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LIBRARY^

INIVEPS'TY OF
CALIFORNIA
SAN DIEGO I

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SOME PROBLEMS IN
CURRENT ECONOMICS

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

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.

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 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

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 — •-^ — --

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Railways, Telegraphs
and Steamships

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Textile Inventions
Mechanical Power
Improvements in AgricjlLure

The Black Death

—

OCOCMOJCMMOJ*-— •-•--

POPULATION IN MILLI0M3

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

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

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

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

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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

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2. Goods (orred on

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4. Selling prices increase^ but not
eriough to maintain profit margins.

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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

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.

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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.

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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

>•

<....:

—V

r- CD LO '^ CO CJ

l-n3A3-l 30N3iSISanS

— c

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

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

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

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.

O 1

Q- i
c- e

0) ! #'

;

1 i ^ v.- \

I !

1 ■E"'' / i J

^2 y

-8-4 4 8 12 1(

Per Cent Annual

>. 1 \

-<I^J--

■•.»
"-^

* "'^

\ 1

1 ' i

1 ' \

*■ %r CD CO c^J cj ^- ^ "•* "-

XN31MXS3ANI -IViOl dOlNBQ dSJ

109

110 CURRENT ECONOMIC PROBLEMS

all gains and losses, the average earnings on
the invested money would very slightly, if at
all, exceed the going rate of interest.

EFFICIENCY AND WASTE

In presenting these and other statistics, it is
not to be expected that the resulting picture will
be clear and distinct in every Hne and angle.
Yet out of the whole there may properly grow
an impression of an economic organization that
is imperfect in a thousand ways, and yet gains
slowly in efficiency as the years go by — that
needs readjustment and strengthening in many
of its parts, and yet can not safely be torn
do^vn or suddenly replaced in any of its major
elements.*

*Socialist3 and the more radical labor unionists, even when
admitting the increasing productivity of the present system,
lay much stress on the demand of the ordinary workers for an
increased share in the control of industry. This feeling Ib
voiced by our socialist critic who says:

"As the principal movement for freedom in the eighteenth
and nineteenth centuries was that for democratizing the polit-
ical machinery, so the great forward looking movement among
the masses of today is that for the democratizing of industry. ' '

He claims, in addition, that the present economic system has
broken down in Europe and calls attention to "the fact that
the 24,000,000 members of the International Federation of
Trade Unions in Europe — which exclude the more radical
unions of the Moscow Trade Union International — have gone
on record in favor of the social ownership of laud and capital."

It is, however, the writer's impression, confirmed to some
extent by conversations with British labor leaders, that much
of the European demand for a radical reorganization of in-
dustry springs unconsciously from class distinctions, traditions
of family control, etc-, which tend to prevent many specially
capable workers from securing advancement to the more re-
Bponsible positions in management. There is little evidence
that a Bimilar demand exists in American business organiza-
tiouB having well developed merit systems for promotion from
the rauks.

SOME PERTINENT STATISTICS 111

This picture as to the combined strength and
weakness of our economic organization is re-
enforced when we come to study the wastes and
the failures to secure real productivity which
characterize every branch of production and
distribution. Statistical evidence along these
lines is too voluminous to be quoted in a short
chapter. Reference can, however, well be
made to a recent study* by a group of engi-
neers in which it is concluded that over 50% of
present waste is chargeable to management,
less than 25% to labor, and the balance to out-
side agencies and the public as a whole.

Yet there is much of fallacy in the demand
for 100% efficiency. It is relatively simple to
set up a highly efficient plan of organization or
operation for a given business organization or
industry, at a given date, under a given set of
conditions, and with a specially selected per-
sonnel. But times, conditions, and methods
change, men lose health or grow old, and man-
agements cannot be reconstructed day by day.
The real test of industrial vigor lies hardly at
all in current efficiency, but almost wholly in the
annual rate of increase in efficiency. This is a
fact that is often instinctively recognized, but
is rarely, if ever, stated.

Much of our seeming inefficiency is but the
price of growth and progress and evolution.

* Waste in Industry, by the Federated American Engineering
Societies.

112 CURRENT ECONOMIC PROBLEMS

The oak tree, in its 200 years of life, will scatter
a million acorns on the earth in order that one
new oak tree may survive the death of the old.
Yet if this new oak is in the slightest measure a
better tree, or better fitted to survive, than the
old, all of this seeming waste is in fact the high-
est of efficiency. The economic system that
gains the most from year to year is in the end —
even mthin the working life of the ordi-
nary man — the most efficient, regardless of
theoretical defects and wastes. If we should
but sacrifice one-half of one per cent, in our
rate of increase in productivity to secure a
maximum present gain in efficiency, we should
quite certainly be the losers in 20 years, and
forever thereafter would lose in increasing
ratio.

When, therefore, all the facts have been ex-
amined and all the theories have been discussed,
the final conviction stands forth that there is no
royal road to the economic millenium. Each
problem must be solved as it comes — a better
organization here, a better understanding there,
a new device in the next place, more foresight
and better planning in still another place — and
everywhere, a little more of honesty, of public
spirit, and of real knowledge, and a little less
of demagogy and partisanship — slowly and by
infinite adaptation progress will be gained.

CHAPTER V

FACING THE FACTS

A RECOGNITION OF NEW CONDITIONS

NOT many months ago, the writer stood
in Hyde Park where a fairly representa-
tive cross-section of the London popula-
tion gathers nightly to discuss every imaginable
subject of human interest. The coal strike had
just been settled. Business depression was
acute and the future held small promise of early
improvement. In ordinary times many of the
speakers would have been arguing for the na-
tionalization of industries, and for other social-
istic and communistic plans. But on this night
the temper of the crowd had changed. Promises
of an early millenium had failed. Eadical plans
for social change had shown their weaknesses
in practice. Nowhere among the hundreds
gathered in the park was a voice raised with a
concrete proposal, but, on the contrary, there
came from all sides the cry '*We must study
the facts ; we must find out what can be done. ' '
This revulsion in popular sentiment seems
to have spread over the world. Demagogues
and false prophets are beginning to be dis-

113

114 CURRENT ECONOMIC PROBLEMS

credited. The attempt to build up class hatreds
and to create class warfare is losing ground.
In the face of a common economic disorder and
distress the world is hunting for the real facts
and for real leadership.

