. But men had not learned how to temper authority with the necessary restraints. This, then, was the great problem with which humanity had struggled for centuries before the Industrial Revolution brought its new and special difficulties. How might an organized society exist without the abuse of power and without subservience on the part of the indi- vidual? THE ORIGINS OF AMERICAN GOVERNMENT The culmination of this long struggle, and the greatest single step forward toward the solution of this century-old problem, came, perhaps, with the American Revolution and the establishment of our present form of govern- ment. Here, for the first time in history, a 40 CURRENT ECONOMIC PROBLEMS great people founded a nation upon the decla- ration that there were certain individual rights that must be preserved and upon the belief that society could develop to its fullest effectiveness only through the upbuilding of the powers and opportunities of the individual. This conception of government was well ex- pressed* by Thomas Jefferson, in 1816, when he said: "Our legislators are not sufficiently apprized of the rightful limits of their power; that their true office is to declare and enforce only our natural rights and duties, and to take none of them from us. No man has a natural right to commit aggression on the equal rights of another, and this is all from which the laws ought to restrain him ; every man is under the natural duty of contributing to the necessities of the society, and this is all the laws should enforce on him; and, no man having the natural right to be the judge between himself and another, it is his natural duty to submit to the umpirage of an impar- tial third. When the laws have declared and en- forced all this, they have fulfilled their functions, and the idea is quite unfounded that on entering into society we give up any natural right. The trial of every law by one of these texts would lessen much the labors of our legislators, and lighten equally our municipal codes." This viewpoint was clearly that of other founders of our government besides Jeiferson. Their fear was as great of the tyranny of popu- *Vol. Ill, p. 3, The Writings of Thomas Jefferson, New York, 1859. ORGANIZATION— SOCIAL, INDUSTRIAL 41 lar majorities and of militant minorities as it was of the tyranny of princes and kings, and this fear fomid expression in the familiar passage from the Declaration of Independence : '^We hold these truths to be self-evident, that all men are created equal, that they are en- dowed by their Creator with certain inalienable rights, that among these are life, liberty and the pursuit of happiness. That to secure these rights Governments are instituted among men, deriving their just power from the consent of the governed." THE AUTOCRATIC IDEA However, in opposition to the individualistic development of the American Government, there still persists in some quarters a belief in highly centralized power. The two signif- icant modern examples of governments or- ganized under this behef are both, curiously enough, of German origin, one being the pater- nalistic autocracy of the pre-war German state, and the other the communistic autocracy of the present Bolshevist Government, which is based directly upon the theories of Karl Marx. In the one case, we are concerned with a state organized from the top of the social ladder and founded upon the idea of the divine right of kings. In the other case, we have an exactly similar conception of government, with 42 CURRENT ECONOMIC PROBLEMS the single difference that it is founded upon the idea that the ruling class should be chosen from the very bottom of the social ladder. Yet it is of little consequence which social group controls the govermnental machine. The fundamental ideas are the same. Individual initiative and individual liberty are destroyed, and the only powers remaining are those of autocratic and, in the end, narrow-minded and egotistical bureaucracies. One of the major causes of the Great War appears to have been the conviction of the German bureaucrats that they had developed so perfect a plan of government that a world that could not perceive, and willingly accept, its beauties and its advantages deserved to be warred upon as the penalty for its ignorance. Similarly, it is one of the basic teachings of the radical creed that communism must be initiated by establishing the most rigid kind of a dicta- torship of the proletariat, and that this dicta- torship must continue until human nature has been remade, if necessary, by force, and the beauties of the new plan are generally and un- questioningly accepted. Neither the true Bol- shevist nor the true Prussian can ever under- stand, or hope to understand, that feeling of men educated in a real democracy which makes them sincerely prefer to be shot rather than to attain perfection under autocratic rule, ORGANIZATION— SOCIAL, INDUSTRIAL 43 whether this be of kings, or of bureaucracies, or of proletariats.* THE NEED FOR COMPROMISE As has pre^dously been noted, the essential purpose of our o\\ni government, as conceived *In explanation of the relation between the teachings of Karl Marx and the present Eussian communism, our socialistic critic of this chapter says : "Today there is a fundamental cleavage in the socialist and communist movements as to the relations of the Marxian philosophy to Bolshevist tactics. On the one hand, such Eus- sian leaders as Lenin and Trotsky declare that their tactics are directly in line with those advocated by Karl Marx, the father of so-called scientific socialism. On the other hand European Marxists such as Kautsky and such American so- cialists as Morris Hillquit (see "From Marx to Lenin") and Louis B. Boudin contend that Bolshevism is inconsistent with Marxism. Marx, they claim, held that socialism was not pos- sible until a country had passed through a stage of developed capitalism. Eussia, however, had hardly entered upon that stage at the time of the November revolution, but was in the lower stages of agricultural development. These Marxists, furthermore, contend that Marx thought of a 'proletarian dictatorship' in terms of a government representative of the 'overwhelming majority' of the population. Marxian so- cialists have generally condemned autocratic control of in- dustry, and have declared that socialism was impossible with- out democratic management. Tlie Bolshevists were of the opinion that, during the transition period, particularly during a period of civil and foreign wars, industrial authority should be centralized. They did not, however, advocate this as a permanent policy, and, since 1921, have done much to de- centralize industrial control. The control originally proposed was a control by the most intelligent and militant minority of the industrial population, (according to Bolshe\'ik concep- tions), rather than that by the 'slum proletariat,' and much stress was at times placed by Lenin and others on the im- portance of the technicians to the industrial machine. They claimed that their object in establishing a temporary dictator- ship was not the perpetuation but the elimination of class rule. ' ' 44 CURRENT ECONOMIC PROBLEMS by its founders, is to protect individual rights and individual initiative. And, in opposition to this concept, the German idea of the state, whether in imperialistic or communistic form, tends inevitably toward what is, at the best, a paternalistic despotism of strongly organized and intrenched bureaucracies. Yet no mistake could be greater than to allow the fear of radical excesses to check or prevent wholly, in this country, that natural develop- ment of cooperative effort which should take place — without sacrifice of individual liberties, mthout destruction of individual initiative, and without violence to fundamental instincts in human nature. The highly individualistic state protects in- dividual liberties and stimulates individual energy; and it is itself largely protected against great errors through the fact that its vitality lies in the many voluntary groupings of its citizens for industrial, social and political purposes and its growth and development come out of the consensus of the experience and the thought of these groups. Yet its centralized governmental agencies — its representative as- semblies — are, almost from their very nature, incapable of successfully directing the admin- istration of large public or semi-public enter- prises. The highly socialistic state, on the other hand, gains power of administration at the sac- ORGANIZATION— SOCIAL, INDUSTRIAL 45 rifice of individual liberty and of individual energy and initiative — while at the same time it so centralizes its thought and its ^dtal functions that it loses all independent life in its members, and after a brief display of abnormal vigor may decay as a whole, or go mad, as nations sometimes "svill, mthout power of recuperation from mthin. If there were no possibility of compromise between these two extremes, the choice would be a hard one — on the one hand, individual lib- erty and individual initiative, but combined with these an inability to meet the growing de- mands of a complex civilization for administra- tive skill in public and semi-public affairs — on the other hand, a centralization of govern- mental power purchased at the price of in- di\'idual subservience and loss of energy, and with the ever-present danger that the central- ized power may run vd\d without balance or control.* THE POSSIBLE ANSWER Between the advantages and disadvantages of the individualistic and socialistic forms of government it is hardly possible that a simple *Our socialistic critic objects to an assumption that all so- cialistic developments necessarily involve a bureaucratic cen- tralization of authority- He says: ' ' Socialism must not be confused with communism in the sense that this word was used prior to the Russian revolution, nor should the old communism be confused with the present 46 CURRENT ECONOMIC PROBLEMS solution may be found. However, a hint at the ultimate answer may lie in the organization of the human body. Here there has developed, through long centuries of evolution, a natural day Eussian communism. Socialism implies a system of so- ciety under which the chief industries are collectively owned and democratically managed. It has often been defined as 'the public ownership and democratic management of the so- cially necessary means of production and distribution. ' Under the system of socialism, as advocated by most American so- cialists, the chief and controlling industries would be owned collectively by the nation, the states and the municipalities, and managed democratically by representatives of the ad- ministrative officers, the rank and file of workers and the com- munity-at-large. Outside of the publicly owned industries there would undoubtedly be a considerable number of in- dustries owned by voluntary cooperative groups of consumers and producers, particularly in intellectual production and in agriculture, and a certain number of private enterprises, par- ticularly in the handicraft industries. Socialists do not con- template under social ownership the bureaucratic and political control found today in most governmental industries. The so- cialist favors the retention of private property in consumption goods. "In primitive times a certain primitive communism was found, under which not only capital goods, but also consump- tion goods, were owned in common. Socialism, as technically understood, was impossible prior to the development of capital- ism, and is regarded by socialists as the logical next step fol- lowing developed capitalism. The communism in Eussia does not advocate, as did the old communism, community in con- sumption goods. The schism at present existing between the socialist and the communist forces of