In this changed attitude of mind there is
hope. There is hope also in the critical, dis-
interested, and impartial studies of economic
questions that are being made in every country,
not only by professional economists, but also
by far-seeing labor leaders and by men in
responsible positions in business and industry.

In the United States there are at present
four scientifically organized and administered
bureaus for economic investigations, the Na-
tional Bureau of Economic Research, Inc., the
Harvard Committee on Economic Research, the
Pollak Foundation and the Economic Institute.
In addition, the National Industrial Conference
Board, while frankly supported by a group of
business organizations, is, nevertheless, doing
much economic work of high scientific character.

These organized activities are supplemented
by an increasing volume of popular economic
writings and editorial work. Such articles
and editorials in the Saturday Evening Post
and Colliers, with combined weekly circula-
tions exceeding 3,000,000 copies, are of notably
high quality. Further important additions to
economic fact and theory are being made by
economic and statistical units organized by the

FACING THE FACTS 116

larger banks and business establishments as
agencies toward the control and direction of
their activities.*

As the result of this grooving interest in
economic investigations practically every phase
of American political and industrial develop-
ment is being subjected to a critical scrutiny.
The amount of the national income and its dis-
tribution — among individuals and by sources
— has been very accurately determined, year by
year, from 1909 through the war period. Much
attention has also been given to questions of in-
dustrial organization and relations, to the busi-
ness cycle and the possibility of controlling its
more extreme swings, and to the relations be-
tween government and industry.

The combined effect of all these studies has
been to build up a growing mass of economic
facts that are beginning to be accepted by pro-
fessional economists, business men and many
active labor leaders, as the basis upon which
future industrial developments in the United
States must take place. The reaction in the
United States from the world-wide radical
movement of the last few years has not only
been more pronounced than elsewhere, but it

*Meiition should also be made of the Bureau of Industrial
Eesearch which has been devoting its main attention to the
coal industry during the last two years, and the Labor Bureau,
Inc., which places its services primarily at the disposal of labor
organizations.

IIG CURRENT ECONOMIC PROBLEMS

also differs from the reactions in other coun-
tries through the fact that a reaffirmed behef in
the essential soundness of American institutions
is being supplemented, perhaps more than else-
where, by an exact knowledge of the facts and
viewpoints which must control the future de-
velopment and evolution of such institutions.

It is the writer's purpose, in the present
chapter to discuss briefly some of the more
important of these facts and viewpoints, and to
indicate in a general way their possible reac-
tions ujion organized movements for the im-
provement of working conditions.

POPULATION AND NATURAL RESOURCES

Among the older of economic facts to which
attention has been newly directed is the neces-
sity for considering, as an essential part of any
broad economic plan, the proper balance in
each country between population and natural
resources.

It probably never will be true, in a modern
civilized state, that population will be limited
by an actual shortage of subsistence. But it
seems equally certain, for every country and
for each stage in economic development, that
there is a certain population which '\\dll permit
the attainment of the highest possible standard
of comfort. It, furthermore, seems certain
that, irrespective of possible temporary im-

FACING THE FACTS 117

provements in conditions through economic ad-
vancement, population in certain central
European and Asiatic countries has already far
outrun the point at Avhich maximum human
comfort may be maintained. To superimpose
on such populations the benefits of modern
sanitation, and modern industrial methods, ap-
parently can result only in rapidly rising
standards of human desire, accompanied by
rapid increases in population and in the pres-
sure of population upon natural resources.
The outcome can hardly fail to be renewed
great forceful movements of population, and in-
tensified military and economic conflict.

The majority of trained American observers
have, for these reasons, ceased to look upon
the question of population growth as an
academic one. They put it in the forefront of
economic problems and feel that, in many parts
of the world, it is almost an idle thing to dis-
cuss other questions until this great question
has been squarely faced.

IMMIGRATION

Closely related to the problem of population
pressure is that of immigration. The early
immigration to the United States was from
peoples closely akin to, and readily assimilable
into, the original white population. There were
also vast areas of unsettled fertile land. The

118 CURRENT ECONOMIC PROBLEMS

theory grew up, therefore, that immigration
should be unrestricted and that the American
''melting pot" could absorb and assimilate un-
limited immigration of whatever kind it might
be.

During recent years conditions have become
very different. The present immigrants are
assimilated with difficulty; many seem to be
permanently non-assimilable; and the absence
of unoccupied farming lands leads to a harmful
concentration of the newer immigration in the
large cities. It has, therefore, come to be
realized that a nation that is striving for an ad-
vanced civilization must preserve a substantial
unity of races, of ideals, and of basic standards
of living, and must avoid to the utmost the
establishment, by accident or design, of any
social, industrial, or racial dividing lines which
may tend to deny the fullest opportunity to
each individual for advancement in accordance
with his natural capacity. Such a nation,
furthermore, must by no chance become divided
into two elements of population, one seeking to
maintain higher standards of comfort through
the limitation of numbers, and the other tend-
ing to bring about lower standards of comfort
through population increases of the sort to
press hard upon the supporting power of
natural resources. A policy of reasonable re-
striction of immigration into the United States
should, therefore, become a permanent one. The

FACING THE FACTS 119

immigration of races having racial characteris-
tics, ideals and traditions radically different
from those of the original population has
tended to destroy social unity, and must, there-
fore, be checked. The unrestrained pressure of
population in European and Asiatic areas must
not be permitted to transfer itself, through un-
restricted emigration, to the United States.

These newly developed American policies are
not peculiar to America alone, and must be
looked upon, from a broad economic standpoint,
as policies that eventually will find world-wide
application.

THE DISTRIBUTION OF INCOME

Next in order of importance, after problems
of population, immigration, and natural re-
sources, is that of the distribution of income.
Since the time of Karl Marx, a large part of the
agitation for radical social and industrial
change has been based upon the belief that
capital was absorbing a large and increasing
proportion of the income of modem industrial
nations, and that the direct road to improved
conditions for the average worker was through
the taking over by ''labor" of much or all of
the income received by "capital."* The lack

*Our socialist critic writes: "It must be said, however,
that much of the socialist literature for the last half century
has dealt with the wastes of competition, as well as wealth in-
equality, and that socialists are laying increasing emphasis on

120 CURRENT ECONOMIC PROBLEMS

of evidence to justify this belief has, however,
been quite fully indicated during recent years
by many careful and impartial studies, among
which those of Professor Bowley in England
and Dr. King in the United States are of special
importance. Still more exhaustive and careful
studies of the National Bureau of Economic
Research in the United States, which have re-
cently been publishedf, confirm the results of
these earlier investigations.

From all of these studies there develop cer-
tain primary conclusions which cannot be
avoided by any observer who, in good faith, is
searching for the facts. These conclusions are
substantially the same in general character for
all industrial nations. They may be enumer-
ated for the United States as follows :

1. A limitation of the maximum individual
income to that of the highly skilled worker (say
$3,000 per annum) vnih. a pro rata distribution

this aspect as time goes on. At the time of Marx, there ■was
little organization among the Avorkers to ensure the workers
more than an existence wage, and the profits of capital mounted
ever higlier. Marx indicated that, wliile tlie tendency of capi-
tal, unhampered by opposing forces, was to absorb an ever in-
creasing proportion of the social product, capitalism was de-
veloping within its bosom a working class ever better or-
ganized, ever better educated. Socialists claim that this
opposing force to unhampered capitalism, which Marx also pre-
dicted would arise, has, by economic and political pressure,
largely counteracted the tendency of capital to obtain an in-
creasing share of the product of industry. ' '

\lncome in the United States, the National Bureau of
Economic Eesearch, Inc., 474 West 24th Street, New York city.

FACING THE FACTS 121

of all excess to those having incomes equal to or
lower than those of such skilled workers would
add not over 25% to the lower incomes. This
percentage would be noticeably reduced if al-
lowance were made for the income taxes paid
by the receivers of the larger incomes. If the
upper limit were fixed at $10,000 per annum,
the increase, through a similar redistribution,
would be less than 10%. This, again, is without
allowance for the heavy personal taxes now
paid by those in the $10,000, and higher, income
classes.

2. High salaries are a negligible factor in
the inequality of income distribution. Practi-
cally the whole of such inequality is due to rents
and return on capital.

3. Separations between total income from
labor (personal service), return from capital,
and rents of natural resources, are difficult
owing to the vast number of small entre-
preneurs — farmers, shopkeepers, small manu-
facturers, self-employed tradesmen, and so
forth. Nevertheless it can be said, with suf-
ficient accuracy for practical purposes, that,
during the war and early pre-war period in the
United States, approximately 68% of the na-
tional income was received for labor, 24% was
received for capital, and 8% for rent of land
and other natural resources. Here, once more,
no allowance is made for personal income taxes.

122 CURRENT ECONOMIC PROBLEMS

4. So far as the proportion of the national
income accruing to capital and natural re-
sources constitutes a problem, it is separable
into several distinct elements. The rent of land
and natural resources differs fundamentally
from other returns on property, and must have
separate consideration under any economic
plan. Furthermore, the 24% of the national
income that accrues to capital proper can
be split into two distinct parts. Somewhat less
than one-half of the 24%, or about 11% of the
national income, is derived from capital em-
ployed in the larger and more highly organized
industries and enterprises — mining, manufac-
turing, transportation and other public utili-
ties, and banking — and somewhat more than
one-half of the 24%, or about 13% of the na-
tional income, represents interest and divi-
dends, or their equivalent, on investments in
houses, farm equipment, merchandising estab-
lishments, equipment of small tradesmen, and
so forth.

THE AVERAGE RATE OF PROFIT

Supplementing these figures as to income dis-
tribution are certain other facts, slowly accumu-
lating, which bear very directly upon the rela-
tion of the average worker to the so-called
"capitalistic system." Many years ago Adam

FACING THE FACTS 128

Smith stated that in his time * * double interest ' '
was considered a fair profit; and, curiously
enough, there is considerable evidence that per-
haps the most accurate general statement that
can be made, today, regarding the average rate
of return on money employed in business and
industrial enterprises, is that going concerns
earn *' double interest."

With this as his fundamental belief, the
present writer accepted some time ago a com-
mission to write a pamphlet telling how a care-
ful investor, by distributing his money among
well-chosen new enterprises, could secure nearly
double the return that he might by investing in
seasoned securities or by loaning his money at
current rates of interest. However, the further
the subject was investigated the less promising
it looked. A considerable inquiry among in-
vestment experts revealed no wdse investors
who had systematically traveled this apparently
sure road to fortune. Powerful labor unions,
mth ample funds in their treasuries to own
and control their own enterprises, and with
memberships which would assure them of
specially favorable markets for their products,
showed no such eagerness to enter into the in-
dustrial field as might be expected if profits
were really equal to ''double interest."

The facts seemed to be that figures based on
going concerns were highly misleading. Each
new enterprise seemed to pass through one or

124 CURRENT ECONOMIC PROBLEMS

more reorganizations, with accompanying heavy
losses to investors, before it really became a
going concern; and each going concern sooner
or later died, or became wholly or partially
crippled. The immutable laws of nature ap-
plied alike to man and his legal creatures. The
corporation, like the man, could not count the
earnings of its robust years as clear profit. It,
equally with the man, must make provision for
youth and old age, for sickness, misfortune and
death. This, at least, became the writer's con-
viction — that taking all legitimate ventures in-
to account, and considering, as a whole, their
failures and successes, their many risks and
their few^ certainties, their youth, their robust
years, and their old age, the average profit on
the capital employed in industry was not
*' double interest," but on the contrary ex-
ceeded ''single interest" by a relatively small
margin, if any.

THE PROFITS OF MARGINAL CONCERNS

The foregoing opinion is shared by many of
those observers who are in best position to
know the facts. It is, nevertheless, only an
opinion, however well grounded, and must await
the result of investigations now being planned
before it can assume a definite place in economic
theory.

FACING THE FACTS 125

There is, however, another analysis of profits
in competitive business as to which the facts
are more definitely determined. It has been
found that when any branch of competitive busi-
ness is studied by itself, there are great dif-
ferences in the rates of profit realized by differ-
ent concerns. Not only do the concerns vary
wddely among themselves, when studied over
long periods, but each individual concern also
shows great variations in profits from year to
year. There are not only the variations due
to the business cycle, but also the variations
due to changes in trade currents, changes in
management, and so forth.