the world has developed over tactics rather than ultimate ideals. The Eussian com- munism has been defined as 'socialism now.' These com- munists urge that social ownership be ushered in by a small, militant minority of the industrial workers, operating through a soviet form of government. The socialists, on the other hand, direct their efforts to the conversion of the majority of the population, and regard independent political action, trade and industrial unionism, cooperation and education as the four roads leading to social ownership. ' ' ORGANIZATION— SOCIAL, INDUSTRIAL 47 and effective balance between the brain and the other vital organs. The brain thinks, rea- sons and plans — but although it is faithfully served by the other vital organs, it has no con- trol over their routine operations. Such con- trol is exercised by separate special brains (or ganglia), each organized and equipped for its particular function — and the more important and vital this function is, the more complete is the control by the ganglion in charge, and the less direct is control by the central brain. The hand may lift involuntarily at a threatened blow, or may be raised at will ; but no conscious effort of the mind can stop the beat of the heart. Yet the heart would be less, rather than more, truly the servant of the whole body if the mind could interfere with its operations. So in the ultimate development of our na- tional organization, if we should cling too closely to an extreme individualism, we might be in the position of a man whose heart beat according to its own fancy without regard to the real demands upon it, whose lungs filled and emptied with no regard for the work at hand, and whose digestive organs furnished sustenance or not as they felt inclined. In the reverse direction, if we should centralize power over the vital functions of trade and commerce and industry in our representative assemblies, we might be like a man who was compelled to order each heart beat and each breath by an 48 CURRENT ECONOMIC PROBLEMS effort of the will. Between these two extremes there must ultimately be, in our national or- ganization, as in our physical bodies, a rational compromise. But we cannot hope to realize at once a final perfection in our national organization. In our present representative assemblies — in our state legislatures and in the Federal Congress — we have the conscious centers of our national life, while in our great corporations we have the beginnings, and in some cases almost the fully developed forms, of our national vital organs and their associated and controlling nerve cen- ters. Both are adapted to their special pur- poses — representative assemblies organized for legislation, and, on the whole, truly respon- sive to the broader currents of popular thought, but lacking continuity of policy and incapable of quick decisions in emergencies — corpora- tions, on the other hand, organized for adminis- tration and decision, manned by specialists of long training, and planning steadily for future growth along lines of well-established policy. It is not to be expected that we could have, today, a perfect adjustment and adaptation of these agencies to our national needs. When our Government was established, modern indus- trial developments were just beginning to take form, and the time that has since elapsed is but a single swing of the pendulum as time is measured in the broad history of human ORGANIZATION— SOCIAL, INDUSTRIAL 49 affairs. The further adjustments cannot take place overnight, but must come by successive small steps, guided always by an increasing knowledge of the facts and by that spirit of true progress which seeks always to save the things of the past that are sound, while developing new plans for the future. Not only must this progress come gradually, but there must also be a clear recognition of the infinite gradations in the character of the public and semi-public services to be per- formed. First come the primary functions of govern- ment itself — legislative, judicial, and public safety; then come public education and certain basic services, such as those of sanitation, water supply, and the maintenance of high- ways, as to which support by taxation, in whole or in part, is necessary and justified. Following these come vital public utility services, such as those of transportation and communication, and the furnishing of light and power, and artificial and natural gas, all of which tend to take on the character of natural monopolies, but which, nevertheless, should be commercially self-supporting. Next in order comes the supph^ of fuel, food, and certain primary articles of clothing. Here public interest is still very great, although the elements of natural monopoly are lacking. 60 CURRENT ECONOMIC PROBLEMS While still further down the line we have the supply of semi-necessaries — automobiles, watches, etc.; and, finally, at the end of the series, comes the supply of pure luxuries, such as jewelry and silks. THE GRADATIONS IN REGULATION AND CONTROL With a range of activities as wide as that just indicated, it is obvious that no single method of administration can properly apply. A de- tailed discussion of all of the gradations that may be developed between complete govern- ment o^vnership and operation, through vari- ous forms of modified and regulated corporate control, to unrestricted private ownership, is, however, beyond the scope of this volume. Cer- tain definite suggestions may, nevertheless, be made as to the conditions that must be observed if a successful development of our national machinery is to take place. Of these the most important relate to the constructive purposes that may be served by private capital and the individual investor, even in a national organi- zation that aims at a very large development of collective effort. First of all, as to the great public utilities, the question of interest and dividend charges, and of the savings that might be made in this respect under complete pubhc ownership, is of very minor consequence — general public belief to the contrary notwithstanding. ORGANIZATION— SOCIAL, INDUSTRIAL 51 If the Government should buy the railroads for any fair sum that could conceivably be paid, and should issue its own bonds for the pur- chase price, the maximum annual saving that could be effected, as compared with the present interest and dividend payments of all the roads, would be less than 2% of the present charges for freight and passenger service. Further- more, nothing in past experience gives any as- surance that this small saving would not be much more than offset by the wastes that seem to be inseparable from governmental operation of complicated enterprises. In the case of many of the public utiUties, the existing capitalizations are so much below the real present values of the physical property that similar purchases by the Government would probably necessitate actual increases in rates due to added capital charges alone, mth- out regard to further increases that might be made necessary through decreased efficiency of operation. Programs for the development of collective effort, whether moderate or radical, put public utilities first in order of consideration; and the special significance of the preceding figures is the indication they afford that, whatever this consideration may be, the question of capital ownership is, in itself, of minor importance, and the controlling point of view must he that 52 CURRENT ECONOMIC PROBLEMS of efficiency of operation and adequacy of ser- vice. Similar conditions exist to a very large ex- tent in connection wdth all of the agencies of production and distribution to which it has been proposed to apply a program of collective control. Out of the 32% of all family incomes that is derived from land and capital, probably one-half is derived from rural and residential property, leaving only 16% to be derived from those investments in public utilities, trade and industry that are most frequently the objects of socialistic concern.* WHERE THE REAL GAINS MAY BE MADE This comparative unimportance of capital charges in the fields ordinarily proposed for the initial applications of collective control is not generally recognized. OfiQcial statistics are frequently quoted for groups of manufacturing *Our socialistic critic objects here to the assumption that the only saving possible under socialization is the difference between the interest and other charges on corporation securi- ties and the corresponding charges on government bonds. He writes : "Socialists agree with the upholders of the present in- dustrial system in their emphasis on the need of capital in the form of machinery, etc., and realize that under a system where capital is privately owned the individual capitalist will demand and secure a part of the social product. They are, furthermore, willing to admit that if the alternative is, on the one hand, the use of capital and the payment to the in- dividual for that use, and, on the other, the non-use of capital, the former procedure, leading as it does to greater productivity. ORGANIZATION— SOCIAL, INDUSTRIAL 53 establishments which show wage payments amounting to only a third, or sometimes only a fifth, of the total value of the product. The usual assumption is that the entire difference between wages and the value of the product represents profits, and that wages could be doubled or trebled if profits were eliminated. is the preferable- Their contention is, however, that the own- ership of capital goods should gradually be transferred to the community; that social investment should gradually take the place of individual investment, at least in the development of large scale production; and that the income which now goes to individuals in the form of rent, interest and profit should accrue to the advantage of society-at-large and be used in in- creasing the return to the nation's producers, in improving the economic structure and in enriching the intellectual and aesthetic life of the people. ' ' Income from the ownership of property will thus gradually be eliminated and the primary source of income for all groups in the community with the exception of the child, the old, the sick, etc., will be that derived from intellectual or manual ser- vice. The socialists believe that society as a whole, with hun- dreds of statisticians at its command, with a comprehensive knowledge of the needs of the community and with the ability to coordinate industrial effort, can perform the function of saving and investing now performed by the individual capital- ist more economically and wisely than at present. Social ownership and investment would also eliminate the necessity of supporting certain groups in idleness. ' ' In opposition to this view, there is a growing feeling, among many who have studied the problem of raising new capital for business enterprises, that such capital can be raised in any required amounts by providing means whereby the average worker may safely and conveniently invest in securities rep- resenting the country's major industries. The possibilities in such distribution of ownership appear to be almost unlimited, and there is a very real question whether this type of public ownership may not combine most of the advantages claimed for the socialistic plan, with the added advantage of develop- ing the traits of thrift and foresight in the individual. 54 CURRENT ECONOMIC PROBLEMS Yet the real facts are that the difference in question represents mainly payments for raw materials, coal, power, rent, taxes, etc., and that profits (including interest on borrowed money) are usually somewhat less than one- third of payrolls. If this ratio of capital return to wages in industry were steadily rising there might be cause for concern. But the reverse appears to be the case. The total product of industry tends to rise steadily year by year at a rate more rapid than that of the increase in popula- tion. The shares of labor and capital in this product are both increasing; but the relative gain on the part of labor appears, in the long run, to be somewhat more rapid than that of capital. Much of this gradual gain appears to be due directly to the more efiScient use of capi- tal and to the lower rates of return necessary for successful financing in those industries that have been consolidated and reorganized along lines of maximum efficiency of operation. So far, then, as the question of capital charges in production and distribution is con- cerned, the average man may reasonably hope for a gradual but steady improvement in his condition as the result of the natural trend to- ward greater stability of investment and the more efficient use of capital as the essential industries become more efficiently organized. ORGANIZATION— SOCIAL, INDUSTRIAL 65 However, a much greater possibility for gain exists in connection with the opportunity for reducing the multiplicity of styles and designs of consumable goods that are advertised and sold. Even in normal times, as any ordinary arti- cle moves from the factory, through the jobber and retailer to the ultimate consumer, the fac- tory price about doubles. This doubling is not due, however, as is commonly believed, to high profits on the capital used in the process of dis- tribution. About three-quarters of the addi- tions to factory prices represent actual salaries and wages paid to employees of railways, trucking concerns, wholesale establishments, retail establishments, etc., and only one-fourth of the additions, in the average case, repre- sents profits and interest on capital used. The greater portion of the increase in prices from the factory to the consumer is due to the large stocks that must be carried, to the time re- quired by the salesman to induce the customer to make his choice, and to the losses that result from changes in styles and patterns. Further very large savings could be made in the factory itself, if this multitude of styles and designs could be simplified to some reason- able extent. As to many classes of commodi- ties, these savings have been estimated at fully 331-3%. 56 CURRENT ECONOMIC PROBLEMS Action along these lines offers, therefore, perhaps the greatest single opportunity for an increase in the comforts and real wages of the average man; but it is very doubtful whether the beginnings can be made by legislation or regulation. If there is popular desire to effect these savings, the public will first have to edu- cate itself to the value of simplification, and as the next step there must come a certain amount of voluntary effort through coopera- tive and consumers' associations. Only when these preliminary steps have been taken, and when there is definite evidence of a general de- sire on the part of the public to avoid extremes of style and design and to use simplified articles, will it be practicable, if at all, to supplement this voluntary action by legislation. THE FINAL PROBLEM Back of developments similar to those that have just been discussed, lies the primary problem of conserving and utilizing, in our na- tional organization, every source of energy, of growth, and of progress that human traits can supply. This organization, in its various parts, must take many forms. But whatever these forms may be, we can combine with them all necessary guarantees for human wel- fare and for equity in the distribution of the product. ORGANIZATION— SOCIAL, INDUSTRIAL 57 Energy in production, furthermore, does not mean the over-driving of men or tools. It means skilled and stable management, fore- sighted planning, new inventions, and new methods, together with a smooth balance and lubrication of the whole industrial machine. And if this energy should be lost, there would be small comfort for the worker in any plan that increased his relative share in the total output, but so reduced the amount of that out- put that his final reward was less than before. Efficiency of administrative organization can, however, only be secured in corporate form. To quote the author of the so-called *' Plumb plan" — *' There has never yet been devised a political government that could suc- cessfully administer an industry." Yet in the development of these special corporate forms, as in all other human affairs, it mil be neces- sary to avoid extremes; and no greater mis- take could be made than to eliminate, or even too greatly to restrict, the influence of the investor. It has been well said that, of all the elements contributing to industrial activity, there is none greater or more valuable and construc- tive than the element of foresight — and no method of securing this element of foresight has ever been devised except that of permitting some individual to put hard-earned dollars into a business that he must thereafter nurse and develop and watch. 68 CURRENT ECONOMIC PROBLEMS Workers come and go, executives change, consumers shift from market to market, what is everybody's business is nobody's business — but back of every honestly earned dollar in- vested in legitimate business there is, per- manently and for all time, some man to whom that dollar represents hard work, self-denial and provision for his family and his old age. Society cannot afford to eliminate, from the management of its great affairs, the qualities that these things represent. It would be as wise to tie all workers' hands, because some hands do violence, as it would be to deny to our industrial organization the services of the live dollar and the progressive investor because some dollars are not well or wisely used. Here lies the great fallacy in the extreme plans for social change that are now proposed, and just as it may be only fair to credit the present Russian Government vdth altruistic motives, so also would it be fair to inscribe on thousands of newly erected Russian tombstones the words — ''Died of an overdose of theories and a shortage of bread." CHAPTER III PRODUCTION AND DISTRIBUTION THE GOING MACHINE THE preceding chapters of this volume have described the development of our present social and industrial organization from its crude beginnings, and have indicated the forms that this organization may assume, if we move forward along sane lines and avoid the pitfalls that lie at both extremes of eco- nomic and political theory. But our primary interest is not in the bare, cold structure of the economic system. Our much more real concern is with the movements and activities of the whole producing and dis- tributing mechanism that, in the end, through its efficiency or inefficiency of operation, must largely determine our individual fortunes and the comfort, or lack of comfort, with which we live. We may be mildly interested in knowing what the 1950 model of industrial machine is to be, but it is of downright serious im- portance to have a full gas tank and oil reservoir and all cylinders firing on this year's model. Furthermore, to continue the parallel, we are not half so much concerned with 69 60 CURRENT ECONOMIC PROBLEMS whether the machine \sill make 60 miles an hour on a level stretch, as we are with its ability to keep going uphill and doA\ailiill at an ordinary road speed and to come home at night under its 0A\Ti power. On the whole, the present economic machine does reasonably well when it is operating with full energy, but its variations in speed — its periodical partial breakdo^\^ls — are of so vital consequence that they constitute the most seri- ous of immediate problems. It \vill not do, however, to condemn the whole machine because of a dirty spark plug or a choked gasoline feed, or to hammer blindly at the mechanism in the hope that a chance blow or turn of the wrench will remedy the difficulty. If we do not know how the present machine operates and how to adjust it and keep it in good running order, there is small chance that we shall do better with another machine or a new model. Furthermore, we can foresee no practicable changes in our present economic organization that can seriously alter the general principles of its operation. There ^vi\\ always be buying and selling. Some men will always work for wages, while others will take risks and build up new enterprises. Money, in some form, will always be used as a common measure of values ; and, in some form, there will always be borrow- ings and lendings, the payment of interest and PRODUCTION AND DISTRIBUTION 61 rents, and the expansion and contraction of banking credits. With this fundamental per- manency in mechanism assured, how, then, does the present industrial system operate and what are the necessary adjustments that should be made I THE FLOW OF INCOME AND EXPENDITURE In attempting to picture the round flow of production, distribution, and consumption, it is helpful to separate the various conditions that may exist and the operations that may take place. The most tangible thing with which we can deal in the economic flow is the fact that, dur- ing times of settled business, the sum of all individual incomes is always substantially equal to the sum of all individual expenditures. Expenditures may take many forms. They may cover necessary living costs, or proper luxuries, or wasteful extravagance. They may involve the accumulation of property in build- ings, or in the stocks and bonds which repre- sent the ownership of business and industrial enterprises. Or they may take the form of bank deposits or loans to individuals, in which case the expenditure is indirect rather than direct. But whether saved or wasted, or spent for necessary living costs, practically every dollar of income received goes very promptly back again into circulation and in turn very 62 CURRENT ECONOMIC PROBLEMS promptly becomes once more the income of some individual. This circulation of money is the blood flow of the economic organization, and the driving power of this organization — its heart energy — is the desire of each man to make a place for himself in the world and to build up comfort for himself and his dependents. The way in which the round flow of money income and money expenditure takes place is illustrated by the diagram on the following page. The various pipes in this diagram are drawn only in approximate proportion to the actual money flow, and many details are neces- sarily omitted. Nevertheless, the picture, as a whole, gives a correct general idea of the trans- actions that take place. At the top of the diagram the total of all individual incomes flows in through pipes representing the three primary factors in all productive operations. Personal service, which includes salaries and wages, with an allowance for the equivalent wages of farm- ers, small storekeepers and others Avho work for themselves, contributes 68% of the total flow. Return on capital, which includes in- terest and dividends and an allowance for money invested in farm machinery, small shops, etc., accounts for 24% of the total. The balance of 8% represents the rent of urban and rural land and other natural resources. THE ROUND FLOW OF MONEY INCOME AMD EXPENDITURE "V Income Trom Capital -Interest Dividends and Profits, 241 Income frcm Incomn from Personal Service. 68t >B-RETaPL ANil WrlOLfeSALt -r - c;- DISTRIBUTION. INCLUDING .