As the result of these underlying conditions,
it is possible in a normal year to divide the in-
vested capital, in any line of competitive busi-
ness, roughly into three classes. The first class
represents investments in concerns that are on
the verge of failure and are earning less than
a normal interest on their capital. About 10%
of the total capital falls in this class. The
second class represents capital invested in con-
cerns which, as a group, are earning about a
normal interest rate. This is the so-called
marginal, or price-fixing, group, in which
roughly 40% of the total capital is invested.
The third class of capital, amounting to about
50% of the total, represents that invested in
the really successful concerns. These concerns

126 CURRENT ECONOMIC PROBLEMS

earn substantially more than a normal interest
on the money employed, and raise the total
earnings of all going concerns to something
approximating ''double interest."

The most significant fact in connection with
this normal distribution of invested capital is
that it seems to be independent of the general
average of managerial skill in the industry or
business. In other words, if we could conceive
all business and industry to be managed with
an average skill twice as great as that which
now obtains, it is probable that we would still
find these same differences in rates of profit.
This is what might be expected. It is impos-
sible for all men and all business organizations
to be equally skillful or to have equal advan-
tages with respect to location, markets, and so
forth, and very shght variations in managerial
skill and in natural advantages, as any experi-
enced executive knows, will produce very great
variations in profits.

If, then, we accept these variations in rates
of profit as necessary and inevitable, we are
face to face with a definite series of facts. First
of all, the marginal and submarginal groups of
concerns turn out 50% of the total product (or
50% of the total services) and must continue to
operate if the market is to be supplied. In the
second place, the marginal group necessarily
fixes the basic prices to be charged by all con-

FACING THE FACTS 127

cems. And in the third place these marginal
concerns, since they earn only a bare going in-
terest rate on their capital, must vary their
prices, in the long run, by an amount which will
exactly compensate for every change in market
wages, which is not accompanied by a corre-
sponding change in productivity.

THE RELATIVE MONOPOLY POWER OF LABOR AND
CAPITAL

All of the preceding facts and viewpoints lead
up to the now generally accepted conclusion
that material progress for humanity must be
sought not primarily in a better distribution of
income, but rather in a greater per capita pro-
ductivity. There is, however, a further con-
clusion which would develop if it should prove
to be true, as seems probable, that capital in-
vested in business and industrial enterprises
earns, on the whole and in the long run, only a
living wage, i. e., the current rate of interest.
This conclusion is to the effect that there is
little or no real margin which labor can claim or
secure from capital by organized effort to raise
the wage paid for a given output. This is cer-
tainly true as to the so-called ^'marginal" and
** sub-marginal " concerns, and, as previously
indicated, it appears to be true for business and
industry as a whole.

128 CURRENT ECONOMIC PROBLEMS

With respect to the efforts of organized
labor, there have, in the past, been two opposing
economic theories. One was that wages were
determined by the relative monopoly power of
land, labor and capital. This theory assumed
that labor, by establishing a special monopoly
power, might secure for itself rewards which
othermse w^ould go to the owiiers of land and
capital. The opposing theory is that labor is
the ''residuary legatee" and as such receives, in
the end, all the gains from improved industrial
machinery and productivity except a "living
wage" for capital, and ordinary (non-mo-
nopolistic) rents. Undoubtedly the truth lies
somewhere between these two theories, but the
evidence is strong that the possible margins
which labor might claim by establishing its
monopoly power are much too small to offset
the minimum losses to the working population
and the community as a whole that must result
from any labor program that is based primarily
upon the monopolistic idea. It is certainly
true that labor cannot hope to gain unless it
uses its monopoly power to increase produc-
tivity and to secure greater rewards not only
for labor, but for invested capital as well.*

*Our socialist commentator writes, as to this paragraph:

"An alternative which labor throughout the world is
choosing to an ever greater extent, as has been stated before,
is that of social ownership and social investment. Granting,
however, the continuance of private investment, it is not clear
to labor what rate of interest is necessary to cause people to

FACING THE FACTS 129

A SPECIAL VIEWPOINT

If we could conceive a situation under which
the average worker's hourly wage was made
the monetary unit, and the hourly wage of each
worker was justly fixed with respect to this
unit, taking fair account of his skill and pro-
ductivity, we should almost automatically have
a new political economy. It is of interest to
follow through the reactions from such a plan.

First of all, as to hours of labor, we might
conceive that each worker would be paid his
standard rate up to that number of hours per
week at which he could work over long periods

invest extensively enough to keep the industrial machine going
and improving. Many people of small means place their
savings in the bank, which in turn is an investor, with the ex-
pectation of little or no interest — merely as a place for safe
keeping until old age. Others are satisfied with low interest
on municipal or state bonds. Capital does not need the 'living
wage' — in some ways a misnomer — in the same sense as does
labor. If interest rates were universally two or three per cent.,
rather than six per cent., would not the great bulk of capital
now invested, continue to be invested? Has this problem
been ever adequately considered? Again labor insists that the
extent to which modern profits have in them the element of
monopoly must be determined before the author's thesis can
be proved.

"It is, however, of interest, that a number of the more
radical unions of the country, such as, for instance, the Amal-
gamated Clothing Workers of America, are insisting that their
members accompany their demand for higher wages with guar-
antee of high production standards. The forward looking
workers are realizing that productivity must be increased, and
in many recent wage disputes they have investigated the
administration of their respective industries and have insisted
that management should put its house in order and eliminate
practices that impede production. At the same time they have
frowned upon a suggestion of 'sabotage' by their own mem-
bers."

130 CURRENT ECONOMIC PROBLEMS

with full efficiency in his particular occupation,
and that for added regular hours of work (as
distinguished from emergency overtime) his
hourly rate would decrease in such manner as
to allow for all elements of decreased efficiency
with longer working hours. Very possibly it
would be found, in many occupations requiring
close concentration or intense effort, that the
rate for the ninth or tenth hour would approach
zero. The worker under such circumstances
would face the facts clearly. He could choose
deliberately the length of working day and cor-
responding income which gave him the greatest
real return in comfort, health, and leisure com-
bined. He would realize that, except under
very rare and special circumstances, the ques-
tion of hours of labor was one of no interna-
tional importance whatever. He would see,
also, that hours of labor might properly vary
in the same occupation as between the city and
the country. He might even appreciate the
danger of forcing a harmful concentration of
industrial development in the larger cities
through the establishment of uniform wages
and hours of labor in all localities. He might
recognize the fact that eight hours of labor in
a large city would involve, perhaps, the same
strain as nine hours of labor in a country town ;
and he might agree that the same pay should
be given for the nine hours of country labor
as for the eight in the city, in order that the

FACING THE FACTS 131

saving in labor costs in the country might
operate to offset disadvantages in transporta-
tion, and so forth, and thus permit many in-
dustries to be established in small cities with
resulting improvement in the workers' general
living conditions.