- TRANSPORTATION AND BANKING 63 64 CURRENT ECONOMIC PROBLEMS The outflow is roughly divided according to the items of the average family budget. A small part becomes individual income imme- diately through payments made for the per- sonal services of servants, tradesmen, etc. But the greater part must pass through one or many intermediate stages before it again be- comes income of individuals. Hardly a purchase or expenditure of any kind can be made that does not, in the end, in- volve practically the whole of the producing and distributing organization. A ten dollar bill paid for a pair of shoes means, first of all, a payment tow^ard the salaries of shoe sales- men. It means a small paj^ment for paper and twine. It covers a fraction of the shoe dealer's expense for railroad freights, telephone calls, electric light, and advertising. It covers in- terest and rent, as well as recompense to the shoe dealer for the services of himself and his invested capital. When these retail charges have been met, about two-thirds of the original ten dollars is passed along to the wholesaler and manufac- turer ; and here a still more complicated distri- bution takes place. Through tanners and pack- ing houses, a portion of the payment goes to the western cattle country. Cotton mills re- ceive payment for the lining. A portion of the original charge goes to Japan for silk thread PRODUCTION AND DISTRIBUTION 65 and to Ireland or Belgium for flax. Copper and zinc miners receive their small fractions for the eyelets and fasteners. And, in the end, a score of countries, a thousand industries, and hundreds of thousands of human beings have made their contributions to the finished pair of shoes and have received their small fractions of the price paid. The splitting up of the money flow into a myriad of channels does not, however, alter the essential simplicity of the operations. Sooner or later, after few or many steps, each cent and each fraction of a cent must appear again as some person's individual income. Even the processes of international trade do not disturb this round flow. The sums paid to Japanese silk growers for silk are balanced, in the long run, by reverse payments for American cotton, etc., so that, when all factors have been con- sidered, the cj^cle may be conceived to begin and end in a single country. MAKING A JOB FOR THE NEW WORKER A very important point in connection with the round flow of income and expenditure is the fact that each man, through his expendi- tures, creates personal income for others exactly equal to the amount of his own. It is this peculiarity of the economic flow which ex- 66 CURRENT ECONOMIC PROBLEMS plains the way in which new workers, whether native born or immigrants, are absorbed into industry. Each day in the United States there is a net gain of over 2,000 new workers — most of them native born young men and women newly grown to working age. No matter how settled the business of the country may be, there are always slight variations in demand. Some in- dustries and occupations show a slight short- age of workers, while others have a slight sur- plus. The occupations that are sUghtly over- supplied are usually slow to lay off trained workers, but those that are under-supplied are quick to hire the newcomers in the working field. The result is that the newcomers are hired. They at once begin to spend their earn- ings and thus increase the demand upon the occupations that were previously over-manned — and so the balance is restored, and full em- ployment is maintained, not only for the new- comers, but also for those who previously were in danger of being laid off. An exactly similar operation takes place when the workers available are not newcomers, but are those released from pre^dous employ- ment by the introduction of automatic ma- chinery or other improvements in processes and methods. If the number of workers so re- leased at any one time or in any one locality is not too great, they are absorbed into other PRODUCTION AND DISTRIBUTION G7 employments in the same manner as an equal number of new workers, but with the added advantage to all workers and consumers that the prices of the commodities which they pre- viously were engaged in producing may, and in time quite certainly will, be reduced as the re- sult of the economies effected. With normal business activity and with nat- ural resources ample for a growing popula- tion, these processes may continue indefinitely. In theory, each employer, as he takes on new workers, slightly increases his borromngs and thereby increases the volume of money in cir- culation in proportion to the increase in his payrolls. This may not be true in practice, for individual cases, but it is true in the aggregate ; and with a fixed level of prices the volume of bank deposits and bank loans should increase steadily from year to year in close proportion to the increase in payrolls and in the total of individual incomes. THE GROWTH OF INDUSTRIAL MACHINERY With this steady growth in business and in- dustrial activity there must be, for continued progress, an even more rapid growth in the machinery of industry. The skilled worker's wage, in this country, will buy today over three times as much wheat 68 CURRENT ECONOMIC PROBLEMS flour as it would in the year 1855. Yet he is hardly more capable and works shorter hours than his predecessor of two generations ago. The difference lies almost wholly in the me- chanical and scientific developments that have taken place — better railways, and greater rail- way mileage, telephones and telegraphs, im- proved agricultural machinery, and new indus- trial processes of a thousand kinds. Political parties may come and go. Theories of reform may wax and wane. But day by day, in thousands of laboratories, in the minds of thousands of inventors, in the workshops of thousands of mills and factories, these con- stant additions to human productivity go on. Careful studies have shown that in the United States the annual production of useful goods increases with remarkable steadiness at a rate between 3 and 4% per annum — while the population increases at the rate of only 2%. High interest rates, shortened working hours, and the losses in productive efficiency that have come as the aftermath of the war, may for a time check this progress, and may retard the normal steady increase in real wages, as measured by purchasing power. Increased governmental expenditures mil also have their influence. In spite of all theories and devices to the contrary, the bulk of the burden of taxation falls in the end upon con- PRODUCTION AND DISTRIBUTION 69 sumption, and shows up finally in higher prices, higher rents, and higher cost of living. Dur- ing periods of growing taxation increases in real wages may not, therefore, be revealed by the usual indices of purchasing power. These may stand still or decline, while the added na- tional productivity is absorbed in improved highways, education, and sanitation, in en- larged national armaments and military ex- penditures, and in many other forms of pro- ductive and unproductive governmental ac- tivity. Unrecognized changes in the character of goods and services are a further factor tending to obscure the normal increase in real wages. The quart of milk which is Pasteurized and de- livered in a sanitary glass jar is not the same article as the quart of milk, plus assorted bac- teria, that used to be ladled from the farmer's milk can. The yeast cake ordered by telephone and delivered by automobile is a different yeast cake from that which used to come home in the housewife's market basket. Housing laws have made five rooms in a modern tenement a dif- ferent thing from five rooms in the old-style rookery. Yet, in spite of all these influences tending to hold back both actual and apparent increases in real wages, the normal annual gain in pro- ductive efiiciency is so great that it must re- 70 CURRENT ECONOMIC PROBLEMS assert itself sooner or later in tangible im- provements in standards of living. Closely related to this steady gain in human comfort lies the often debated, but fundamen- tally sound, theory that labor, under conditions of free competition, is the ** residuary legatee" and, as such, receives, in the end, all the gains from new machinery except a living wage for the new capital invested. The basis for this theory is simple. Each manufacturer in a competitive field who puts in a new machine, or introduces a new process, does so because he expects to make a saving greater than the interest charges on his added investment. He hopes to retain, and for a time may retain, the entire excess as his own added profit. But, in the end, his competitors will imitate him, and, when this imitation takes place, prices will be reduced to a point where the new investment earns only a normal rate of return and the balance of the gain is passed along to the consuming public* The most vital interest of the ordinary worker, and of every consumer, lies in main- taining this steady building up of productive •This theory is often attacked l)y the laV)or unionist and socialist on the ground that a large portion of the gain from new processes and machinery is absorbed in monopoly profits. In such cases it is claimed that "labor" gets the "living wage" — or less — and that capital is the "residuary legatee." Tt would be very dilTicult to determine .just Avhat propor- tion of the total national income is absorbed in monopoly profits — but it is hardly probable that more than one-third of PRODUCTION AND DISTRIBUTION 71 macliinery. It happens that this development has taken place in the past without increasing the relative share of capital in the output. But it is of comparatively little importance what these relative shares may be, provided only the purchasing power of the worker's wages steadily increases. Two things, in particular, are necessary for a steady increase in productive industrial equipment. There must be general confidence that investments once made will be protected and will be allowed a ' ' living wage, ' ' and there must be a continuous large volume of savings available for investment. With these require- ments met, interest rates will be low, the addi- tions to industrial equipment will be large, and the increases in productivity and in real wages will be rapid. Before the war, the greater part of large in- dividual incomes and of the surplus earnings the output of the highly organized industries is sold at a monop- oly profit, or that such profits represent an average addition of more than one-half to normal competitive profits. On this basis monopoly profits in the highly organized industries of the United States at the outside might amount to one-seventh of the total profits in such industries, or to about 2% of the national income, as compared with the 68 to 70% of the national income which is paid to labor. Unless these figures are very greatly in error, or the percentage of monopoly profit is very rapidly increasing, it would appear that the theory of labor as the residuary legatee is substantially sound for con- ditions as they now exist in the United States. 72 CURRENT ECONOMIC PROBLEMS of business enterprises was regularly rein- vested in productive machinery and equip- ment. Such harm as there may have been in large individual and corporate incomes lay not in the incomes themselves, and certainly not in their reinvestment. It lay only in occasional conspicuous examples of monopoly prices and wasteful living, and in occasional abuses of the power which large incomes and large fortunes created. Today, mth heavy personal taxes amomit- ing to 60% of the larger incomes, and with other taxes absorbing a large portion of the surplus earnings of business enterprises, the normal flow of investment money is diverted from industry and passes into the hands of governmental agencies. From such agencies, a part may be returned to investors through payments of interest and repayments of prin- cipal on government bonds, but a much greater part ceases to be available for investment pur- poses. The result has been to increase greatly the cost of raising new money for industry and business, and to raise interest rates, in the judgment of the best observers, to a semi- permanent plane from 1 to 2% above the pre- war level. This not only transfers back to the ultimate consumer in higher prices much of the tax originally imposed upon individual and corporate incomes, but has the further great PRODUCTION AND DISTRIBUTION 73 disadvantage that it tends seriously to throttle normal industrial development.