Next, as to prices of commodities, the worker,
as previously indicated, would practically have
eliminated questions of wages and hours of
labor. His prime interest would, therefore, be
in prices. He would look with immediate favor
on plans for a larger degree of simplification
in the variety and types of essential commodi-
ties. He would see very clearly the personal
advantages to him in improved processes and
machinery, and he would directly and immedi-
ately resent any action by other groups of
workers that tended improperly to increase the
prices of the things he purchased. Finally, also,
he might realize that the constant cheapen-
ing of commodities upon which his increases in
real wages depended could not take place mth-
out such rates of return on invested capital as
were necessary to encourage enterprise and
industrial progress.

All of the preceding vie^v'points would come
automatically if we had a monetary standard
based on the hour of labor. Yet the economic
factors and operations would be unchanged.
The only difference would be that certain neces-
sary relations, which are now obscured by con-

132 CURRENT ECONOMIC PROBLEMS

slant changes in price and wage levels, would
become obvious with wage levels fixed once for
all, and with prices the only variable. Similarly,
it might soon be recognized that no special
determinations of the relative value of the labor
of different workers and classes of workers
could exceed in accuracy or fairness that deter-
mination which the combined judgment of the
whole community now enforces, and over long
periods probably always will enforce, through
the operations of the so-called '4aw of supply
and demand."

A CONSTRUCTIVE PROGRAM

But the arguments from the hypothetical
labor standard of value have been carried far
enough. The essential point is that there is
growing up in the United States a body of in-
telligent and human-minded opinion that sees
only waste, hopeless conflict, and disorder as
the outcome of most of the present effort for
the improvement of the conditions of the masses
of the working population.

This body of opinion is firmly convinced of
the fundamental soundness and productivity of
the capitalistic system. It recognizes competi-
tive wastes, but holds these to be less serious
and more easily remedied than the unavoidable

FACING THE FACTS 133

wastes of a socialistic system.* It insists that
the law of supply and demand shall govern mar-
ket wages as well as prices; it contends that
forced increases in the market wage result only
in increased prices and the advantage of one
group of workers over the others; yet it con-
tends, also, that the test of real managerial
skill is the ability to pay more than a market
wage, mthout increasing prices, and with
mutual profit to employer and employee. It
believes in a frank discussion of industrial
problems and profits with all employees ; but it
would share profits and the responsibility of
management only with those who are willing

*A8 to the waste of the socialistic system, our critic says:

"The argument that socialism will bring about waste and
inefficiency is generally based on the assumption that the so-
cialistic system will fail to provide adequate incentive for
work. This assumption is in turn based on two further as-
sumptions; namely, that socialists urge an absolutely equal
wage to all workers, or a wage according to needs, and, sec-
ondly, that the profit incentive is and will always remain the
principal incentive for industrial activity. Socialists, how-
ever, have no objection to a difference of compensation based
on ability and productivity, and declare that, under a system
of social ownership, every incentive known to the present
system could be brought into play to produce the highest
results. They affirm, however, that many other incentives be-
sides the money incentive — the incentive of social prestige, the
pleasure coming from creative and artistic activity and the
doing of any work well, loyalty to the interest of particular
groups, and mere custom, can be utilized in industry much
more effectively than they now are. In the cooperative move-
ment, in certain branches of the public service, in many of the
professions, and even in business, one sees these incentives now
in operation to a greater or less extent. If the criterion of
success in business were the character of service rendered the
community, rather than the amount of money accumulated,
the profit incentive would lose much of its power over men. ' '

134 CURRENT ECONOMIC PROBLEMS

to share the risks of the enterprise by investing
in its securities. And, finally, it seeks, mthin
each industry, to insure regularity of employ-
ment and the fullest possible protection against
sickness, accident, incapacity and death.

These points of view, and the program which
goes with them, are in themselves fundamen-
tally constructive — ^but they are destructive of
many things that for years have been taught
as the very foundations of policy in the labor
movement.

For a succession of conflicts and armed
truces this opinion would substitute cooperation
and the slow building up of sound industrial
traditions. For distrust between employer and
employee it would substitute mutual confidence
and frankness of understanding. For the
present militant and monopolistic type of labor
organization it would substitute the employees'
association and the shop committee, reenforced,
as to problems affecting all classes of workers,
by national organizations Avhich shall think in
terms of economic research and popular educa-
tion, rather than in terms of the strike and the
boycott.*

*Our critic comments as follows regarding this paragraph:

"The advanced labor movement in this country is laying
increasing emphasis on constructive measures which lead to a
new status in labor, and is consequently relying less exclu-
sively upon the strike and boycott. A number of national
unions are developing research bureaus, as in the case of the
railway brotherhoods, the International Ladies Garment

FACING THE FACTS 136

There is today in the United States a growing
number of business organizations that are giv-
ing practical application to these principles and
policies. The response on the part of their
employees can perhaps best be illustrated by
quoting from a letter written by a previously
discontented worker to his superintendent
about three years after he had left the employ-
ment of one of these companies. The company

Workers and the Amalgamated Clothing Workers. They are
building up their own labor colleges, and in 1921 organized a
Workers' Education Bureau on a national scale. They are
establishing their own banks, going extensively into coopera-
tive enterprises, seeking corrective legislation, setting up a
machinery for tlie settlement of disputes, organizing their own
health service, purchasing recreational centers, developing
production standards, systems of unemployment insurance, and
of shop control, and gradually evolving a labor statesmanship
of a high order. Although these developments exist in a
minority of unions, recent progress in that direction has been
of no small significance.