* Industrial progress and the welfare of every individual demand that at least 10% of our na- tional effort shall be expended each year in new buildings — residences, offices and factories — in added public utility facilities, in added stocks of goods, and in added factory equip- ment. This need is a primary one, and no theory of government, of industrial organiza- tion, or of taxation is, or can be, sound that does not provide this continuous flow of new investment or that increases seriously the cost of maintaining it. If certain limbs in the form of large incomes are to be lopped off or pruned from our eco- nomic tree, it is quite essential to be sure that we are not sitting on these limbs before we be- gin to wield the saw. THE BUSINESS CYCLE In the preceding pages, the discussion has been confined to the normal flow of income and *Our socialistic critic says: "If the money thus collected in taxes were used primarily in the building of needed public works, in the development of industries of a public character, and of the educational and artistic resources of the country, instead of for military purposes, as is largely the case at pres- ent, such taxation would be a boon, not a hindrance to the in- dustrial and social welfare of the people. If investment in harmful and comparatively useless commodities was eliminated, the present volume of investment would suffice to produce vastly more necessities and comforts for the people than at present. ' ' 74 CURRENT ECONOMIC PROBLEMS expenditure and to the underlying steady in- crease in productive efficiency which is the most hopeful feature of our economic system. It is, however, a rare thing for business ac- tivity to continue at any given level, or at any steady rate of increase, for a long period. The volume of business and of production grows from year to year, not steadily, but in a series of spurts, each of which is followed by a check or decline. These alternations of activity and depression constitute what is known as the business cycle. In its details each business cycle probably will always differ from every other. Yet in certain elements practically all cycles are alike. If we begin with a period of depression, we find merchants reducing stocks, bank loans be- ing contracted, the weaker and less efficient business enterprises forced to the wall, prices dropping, and much labor unemployed. Con- struction activity and new business ventures are also at a low ebb. It is theoretically pos- sible for business to continue at this low level indefinitely. Low incomes result in low ex- penditures, and low expenditures in turn make low incomes. But, in practice, there are several things which always operate to bring about a business revival. A certain considerable amount of money is always being saved by thrifty per- PRODUCTION AND DISTRIBUTION 75 sons, even during the worst of a business de- pression, and these savings create a growing pressure for an outlet in new enterprises and business expansion. Much construction work that has been checked by high prices during the preceding boom is always awaiting a favorable moment — a moment of low prices for material, low labor costs, and low interest rates — for a fresh start. Business men, generally, are al- ways estimating price trends and will place orders for larger supplies of goods and for longer periods the moment they feel that the liquidation is complete and that prices are due to increase rather than to make further de- clines. Sooner or later, therefore, the vicious circle of low income and low expenditure is broken. Bank balances are drawn upon, new loans are made, and each day's expenditure is greater than the income of the day before. This process is cumulative. Merchants, who have delayed their purchases until they find prices on the up grade, buy liberally at these higher prices to avoid paying still more. The construction work begun by a few far sighted investors is supplemented by perhaps an even larger volume of construction — the building of new telephone lines, the buying of new railroad cars, and the extension of in- dustrial plants — arising directly out of the in- creased business activitv itself. 76 CURRENT ECONOMIC PROBLEMS All of these operations involve a greater or lesser recourse to the banks for loans. Bank reserves begin to be inadequate, and interest rates rise. By this time, prices have also risen very con- siderably; labor has become scarce and high priced, and labor unrest develops ; the efficiency of the individual worker falls; the cost of new construction work becomes prohibitive for pur- poses of long term investments ; business profits decline; losses increase; and a general feehng arises that the boom has been overdone and that a reaction is at hand. This stage in the business cycle is usually marked by a break in the stock market, which is intensified by the specially high interest rates demanded on loans for speculative purposes. However, the existence of large amounts of uncompleted construction work and of heavy unfilled orders at factories maintains business activity for several months after the slump in the stock market. Construction work then begins to fall off rapidly. Retail mer- chants, seeing poor business ahead, reduce stocks and place few new orders. This action falls with cumulative effect on jobbers and manufacturers. Prices fall rapidly, and fail- ures and unemployment increase. Finally when this rapid downward trend has continued for perhaps six months, banking PRODUCTION AND DISTRIBUTION 77 conditions gradually improve, interest rates de- cline, the feeling arises once more that a favor- able time is at hand for new construction work to be undertaken and for long term contracts for goods and supplies to be made ; and the cycle is again repeated. This whole sequence is pic- tured graphically in the chart on the next page. CREDIT EXPANSION" AND CONTRACTION Closely tied into the business cycle is the question of increases and decreases in bank credits. In the days before modern banking facilities had been devised, a period of business depres- sion was also a period when actual coin was hoarded up; while, in the reverse direction, a period of business expansion was one when hoarded money was withdrawn from its hiding places and put into circulation through loans to or investments in new business ventures. Today actual coin plays a minor part in business transactions. About 85% of all pay- ments are made by checks or bank drafts and only 15% are made in bank notes or other forms of currency. The real money of present days consists, therefore, mainly of demand deposits in banks. These deposits, in turn, represent only in small part coin or currency paid into the banks by depositors. They represent, in the main, bank checks and drafts u t i! u z D Q I o 0) U o s u z 1- s 1 c 1 a t. Credit strain is reduced. 2. The volume of business low. buying for immediate roquirements only, wages hill, efficioncy increases. 3. Prices and coal of domg busine^is daciino. 4. Coit of construction declines. 5. Merchandise slocks reduced. shortage of both produc*rs" and consumers' goods gradually accumulates. 6. Credit entanglements straighleiwd out, interest rates continue to decline Normal \ z o in V) I >^ # 0- # bl / ° i 1 1 1. Profits decline. 2. Goods (orred on market nt reduced prices, buying restricted, volume of business decreab«s. 3. Retrenchment becomes general, unemploiy- ment grows. 4. Liquidation spreads and cumulates. 5. Prices derllne more rapidly 6. Credit suain busmess docreases. ■^^.7. Failures tncrease. ^^^ crJws or panic follows. ^ o o i d .S a ■s 1 E s J £ 1 1 1. Labor fully employed at high wages. 2. Efficienry of tabor and marugement decreases.. 3. Cost of doing business increases. 4. Selling prices increase^ but not eriough to maintain profit margins. 5. Stocks of goods become Itirse and markets are overbought. 6. Inve9«ment nmstruction falls off. 7. Tension in the money market 8. Creditors begin to press for payment U a. s K a. 1 1 3 • 1 M \ iiJi il ill \ Ui 1 II liui :silf l3!§3a,|i 1 1 11 ; ^ 1 1 ? 1 i i i s i — r^ M «T ui (« g 1 V 78 PRODUCTION AND DISTRIBUTION 79 which have been turned in by depositors for collection. It is this characteristic of bank deposits which explains the manner in which deposits and bank loans rise and fall in substantially equal amounts. A bank loan is almost inva- riably deposited to the borrower's account at the bank where the loan is made. This deposit is then withdrawn through checks which are mailed to creditors of the original borrower. These creditors in turn promptly deposit the checks to their own accounts, so that any loan made at a bank will ordinarily show up very promptly in bank statements as an equivalent increase in demand deposits. In the reverse direction, reductions in outstanding loans are almost invariably made by means of checks dra"svn against demand deposits, which there- fore show a decrease corresponding very ex- actly to the decrease in outstanding loans. THE QUANTITY THEORY OF MONEY As a result of these relations, the volume of money in circulation (counting both checks and currency as money) is very closely dependent on the volume of outstanding bank loans, and an increase in such loans has an effect equiva- lent to an equal increase in the issues of bank notes. 80 CURRENT ECONOMIC PROBLEMS The quantity theory of money is frequently EQisinterpreted. When reduced to its simplest terms, it amounts to nothing more than a state- ment of the obvious fact that the sum of all payments made in checks and currency is equal to the prices of the goods and services pur- chased, multiplied by the corresponding quanti- ties. The debatable point in the theory is as to whether increases in prices cause increases in the volume of money and checks in circula- tion, or vice versa. The answer seems to be that either tiling may happen. A sudden war demand for commodities may raise prices and thus compel an increase in bank loans and cur- rency, or, in the reverse direction, an increase in credit facilities at a more rapid rate than the increase in commodity production, may cause prices to rise until a balance is reestab- lished. In general, it is a fact, proven by experience, that any credit facilities that are available will in time be employed, so that over long periods it appears to be true that price levels are close- ly determined by the ratio of legally permissible bank credits, and, therefore, of possible checks and money in circulation, to the total output of goods and services. In the ordinary business cycle the relations of bank credits and of money circulation to business activity and the general price and wage levels are comparatively simple. When PRODUCTION AND DISTRIBUTION 81 a period of business expansion begins, the first signs of increasing activity are increases in purchases by retailers and jobbers, increases in bank loans, and increases in money circula- tion as sho^vn by the rise in ''bank clearings" and "debits to individual accounts." During the early stage in the boom, prices rise only moderately. Much labor is still unemployed and the first industrial movement is to put this labor back at work. The labor turnover is low and productive efficiency is high. The output of goods, therefore, increases practically in proportion to the increase in money circulation. This process continues until, finally, there is full employment for labor ^^'ith prices at a normal point, and with manufacturing and commercial profits on a high plane, owing to the fact that a full volume of business is being done on an efficient basis. If the business cycle could