"National and international unions have come to stay. Local
employees are often at a great disadvantage when bargaining
with their employers, because of lack of training and their
fear of discharge. It is but natural that the workers should
turn for aid to an organization of national scope to defend
their rights. Most company unions have hitherto been owned
body and soul by the company. The present international
unions have many faults. Their organization according to
craft instead of according to industry, and the exclusiveness of
many of them, lead to the greatest amount of confusion. But
they are evolving a wiser leadership, and may be depended on
as a great force in industrial reconstruction. They are going
to be improved not by such campaigns as the recent 'Open
Shop' campaign, directed by many toward the annihilation of
unionism, but by a recognition that here, as well as abroad,
labor has decided to bargain collectively, through organizations
of their own choosing, and that unions should be dealt vfith
as legitimate representatives of labor, not as outlaws."

136 CURRENT ECONOMIC PROBLEMS

must be nameless, but the writer can vouch for
the genuineness of the letter.

"About a year ago I wrote you a very sarcastic
letter, regarding your companies' methods of han-
dling labor .... As this is a world in which we live and
learn, and time alone proves right from wrong, I
want to be as fair to you today, as I was unfair
a year ago. I want to tell you, that you were right
and I was wrong. I wish to apologize to you like a
man for writing that letter. At the time I wrote it
I was sincere in my belief that capital did not deal
fairly with labor, but I have traveled in France,
England, Scotland and Spain since I wrote you, and
have always studied labor wherever I went. I am
sorry to say that labor has abused its power as much,
if not more, than what capital ever done I wit-
nessed the coal strike in England, and attended
some of their meetings. They only know one thing,
their own side of the dispute.

"One of the chief causes of unrest in the world
today is the labor unrest. We don't want and we do
not need strikes, what we need is more production.
An honest day 's work for an honest day 's pay. I can
never see where you benefit by a strike. If a body
of men should win a strike, they lose in the long
run, because they lose more money while on a strike
than what their gains amount to. They also lose
the mainspring of their work, which is the enthu-
siasm and interest they had in their work before the
seeds of discontentment set in. To my way of think-
ing today, there is absolutely no reason why labor
and capital cannot meet on a midde ground and
settle their disputes without bitterness creeping in.
They can if they will only be fair with each other,
but it seems as if some of them is always figuring on
slipping something over the other fellow I think

FACING THE FACTS 187

that if men felt like they could go to their employers
when they have a grievance, or thought they had a
grievance, and talk to him, man to man, and that he
would listen and reason with them to be fair and
honest, you would soon do away with all the unrest
of labor

"In ever}'^ country and every meeting I ever at-
tended I have always spoken of the loyalty of em-
ployees of the Company. You can safely say that
you have the most loyal and efficient group of men
and women in your employ of any organization in the
world. It is something that grows on you. You can-
not work for the Company long before you are either
one or the other, either you are intensely loyal or
you are not the type that has made the business
what it is today. If you are of that type you never
get it out of your blood

"In closing I want to say that although you were
slow in starting to meet the advance cost of living,
that your company has acted splendidly by their
employees. I am honest, and while you told me in
your office that day that you would gradually work
out the wage question, I did not believe you at that
time. I did not think you were sincere. Once again
showing me that I was wrong and you were right.

"In closing, I will say this and you can use it
wherever you like or whenever you like, and it is
this, that while I have worked for several different
companies, traveled in several different countries,
and met men of all kinds, I never have received as
fair and square treatment, never worked with a
cleaner, fairer and squarer bunch of men and women
than when I was with the Company. I also want to
thank you personally for the square way you treated
me. Most employers would have discharged me at
once. It has taken time to make me realize those
things but, I am grateful to you nevertheless. ' '

INDEX

Adams, H. C. "Description of
Industry," 21.

Aldrich Report, 95.

Amalgamated Clothing Workers
of America, 129, 135.

American Government, origins of,
89; statement of Thomas Jef-
ferson with respect to funda-
mental principles of, 40 ; Indi-
vidualism under, 40.

American Revolution, 39.

Amherst, 90.

Autocracy, German development
of, in paternalistic and com-
munistic forms, 41, 42; not
admitted by modern socialists
to be feature of true Marxian
philosophy, 43, 45, 46; consid-
ered with respect to organiza-
tion of human body, 47, 48.

Babylon, 19-20.

Bacon, Lord, 19.

Bank credit, use of, as money,
77, 79; relative importance of,
as compared with coin and
currency, 77; close relations of,
to amount of demand deposits,
79; relation of, to business
cycle, 80-84.

Bank deposits (see Bank credit).

Bank loans (see Bank credit).

Belgium, 65.

Bell Telephone System, 102.

Bolshevist Government (see Rus-
sia and Communism).

Boudin, Louis B., 48.

Bowley, Prof., 120.

Boycott, 134.

Bradst reefs, 95.

Bureau of Foreign and Domestic
Commerce, 107.

Bureau of Industrial Research,
115.

Bureaucracy (see Autocracy).

Burke, Edmund, 35.

Business cycle, harmful effects of
depressions related to, 60; de-
scribed, 73-78; control of, nec-
essary prior to inception of

depression, 83-84 ; possible
methods of controlling, 84.
Business depressions (see Busi-
ness cycle).

Capital, proportion of national
income accruing to owners of,
29, 62, 103-106; defined, 88;
constructive purposes served by
private, 50; relative unimpor-
tance of charges for, 51, 52;
advantages in widespread pri-
vate ownership of, 53; trend
of wages in relation to retxirn
on, 54; bulk of larger incomes
derived from rents and return
on, 103; profits of, in competi-
tive business, 108-110; distri-
bution of. by rates of return
in competitive business, 108-
109; figures as to profits of, in
going concerns claimed to be
misleading, 108-110, 123-124;
average rate of return on, 122-
124; average return on, in
time of Adam Smith, 122-123;
probable true rate of return
on, 124; classification of in-
vested, by rate of return, 125-
126; return on, in sub-marginal,
marginal, and supramarginal
concerns, 125-127; relative mo-
nopoly power of, 127-128; so-
cialistic attitude toward neces-
sary return on, 128-129.

Centralized power (see
Autocracy).

China, 13.

Communism, German origin of,
4 1 ; bureaucratic autocracy
under, 42 ; relations of, to
modern socialism and Marxian
philosophy, 43; defined, 45, 46.

Communist Manifesto, 23.