be held at this point, much would be gained. Competition should, and vdth. reasonable public regulation quite surely would, hold prices and business profits at a reasonable point. Prices, in fact, should decline somewhat as the result of the efficiencies resulting from a steady output at a normal rate; while, at the same time, the working forces, except in occupations subject to seasonal variations, would have sub- stantially continuous employment at wage rates 82 CURRENT ECONOMIC PROBLEMS which should steadily rise in purchasing power at the rate of perhaps 1% per annum. Unfortunately, however, the expansion of business does not stop at this point. Com- mitments for supplies of goods and new con- struction are made by thousands of business men, each largely ignorant of what the others are doing. These commitments involve new bank loans, mth corresponding increases in the volume of money in circulation. Employ- ment and production are already at the max- imum, mth the result that the demand for goods and labor soon exceeds the possible supply. At this point, then, there is an attempt by purchasers to buy with, say, $1,100, in checks and currency, a total supply of goods that can- not exceed $1,000 in amount at the old values. The immediate result is that prices begin to **sky rocket," and this is perhaps the first sign of the approaching business depression. The demand for workers exceeds the supply. Wage rates rise rapidly. Workers change from job to job, and efficiency is thereby greatly lowered. Strikes and labor unrest increase, and even the most conscientious of workers are affected in their output by the general disturbance of working conditions. It is here, as previously noted, that the busi- ness cycle turns and a period of depression sets in. PRODUCTION AND DISTRIBUTION 83 Manufacturers and contractors find that con- tracts, which originally promised substantial profits, threaten now, because of rising costs of labor and materials, to result in heavy losses. Business confidence is shaken, credits are closely scrutinized, the further expansion of bank loans is checked, and an active contrac- tion may take place. HOW MAY BUSINESS DEPRESSIONS BE PREVENTED? When a business depression has actually be- gun, there is little that can be done but to wait. The preceding period of credit inflation has es- tablished false and impossible price standards. Business cannot go forward again in normal fashion until those false standards are torn down and true values are reestablished. Every wage earner, every fanner, every merchant and manufacturer hopes some day to beat the law of supply and demand. In times of inflation they all become convinced that this law has finally been repealed, and that the glad time has come when each man may set his own price on his goods and his services, regardless of what the buyer may think or say. When the inevitable crisis comes, the awak- ening is a hard one. Each group claims that the other groups should deflate first. There is much futile argument back and forth. But, in the end, normal price and wage relations are 84 CURRENT ECONOMIC PROBLEMS once more established anc! business activity returns. As with typhoid fever, so with business de- pressions, the only real cure lies in prevention. But the prevention is not simple. The only workable remedy appears to lie in a control and restriction of banking credits, at the point where proper business activity begins to run mid into inflation. Whether this control should be exercised wholly through the interest rates charged, or should take other forms, is an un- settled question. Furthermore, it is obvious that action in one country alone cannot be wholly effective in view of the ease with which investment money moves from country to country in response to variations in interest rates. Yet, with all these difficulties in the way, the problem must be solved, for only when it has been solved will it be possible to secure that confidence in the foundations of our present economic structure which is neccessary before we can build it to greater usefulness. And this matter of confidence must go fur- ther than a mere belief in principles of gov- ernment. It must be built into the structure of every business and personal relationship. It must primarily be between man and man. It would be small wonder if such confidence were lacking today in a world that has rapidly alternated between military discipline and com- PRODUCTION AND DISTRIBUTION 86 munism, and between war wages and no jobs at all. But only when this man-to-man con- fidence is restored can we have a clear recog- nition of the fundamental facts which underlie all our problems of production and distribu- tion. 1. That all material welfare depends upon high productivity. 2. That our present industrial system in the United States is the most efficient that the world has ever known. 3. That a ten-year normal increase in per capita production under our present system represents a greater gain for the worker than any that is possible as the result of any conceivable redistribution of profits. 4. That this normal increase in produc- tion can only go forward with ample invest- ments in new productive equipment and with the assurance of a living wage for such in- vestments. CHAPTER IV SOME PERTINENT STATISTICS STATISTICS VERSUS "tHE STATISTIC" MERE bulk statistics on any subject have, to the ordinary man, all the cheeriness and practical value of a night fog on the North Sea. What he is looking for is the statistic — a statistical lighthouse by which he may steer a course and reach an anchorage. When, therefore, we seek to summarize the statistical evidence that lies back of the points of idew previously presented in this volume, it will not do to submit long tables of figures or lengthy references to the census reports. The first necessity is to state clearly the prob- lems involved, and the second is to associate with each problem the statistic which is most pertinent. In some instances it will be found that there are no pertinent statistics; in others we may find an acceptable substitute for statistical evidence in simple lines of reasoning from com- mon human experience; but in every case, if we are seeking to base our conclusions upon facts and dependable logic, rather than upon 86 SOME PERTINENT STATISTICS 87 opinion and prejudice, the least that we can do is to set up our problems in logical order side by side with the facts and lines of reason- ing that apply. Much, however, will depend upon the way in which we state the questions to which we wish statistical answers. The simpler and more defi- nite each question can be made, the greater is the possibility of finding a simple and con- vincing answer and the less is the chance of be- ing lost in a fog of figures and arguments. THE QUESTIONS TO BE ANSWERED From a practical standpoint we are not directly concerned with whether we should have a socialistic or an individualistic government, or a compromise between the two. Mere names are of little account. Governments, and indus- trial and social organizations, based upon hereditary rights and privileges, obviously be- long to a primitive stage in human history, and are not to be considered for the future. But be- yond this we are only confusing the issue w^hen we talk in terms of republics and democracies, or of individualism, socialism, and communism. Men are what they are because of long cen- turies of evolution and human experience. They have certain instinctive desires, habits, and points of view, which can change only slowly from generation to generation. Our 88 CURRENT ECONOMIC PROBLEMS future problem is not that of setting up a theoretically perfect economic plan, and of say- ing that men shall then adapt themselves to it. It is very certainly the opposite — that of study- ing the habits and instincts of human beings as they are, and of developing forms of political, social, and industrial organization which will operate most effectively in relation to such habits and instincts. If we wish to risk a generalization w^e may put it in paradoxical form by sajdng that our economic system, under any sound develop- ment, will become more socialistic in the sense that we shall cooperate more effectively and recognize the public interest more fully with respect to many of our affairs, while at the same time we shall become increasingly in- dividualistic in the sense that we shall more rigidly restrict our basic governmental ma- chinery to the primary functions of govern- ment.* Whatever these developments may be, we do not need the recent failure of the great *One of the most serious dangers from the writer 's stand- point is that the pressure for necessary and proper develop- ments of governmental activity may lead to mistakes that may be difficult, if not impossible, to remedy. Not only may direct governmental authority be extended over undertakings which should be subject, at the most, to a reasonable regulation, but the tendency may be to impose the burdens of manage- ment, even as to proper undertakings, upon existing political machinCTy which, from its very nature, is incapable of ad- ministering affairs requiring systematic planning and continuity SOME PERTINENT STATISTICS 89 economic experiment in Russia to tell us that our future economic development must come gradually, step by step, out of the system we now have. On this basis, then, we may ask a series of questions to test the strength and the weakness of our present economic organi- zation and to indicate in some measure the possibilities of improvement: 1. What is the trend of per capita physical production ? of policy. A further great danger is that, under the forms of governmental operation now in vogue, there may grow up great bodies of public employees who may be tempted, if not compelled, to bring concerted and, in the end, very harmful political pressure upon public officers and legislative bodies. Our socialistic critic, while sharing some of the writer's fears as to political and bureaucratic management, still hopes for a rapid increase in socialized control and advocates the development of special forms of administrative organization as successors to those forms set up by "developed capitalism." After referring to the extent to which railroads and other public utilities, banking, forests, etc., have already come under state control, he quotes from "State and Municipal Enter- prise, ' ' as follows : " 'Even if no more were accomplished within the next thirty years than in bringing under the public administration in all countries of the civilized world, those industries and services which are today governmentally administered in one or other of the countries, ' declares the Fabian Bureau, ' the aggregate volume of state and municipal capital and employment would be increased five or six fold. ' Such an increase, without adding a single fresh industry or service to those already successfully nationalized or municipalized in one country or another, would probably bring into the direct employment of the national or local government an actual majority of the adult population; and along with the parallel expansion of the cooperative or voluntary association of consumers in their own sphere, would mean that probably three-fourths of all the world's industrial capital would be under eoUectiTist or non-capitalist adminis- tration. ' ' 90 CURRENT ECONOMIC PROBLEMS 2. What is the trend of real wages? 3. How is the national income distributed among individuals, and is income tending to become more or less concentrated in a few hands? 4. How is the national income distributed to labor (personal service), capital, and the owners of natural resources? What is the trend of such distribution? 5. What are the practicable possibilities with respect to securing a more uniform distribu- tion of income among individuals? 