Competition, in relation to theory
of labor as "residuary legatee."
70; profits under conditions of,
108-110, 122-127.

Construction (see Industrial
equipment).

Corporations, compared with
vital organs and controlling

139

140 CURRENT ECONOMIC PROBLEMS

ganglia in human body, 48;
only form of organization
capable of administering in-
dustry, 57.

Crises (see Business cycle).

Crompton, 22.

Day, E. E., 90, 92.

Declaration of Independence, 41.

Descartes, 22.

Desires, normal human, 17.

Dictatorship (see Autocracy).

Distribution (see Production and
distribution).

Economic Institute, 114.

Egypt, 19-20.

Employees asssociations, 134.

Employment, tendency toward
automatic provision of, for
new workers, 65-66; required
for 2,000 new workers each
day, 66; method of absorption
into, applies similarly to im-
migrants, native born, and
those released by labor saving
machinery, 66-67; relation of,
to business cycle, 74, 76, 78.

Engels, 23.

England, 20-25, 96-97, 110, 136.

Euler, 22.

Expenditures, total of, substanti-
ally equal to total income,
61 ; forms of, 61 ; savings as
indirect form of, 61 ; round
flow of, 61-65 ; effect of inter-
national trade on round flow
of, 65; relation of, to business
cycle, 74-75.

Fabian Bureau, 89.

Federal Congress, 48.

Federal Income Tax Bureau, 103.

Federal Reserve Bank of New
York, 90.

Federated American Engineering
Societies, "Waste in Industry,"
111.

Feud spirit, in industry, 11, 12.

Ford, Henry Jones, "The Natural
History of the State," 36.

Foresight, importance of, in in-
dustry, 57.

France, 97, 186.

Galileo, 22.
George III, 21.
Germany, 41, 42, 44, 97.

Government (see Organization,

social and industrial).
Greece, 21.

Hargraves, 22.

Harvard, 90.

Harvard Committee on Economic
Research, 114.

Hillquit, Morris, 43.

History, industrial, prior to In-
dustrial Revolution, 19-22; dur-
ing Industrial Revolution, 21-
26 ; the three stages of, 27, 28.

Hours of labor (see Length of
working day).

Hyde Park, 113.

Immigration, reasons for restric-
tion of, 117-119.

Income, distribution of, among
factors in production, 29, 62-63,
103-106, 121-122; bearing of
taxes on effective distribution
of, 30; reinvestment of, in
productive enterprises, 31 ; pro-
portion of, derived from invest-
ments ordinarily proposed for
socialization, 52, 122; flow of,
directly related to expendi-
tures, 61; round flow of, 61-65;
effect of international trade on
round flow of, 65; relation of,
to business cycle, 74-75; studies
of National Bureau of Eco-
nomic Research with respect to
size of U. S. national, 98-99;
distribution of, in U. S. among
individuals, 100-101, 120-121;
relative distribution of, be-
tween official salaries and
wages, 101-103; tendency of,
toward increasing or decreas-
ing concentration in few hands,
103; fallacy in belief as to
concentration of, 119-122.

Individualism, among progenitors
of mankind, 36; protection of,
under American form of gov-
ernment, 40; contrasted with
socialism, 44; as displayed in
organization of human body,
47.

Industrial equipment, necessity
for growth of, 67; prerequisites
for incresise in, 71; per cent, of
national income required for
increase in, 78; relation of ex-
penditures for, to business
cycle, 74-78.

INDEX

141

Industrial Revolution, description
of, 21-26; effect of, on produc-
tion, 23; effect of, on popula-
tion. 23-25; apparent effect of,
in developing business crises,
26; problems left unsolved by,
26, 38.

Interest (see Capital).

Interest rates, effect of taxes on,
72; relation of, to business
cycle, 75-78.

International Federation of
Trade Unions, 110.

International Ladies' Garment
Workers, 134-135.

Investor, constructive purposes
served by private, 50; impor-
tance of, as only dependable
source of foresight, 57-58.

Ireland, 65.

Italy, 22.

Japan, 64-65.

Jefferson, Thomas, "The Writings
of Thomas Jefferson," 40.

Kautsky, 43.

King, W. I., studies of, 90, 92, 98.
120; "The Wealth and Income
of the People of the U. S.," 98.

Knauth, O. W., 98.

Labor, income of and payments
to (see Wages).

Labor, mobility of, 14; monopoly
power of, 127-128.

Labor Bureau, Inc., 115.

Labor unions, demand of more
radical, for democratizing of
industry, 110; attitude of, to-
ward productivity and sabot-
age, 129; attitude of progres-
sive employers toward, 184.

Laidler, H. W., "Socialism in
Thought and Action," 23.

Land (see Natural resources).

Law of supply and demand, ef-
forts at evasion of, 83; fair-
ness of, in fixing of relative
wage rates, 132.

Leibnitz, 22.

Length of working day, 129-130;
proper variations in, between
city and country, 130-131.

Lenin, 33, 43.

Liberty, individual, long strug-
gle for, 38; restrictions upon,
39.

London, lis.

Macaulay, T. B., "History of
England," 20.

Macauley, F. R., 98.

Malthusian Doctrine, 24, 26, 97;
modern interpretation of, 116-
117.

Management, problems of, 13-17;
under pioneer conditions, 13,
14.

Management and property,
shares of, in net value product
of highly organized industries,
104-105.

Marx, Karl, quoted, 23; theories
of, 41, 43; referred to, 119, 120.

Meredith, H. O., "Economic His-
tory of England,'' figures
adapted from, 96, 97.

Mitchell. Wesley C, 98.

Money, quantity theory of, 79-83;
tendency to expand supply of,
through full utilization of bank
credit, 80; relations of, to busi-
ness cycle, 80-83.

Monopoly, profits of, 70-71, 129;
relative, power of labor and
capital. 127-128.

Moscow Trades Union Interna-
tional, 110.

National Bureau of Economic
Research, "Income in the
United States," 91, 98-102. 104-
105, 107, 114, 120.

National Industrial Conference
Board, 114.

Natural resources, per cent, of
national income accruing to
owners of, 29, 62-63, 103-106;
rent of, important element in
larger individual incomes, 103;
relations of, to population and
standards of living, 116-117,
relative monopoly power of,
127, 128.

Net value product, division of, in
highly organized industries,
104-105.

Newton, Isaac, 22.

North Sea. 86.

Organization, human, beginnings
of, 18. 19.

Organization, social and indus-
trial, proper demands upon,
37, 38; compared with organi-
zation of human body, 47, 48;
functions of, classified, 49, 50;
necessary gradations in, 50;

142 CURRENT ECONOMIC PROBLEMS

fundamental principles of op-
eration of, 60; practical re-
quirements with respect to, 87-
88; trend of sound develop-
ment in, 88; political dangers
arising from false development
of, 88-89; socialistic claims as
to trend of, 89 ; tests of present
strength and weakness of, 89-
90; a constructive program
with respect to, 132-137.

Penelope. 21.

Pittsburgh, 11.

Plumb, 57.

Pollak Foundation, 114.

Population, increase resulting
from Industrial Revolution, 23;
chart of increase in England
and Wales from 1100 to 1900,
25; rate of Increase in, in U.
S., 68 ; relations of, to natural
resources and standards of hv-
ing, 116-117; relations of, to
military and economic conflict,
117.

Prices, proportion of, due to sal-
ary and wage payments, 33,
55; increases in, due to mul-
tiplicity of styles and designs,
55; effect of taxes on, 68-69;
relations of business cycle to,
75-78; inflation of, at culmina-
tion of boom, 82 ; importance
of. under hypothetical labor
standard of value. 131.

Product (see Net value product).

Production and distribution, in
relation to economic activities,
59-85.

Production, physical, rate of in-
crease in, 68 ; relation of, to
business cycle, 74-78; statistics
relating to, 90-92.

Productivity, losses in, due to
war, 68; relation of, to busi-
ness cycle, 76, 78; dependence
for material welfare upon. 85;
importance of maintaining
steady increase in, 85; statis-
tical evidence of fundament-
ally sustained Increase in, 98;
labor union claims as to cause
of increases in, 98; labor union
attitude toward, 129.

Profits (see Capital).

Prussia, 42.

Railroads (see Utilities, public).
Railway Brotherhoods, 184.

Renaissance, 22.

Rent (see Natural resources).

Representative assemblies, com-
pared with central brain in hu-
man body, 48.

Revival of Learning, 22.

Robinson, James H., "The New
History," quoted, 18.

Rome. 21.

Russia, 33, 43, 45, 46, 58. 89.

Sabotage, attitude of progressive
labor unions toward, 129.

Salaries, effect of high, on dis-
tribution of income, 29 ; social-
istic attitude toward, 29.

Savings, per cent, of, necessary
out of national Income, 73, 106-
107; eflFect of, in producing re-
vival from business depression,
74-75; sources of, largely in in-
terest, profits and rents, 107;
transfer of sources of, to labor
would not release investment
fund for expenditure in hn-
proved st.andards of living, 107.

Schoenhof, J.. "History of Money
and Prices." 24, 97.

Science, rapid progress of. prior
to Industrial Revolution. 22 ;
practical applications of. at be-
ginning of Industrial Revolu-
tion, 22-23; increase in real
wages due to applications of,
during past two generations,
68.

Scotland, 136.

Shop committee, 134.

Simplification, of commoditiea,
possible gains through, 55.

Smith. Adam, 122-123.

Snyder, Carl, 90-92.

Socialism, attitude of, toward
high salaries, 29; attitude of,
tow.'ird waste. 29, 133; attitude
of. toward inherited fortunes.
31 ; among the progenitors of
mankind, 36; contrasted with
individualism. 44; defined, 45-
4fi; attitude of, toward private
capital, 52-53; demand of, for
democratizing of industry, 110;
incentives to productivity
claimed under, 188.

Spain. 136.

Standard of living, marked im-
provement of, not practicable
through transfer to labor of
sources of investment fund,
107.

Standardization (see SimpHflca-
tion).

INDEX

143

"State and Municipal Enter-
prise," 89.

Statistical Abstract of the U. S.,
107.

Sterrett, J. E., 108-109.

Stewart, W. W., 90, 92.

Strikes, 134-136.

Supply and demand (see Law of
supply and demand).

Taxes, ultimate eflFect of, on real
wages, 68-69; effect of, on in-
terest rates, 72; socialistic at-
titude toward, 73.

Trotsky, 33, 43.

Ulysses, 21.

U. S. Bureau of Labor Statistics,
95.

Utilities, public, relation of, to
employees, investors, and pub-
lic, 14, 15; investment in, 15;
necessity for growth of, 15;
necessity for surplus earnings
of, 16; effect of public owner-
ship on cost of operation of,
16; relative unimportance of
capital charges in connection
with, 50, 51 ; payments for sal-
aries in, 102.

V
Value product (see Net value
product).

Wages, of public utility employ-
ees, 14, 15; of English car-
penters and masons from 1766
to 1882, 24; per cent, of
national income received as,
29, 62, 103-106; determination
of real, by productivity of en-
tire industrial system, 32 ; fal-
lacious assumptions with re-

spect to possible increases in,
52-53; trend of return on
capital in relation to, 54; abso-
lute rather than relative share
of, in product to be considered,
57 ; increase in, of skilled
workers in U. S. since 1855, 87-
68 ; normal increase in real, 68-
69, 93; effect of unrecognized
changes in commodities and
services on real, 69; relation
to, of theory of labor as "re-
siduary legatee," 70; socialistic
theory with respect to, 70; re-
lation of, to business cycle, 76,
94; statistics relating to real
increase in, 93-97; real in-
creases in, subject to many
temporary checks and irregu-
larities, 93; English, French
and German statistics regard-
ing, 97: real increases in, in-
dicated by studies of per cap-
ita national income in U. S.,
98-99; possibility of increasing
share of, in national income,
106-110; probable absence of
margin of profits for increase
in, 122-128; application of law
of supply and demand to de-
termination of, 132-133; abil-
ity to pay more than market,
real test of managerial skill,
133.

Wales. 23, 25.

Waste, socialistic attitude to-
ward, 29, 119-120; apportion-
ment of responsibility for, by
Federated American Engineer-
ing Societies, ill; fallacy in de-
mand for 100% elimination of,
111-112; percentage of, at any
time, relatively unimportant if
rate of increase in productivity
is high, 112.

West Virginia, 11-12.

Workers Education Bureau, 185.