6. What are the practicable possibilities with respect to increasing the share of *' labor" in the total product? 7. What is the e\ddence as to waste and de- fects in our present economic system, and as to possible improvements? THE INCREASE IN PHYSICAL PRODUCTION To the first of the preceding questions, the statistical answers are specially complete. In- dependent studies have been made by E. E. Day of Harvard, W. W. Stewart of Amherst, Carl Snyder of the Federal Reserve Bank of New York, and W. I. King, for varying periods from 1870 to date, all of which studies indicate an average annual increase of between 3% and SOME PERTINENT STATISTICS 91 4% in the volume of essential commodities pro- duced in the United States. These studies have recently been supplemented and corroborated by studies* of the National Bureau of Eco- nomic Research with respect to the purchasing power of the national income. The results of these various investigations are shown in graph- ical form, on the chart which follows, in com- parison with a line representing the increase in population. In each case the population or physical production in the year 1913 has been taken as 100 and the figures for other years have been plotted with relation to this base. Roughly speaking, it appears from these studies that the physical volume of production nearly trebled from 1880 to 1919, while popu- lation only a little more than doubled. On a per capita basis this corresponds to an increase in physical production of somewhat more than one-third during the years involved. The bulk of this increase came in the period from 1894 to 1919, during which time per capita pro- duction increased at a rate somewhat in excess of 1% per annum. *See pages 79 and 80, Income in the United States, National Bureau of Economic Eesearch, Inc., 474 West 24th Street, New York City, for the results of these studies and for detailed references to the other investigations mentioned. A recent re- vision of Mr. Snyder's index is, however, shown on the chart here presented. z o h- o z> Q O cr Q. < o CO > X Q. LJ CO < UJ o CO u CO ZD o a: X ooooooooooo 1 i 1 1 (i t III! d) 1 ^ i 1 j v- C \ in o \ CO CO Q i^ i t D "O -I j//i_^-:._^__. ^<^ ^^ ^V7 ^ ,\ UJ g c S - 3 >, ^^ ^ 1 ■■"•^ I ! / ^^ , 1 ' 1 .-^ 1 ji pK ' t/^\ i h ' ^ 1 ! ■ \\> 1 i 1 Y^J ! M' '■^s^'V ! 1 Y^"o^ i \\\\\ i ! 1 \\i^'\ i 1 A%:A! 1 1 1 -t-3 r . ^^\\ 1 i i V 1 M i 1 ; \ ^^ ^ [ 1_ \ ;;'V--4_ 7<\ W ■ 1 o. Q. \ \\ : \ r-%>4--- V ^A-S- ] \ 1 y '. i 1 A 'L-'iS 1 1 \ iVV'M ^ \ W i \. V \\ 1 \ \ 1 1 1 \ \ ! \ K \ \ ( ,J \\ y/ - 'fi 1 L LO_ \ ' ■ , \> 1 1 ' : 1 ! \!w ^ \l OOOOOOOOOO OSi COCVJ — O-C0li5'«*C0 92 SOME PERTINENT STATISTICS 93 THE INCREASE IN REAL WAGES With this steady and substantial increase in per capita physical production, it is to be ex- pected that real wages would increase, in spite of moderate changes that might take place in the distribution of the national income among individuals and among the factors in produc- tion — i. e., to labor (personal service), capital, and the owners of natural resources. Such increases, as indicated by the increase in per capita production, should be at the rate of approximately 1% per annum. This rate of increase is not great enough, however, to prevent the long term trend from being ob- scured from time to time by changes in price levels and by economic adjustments among occupations. These latter adjustments during one period of years may cause most of the general gain in productivity to accrue to far- mers and agricultural workers, or to relatively unskilled workers, while during other periods they may work in the reverse direction to the advantage of miners or factory workers or clerical employees, or specially skilled oc- cupations. For this reason, and because of the difficulty in establishing proper general in- dices of prices, wages, and cost of living, there arises the belief, ever so often, that the pur- chasing power of wages is steadily declining; and it is often possible, by selecting special cases for investigation, to collect figures which 94 CURRENT ECONOMIC PROBLEMS show that such a decline has taken place, tem- porarily at least, in some particular occupation or in some particular locality. Our major concern is, however, mth the long term trend of wages as a whole, and, as to this, there is, during the past 50 or 60 years, evidence of a reasonably continuous increase such as might be expected from the increase in per capita producti\dty. The first of the two charts which follow is based upon what are believed to be the best indices of hourly wages and prices* available from jort to year during the period indicated. It is necessary to note on this first chart that there is, in general, a tendency for real wages to increase slowly or even decline during the early stages of a business revival, and to rise at an abnormal rate during the later stages of the business cycle. This is due to the tendency for wage rates both to rise and to fall more slowly than prices, and is largely independent of the long term trend in real wages.f *Wholesale rather than retail prices are uaed owing to the difficulty in securing any satisfactory general indices of retail prices. Wholesale prices fluctuate more than retail prices, but over long periods their trend is substantially the same. tin estimating the long term trend of real wages it is neces- sary to disregard periods of rapid price changes, such as those from 1861 to 1879, from 1893 to 1900, and from 1916 to date. The true trend is much more definitely indicated by periods when prices are stable or are drifting steadily in one direction or the other. Figures for the year 1921, when available, may show a reversal of the uptrend in 1920, but such reversal will have only temporary significance owing to the present inata- bility in price levels. saaawnN xaoNi o o lO o CD to o o in o en n o o o o OJ Od — ID O li) UJ a u I- UJ o X 2 H — zS to " UJ p o ♦" 5 UJ a: '*•« '••, --. ••• *1 /•■ t ' ee X %^ t o 1 < »* ^ A^ T^ -— r — ^ — \: Z \ a ii a • i -i 1 * V < O - » 1 2 t ^ \ \ 1 i ' .oSig§ *\ •• U) "fm S " o Y' O JIO oli u ;| o s „■ k - -S :l < fee -32 * V N ^ y i mT u> .J-" 1 \ Aldr Who US Brad *•, '•J ) f o o o o o o o o OLDOlOQinOtT) o o o o o o o2 o lo o lo o in '-' CO CVJ cvj — — _ I =n3A3n 30N3isisans 00 O CD LO -"^ 00 (XJ — O 1250 1300 1350 1400 1450 1500 1550 1600 1650 1700 1750 1800 1850 1900 1950 The spoce between zero ond 1 on iheverticol scole represents Adapted" from "Economic History of tnglond' quantity of wheat assumed odequole lo nourish o family of medium siie' by H Meredith VARIATIONS IN AMOUNT OF WHEAT PURCHASABLE WITH DAILY WAGES OF ENGLISH CARPENTERS AND AGRICULTURAL LABORERS FROM 1270 TO 1890 EAT PURCHASABLE WITH LABORER'S WAOE •• •••••••• m? !?"'*V • *••••. Z F. 2: 2 » ~ III /• *< °i Z D '\ •• •••• ^v 1 1 AMOUNT OF WHEAT % PURCHASABLE WITH *. CARPENTER'S WAOF h > \ s ^" J >• 1 < > ^ <....: V —V r ^ i 1 r- CD LO '^ CO CJ l-n3A3-l 30N3iSISanS — c 96 SOME PERTINENT STATISTICS 97 The figures just mentioned cover, however, what is relatively a very short period in eco- nomic history. For a longer view of the changes in real wages it is necessary to use European statistics. The second of the preceding charts* shows the wages of English agricultural labor- ers and carpenters from 1270 to 1890 in terms of the amount of wheat required to sustain a normal family. It will be seen from this chart that, prior to the Industrial Revolution, there was no evidence of any continued up- trend in real wages. On the contrary the in- dications were all in favor of the theory that wages must periodically drop to the starvation level and remain there until the pressure of population had been relieved by war, famine, or pestilence. The long period trends of real wages in France and Germany are similar in a general way to the English trends, although the in- creases following the Industrial Revolution ap- pear to be less pronounced. However, Ameri- can economic development is more closely re- lated to English development than to that of other European countries, and can best be studied as a continuation of early English ex- perience. ^Adapted from Hconomic History of England by H. O. Meredith, pages 352-353. See also A History of Money and Prices, by Schoenhof, page 313. 98 CURRENT ECONOMIC PROBLEMS THE SIZE OF THE NATIONAL INCOME AVhen we combine the preceding quite de- pendable figures for the increases in per capita productivity with the less dependable, but still significant, figures for increases in real wages, it is evident that in recent years there has been a fundamentally sustained, although occasion- ally fluctuating, increase in the quantity of use- ful goods supplied to meet the needs of each individual in the American population.* A further check on this evidence is supplied by studies of the national income as a whole and of its distribution among individuals. Un- til very recently, the most thorough attempt at such a study for the United States was that of W. I. King.f During the past year, how- ever, the research staff of the National Bureau of Economic Eesearch, including Wesley C. Mitchell, W. I. King, F. R. Macauley, and 0. W. Knauth, has completed and published, as Income in the United States, a very thorough study along these lines. This study was made in two separate parts. The first estimate was made by summing up the amount of all income *Labor unionists claim that much of this increase in pro- ductivity has been due to improvements in management and processes introduced under the pressure of advancing wage rates. \Tlie Wealth and Income of the People of the United States, by W. I. King. SOME PERTINENT STATISTICS 99 at the points of origin, that is, by adding to- gether, by industries and occupations, pay- ments made for wages, salaries, and personal services as a whole, and payments made on ac- count of interest, profits, and rents. The sec- ond estimate was made by summing up all per- sonal incomes, including those below the in- come tax range, as well as those above, with proper adjustments for under-reporting, and so forth. These two estimates were independently made, and when completed were found to be in very close agreement, with average yearly differences amounting to less than 5%. The final estimates of the Bureau are given in the table* which follows: INCOME IN THE UNITED STATES Total Income Income Per Capita Income Per Capita Tear in Billions in Actual Dollars in 1913 DoUarst 1909 $28.8 $319 $333 1910 31.4 340 349 1911 31.2 333 338 1912 33.0 346 348 1913 34.4 354 354 1914 33.2 335 333 1915 36.0 358 350 1916 45.4 446 400 1917 53.9 523 396 1918 61.0 586 372 *Income in the United States, pages 64, 68 and 76. tThls column indicates purchasing power per capita in terms of dollars having the purchasing power that obtained in 1913. 100 CURRENT ECONOMIC PROBLEMS THE DISTRIBUTION OF THE NATIONAL INCOME AMONG INDIVIDUALS If we accept the foregoing figures as to the size of the national income, in total and per capita of the population, the next question is as to the manner in which this income is distrib- uted among indi\dduals. Here we have two major points of view, first as to the present dis- tribution, and, second, as to the trend toward increasing or decreasing concentration in a few hands. As to the present distribution the most de- pendable figures are, again, those of the Na- tional Bureau of Economic Research for the year 1918. During this year, excluding 2,- 500,000 soldiers, sailors and marines, there were 37,569,000 persons in the United States having personal incomes. The average in- come per person was $1,543. About one income receiver in each 148 had an income of $10,000 a year or more. These larger incomes amounted in all to about $6,936,000,000, or 12% of the total income of all persons. If these larger in- comes were all leveled do^^^l to the $10,000 figure, the total reduction would amount to about 8% of the national income. All of the preceding figures, it should be noted, exclude the incomes of the 2,500,000 men engaged in military service during 1918. Furthermore, they include no allowance for SOME PERTINENT STATISTICS 101 deductions on account of personal income taxes, which in 1918 ranged from about 1 % of incomes between $1,000 and $3,000 to about 8% of in- comes between $10,000 and $25,000, and up to nearly 65% of incomes of $1,000,000 and over. The follo^\ing table gives the basic data from which the computations in the preceding para- graph were made. A CONDENSED SUMMAEY OF THE DISTRIBUTION OF PERSONAL INCOMES IN 1918 (Excluding 2,500,000 soldiers, sailors, and marines.) Income Class Number of Amount of Persons 200,000 Income Under Zero $—125,000,000* 0-$ 500 1,827,554 685,287,806 500- 1,000 12,530,670 9,818,678,617 1,000- 1,500 12,498,120 15,295,790,534 1,500- 2,000 5,222,067 8,917,648,335 2,000- 3,000 3,065,024 7,314,412,994 3,000- 5,000 1,383,167 5,174,090,777 5,000- 10,000 587,824 3,937,183,313 10,000- 25,000 192,062 2,808,290,063 25,000- 50,000 41,119 1,398,785,687 50,000- 100,000 14,011 951,529,576 100,000- 200,000 4,945 671,565,821 200,000- 500,000 1,976 570,019,200 500,000- 1,000,000 369 220,120,399 1,000,000 and over Total... 152 316,319,219 . .. 37,569,060 $57,954,722,341 A supplemental viewpoint with respect to in- come distribution relates to salaries and wages *Thi8 negative figure represents the speculative and business losses of certain individuals through failures, etc. 102 CURRENT ECONOMIC PROBLEMS only. For the large organized industries, in- cluding mining, manufacturing, and land trans- portation, during the period from 1909 to 1918 inclusive, manual workers and clerical em- ployees received from 91.4% to 93.0% of total payrolls, while the percentage paid for salaries of officials ranged from 7.0% to 8.6%, the aver- age being 7.7%*. This classification is, of course, a very rough one, and many so-called officials are undoubtedly little more than cleri- cal workers, foremen, or superintendents, at rather moderate salaries. A more direct test of the relative importance of salaries of officials is obtained by computing the effect of eliminating all salaries above a certain maximum, or of limiting salaries to a determined maximum. For the Class I rail- roads of the U. S. in 1919, which operated 233,- 808 miles of line, the total salaries of division and general officers, receiving $3,000 per an- num and upward, amounted to only $46,783,- 275, as compared with a total payroll of $2,- 828,014,440. The higher railroad salaries for this group of roads amounted, therefore, to only a little more than 1V2% of the payrolls. For the Bell Telephone System in the IT. S., a limitation of all salaries to a maximum of $5,000 a year, in 1920, would have brought about a reduction in such higher salaries suf- ficient only to permit an increase of 22 cents per week in the salaries of the lower paid employees * Income in the United States, page 99. SOME PERTINENT STATISTICS 103 if the savings were equally divided. Somewhat similar conditions undoubtedly hold true for the larger manufacturing and commercial or- ganizations ; although, on the other hand, there are many small enterprises in which a few large salaries make up a large proportion of the total disbursements for salaries and wages. The second major viewpoint in connection with income distribution is with respect to the tendency toward an increasing or a decreasing concentration of the national income in a few hands. As to this point, there are no direct statistics available covering long periods, al- though it is obvious that in very recent years both inheritance taxes and personal income taxes have operated to cause a decreasing, rather than an increasing, concentration, so far as sums actually available for personal expendi- ture are concerned. THE DISTRIBUTION OF THE NATIONAL INCOME BETWEEN FACTORS IN PRODUCTION A study of the reports of the Federal Income Tax Bureau brings out very clearly the fact that large incomes are almost wholly derived from return on capital and rents of natural re- sources. For example, in the year 1919, only 15.4% of incomes between $100,000 and $150,- 000 was derived from salaries and wages. In previous chapters, it has been stated that approximately 68% of the national income was 104 CURRENT ECONOMIC PROBLEMS received for salaries, wages, and personal service, about 24% for return on capital, and about 8% for rents of natural resources. These figures represent the writer's personal esti- mate, based upon certain assumptions as to the percentages of house rents that are assignable to return on capital and to land rents, combined with other figures as to the distribution of the value product of all classes of business under- takings between wages and salaries, and rents and other returns on property. This estimate is, however, very well substantiated by the fol- lowing table taken from Page 97 of Income in the United States. ''Wages and salaries" in- cludes all pensions, compensation for accidents, and the like. "Management and property" in- cludes rentals, royalties, interest, and divi- dends. "Net value product" does not include raw materials, supplies, and services received from other industries. DIVISION OF COMBINED NET VALUE PRODUCT OF MINES, FACTORIES, AND LAND TRANSPORTA- TION BETWEEN EARNINGS OF EMPLOYEES AND RETURNS FOR MANAGEMENT AND THE USE OF PROPERTY 1909-1918 Millions of Dollars Per Cent. Wages and Management Wages and Management Year Salaries and Property Salaries and Property 1909 ' $ 6,481 $2,950 687? 3l73 1910 7,156 3,250 68.8 31.2 1911 7,287 2,791 72.3 27.7 1912 7,993 3,169 71.6 28.4 1913 8,651 3,359 72.0 28.0 SOME PERTINENT STATISTICS 105 1914 7,947 2,816 73.8 26.2 1915 8,722 3,470 71.5 28.5 1916 11,630 5,810 66.7 33.3 1917 14,375 6,502 68.9 31.1 1918 17,472 5,124 77.3 22.7 In the above table, it should be noted that un- distributed corporate surpluses are counted as part of the payments to management and prop- erty, and also that only partial allowance is made for the heavy losses to management and property that occur in connection with the fail- ure and liquidation of many concerns. It is obvious that, if anything, the recent trend has been toward increasing the share of labor in the product of industry, and, as indi- cated in previous chapters, there is some frag- mentary general evidence of a long term trend toward a decrease in the share of capital. However, the disturbances brought about by the war have been too great to make the recent trend particularly significant; and there is, furthermore, no reliable single set of figures from which a long term trend can be directly determined. An indirect approach to the problem may, nevertheless, be made by com- paring the annual increases in per capita prod- uct with the annual increases in real wages, as indicated on previous charts. This com- parison tends to show that the two items are increasing from year to year at about the same rate. This could not be the case if the per- 106 CURRENT ECONOMIC PROBLEMS centage of the total product paid for the use of capital and the rent of natural resources was either increasing or decreasing at a rapid rate. CAN THE SHARE OF LABOR BE INCREASED? If, then, it is assumed that the present ten- dency is for the share of ''labor" in the na- tional product to remain relatively fixed or to increase very gradually, the question still arises as to whether there are not practicable ways to increase this share, and thus to secure a greater immediate equality of distribution of income among individuals. Statistical evidence on this point is very difficult to obtain or present. It is necessary, in any case, to emphasize the word ''practicable," for the reason that it might be very easy to set up plans which would increase the share of labor in the product, but would de- crease the total product by such amount as to leave labor worse off than before. There are, however, two indirect ways through which an approach to an answer to this question may be obtained. The first relates to the necessity for a volume of savings in the United States amounting, annually, to from 10% to 16% of the national in- come. No definite and convincing statistical studies along this line have yet been published, although preliminary studies indicate that 16% SOME PERTINENT STATISTICS 107 is nearer to the facts than 10%. A simple check on this percentage is obtained by assum- ing that the physical wealth of the countiy must increase approximately at the same rate as the volume of physical production, that is, at a rate between 3% and 4% per annum. The physical wealth* of the country (excluding land) may be valued at about four times the annual national income, and a 3% or 4% annual addition to this wealth would require that from 12% to 16% be saved out of each year's income. The application of the preceding figures to the problem of a possible increase in the share of labor is this — that these savings must be pro- vided if economic progress is to continue ; that the bulk of new capital, today, is provided by the reinvestment of interest, dividends and rents ; and that, if * ' labor ' ' should take over, by some process, the entire profits of property and management in the highly organized industries, this sumf of from five to six bilhon dollars a year would, very largely or wholly, have to be reinvested by *' labor," for its own self -protec- tion, in new productive machinery. Such a change would, therefore, result primarily in a redistribution of wealth and ownership, rather than an improvement in standards of living. "Estimated from figures on page 716, Statistical Abstract of the U. S., 1920, published by Bureau of Foreign and Do- mestic Commerce. ^Income in the United States, page 97. 108 CURRENT ECONOMIC PROBLEMS A second indirect approach to the problem of a greater equalization of incomes is through consideration of the actual profits in trade and industry. Here there is a very live conflict of statistics and statisticians. The ordinary view of business profits is illustrated by the chart on the following page which is based (through the selection of concerns doing a strictly competi- tive business) upon what is probably the most exact study* yet made of profits in a typical group of manufacturing and mercantile estab- lishments, the concerns in question having been chosen at random from among those whose ac- counts had been audited by a large firm of public accountants. If these figures are taken at their face value, it would appear that, while the marginal or ''price fixing" concerns earn only simple interest on their investment, the average return on all of the invested capital is between 13% and 14%. If these average earnings are correct, there may be ground for feeling that some further distribution should be made to ''labor." But many practical business men refuse to accept such figures. They claim that a study of "go- ing concerns" is meaningless and misleading, and that, if all the legitimate ventures in any competitive industry were followed through from birth to death, with full account taken of *J. E. Sterrett, American Economic Review, March, 1916. iN3WiS3AN| nViOi 3O1N30 a3c| looinouooioo,-,^ ^ ■^COCOOJOJ'- — ^ ^^ DISTRIBUTION OF AGGREGATE INVESTMENT BY PER CENT ANNUAL RETURN ON INVESTMENT 1 1 i 1 55 S 5 20 24 28 32 36 40 4^ Return on Investment ' F'gunes based upon audited returns for one or more pre-war years, generally the year 1913. Investment includes borrowed money .03% of total investment m manufaclunmq, ond 1 4%of-total investment in Inenconlile corporations, earned over 44% per annum. 1 1 O 1 2 i 1 Q- i c- e 1 1 0) ! #' ; 1 i 1 i ^ v.- \ i i I ! A 1 ■E"'' / i J ^2 y ^ -8-4 4 8 12 1( Per Cent Annual >. 1 \ -