PRINCIPLES OF POLITICAL ECONOMY BY CHARLES GIDE PROFESSOR AT THE UNIVERSITY OF MONTPELLIER, LECTURER ON ECONOMICS AT THE PARIS LAW SCHOOL SECOND AMERICAN EDITION ENTIRELY KE-TKANSLATED FROM THE LATEST FRENCH ORIGINAL AND ADAPTED TO THE USE OF AMERICAN STUDENTS BY C. WILLIAM A. VEDITZ, PH.D., LL.B. SOMETIME FELLOW IN SOCIOLOGY AT THE UNIVERSITY OF PENNSYLVANIA PROFESSOR OF ECONOMICS AT BATES COLLEGE, LEWISTON, MAINE BOSTON, U.S.A. D. C. HEATH & CO., PUBLISHERS 1904 COPYRIGHT, 1891 AND 1903, BY D. C. HEATH & CO. TRANSLATOR'S PREFACE THE fact that Professor Gide's "Principes d'Economie Politique " has gone through eight editions in the original French and been translated into the Russian, Swedish, Polish, Dutch, Finnish, Spanish, and Bohemian languages, furnishes presumptive evidence of its usefulness. The first English translation, published in 1889, has been very widely used in England and America as a college text-book, despite numer- ous features of this translation which placed it at a disad- vantage when compared with other text-books designed to supply practically the same need. These features have been pointed out from time to time by benevolent critics ; but the continued extensive use of the book with classes in political economy led the publishers to conclude that a new edition, without the objectionable features, and adapted more closely to the needs of American college classes in economics, would find an even wider acceptance than the first English translation. The successive French editions of the work have under- gone numerous and important changes, changes not so much in the general scope and spirit of the book as in the manner of presenting certain sections of the subject. The fundamental purpose has remained precisely the same : to give the reader a plain statement of the accepted principles of economics, a summary of the unsettled problems of the science, and a clear, brief, and impartial outline of the various solutions that have been proposed. iv TRANSLATOR'S PREFACE The book as now issued, however, is not a mere transla- tion of the eighth edition of the original, published some months ago. In some respects it is more, and in others less. I have, in the first place, eliminated all distinctively French illustrative material which could add little or noth- ing to the value of the book in the hands of American readers. For this French material I have substituted data from American sources ; and in so doing I have endeavored to quote the latest and most reliable authorities. The vol- ume contains a vast amount of statistical and other illus- trative material which, I trust, will give the book a vitality, a closeness to real industrial life, and a smack of American " up-to-date-ness " which ought not to be objectionable, but which is unfortunately so rare in economic text-books. I see no sound reason why political economy should be re- garded as it undoubtedly is regarded by a large number of students as a recondite study dealing with all manner of uninteresting theoretical minutiae . No subject is, as a matter of fact, more intensely practical. The undue em- phasis on purely doctrinal matters, unaccompanied by any appeal to the facts of economic experience or history, and with apparently no regard for the problems that are now demanding a solution, cannot improve the reputation of political economy. It is to be hoped, therefore, that the present accumulation of illustrative material will counteract this tendency. Although Professor Gide himself gives an abundance of statistical and historical data, I have gone even further in this direction. In the discussion of protec- tive tariffs I have given a history of our own tariff legis- lation ; in connection with the discussion of metallic money and of paper money I have outlined our own instructive monetary experiments ; and in the treatment of the prob- TRANSLATOR'S PREFACE v lems of bank organization I have sketched the history of banking in the United States. In the second place, I have suppressed a few notes of interest only to the French reader, and I have entirely omitted the appendix on French finance. This appendix appears to have been little used in the previous English edition, and certainly is of no more value to the American student than a sketch of German or English public finance. There was really no valid reason for its retention in the present edition. It would, to be sure, have been possible and perhaps even desirable from some points of view to substitute a sketch of American public finance. There are, however, several excellent small text-books which cover this subject much more satisfactorily than the twenty-five or thirty pages of an appendix. In the third place, some of the sections on Distribution and on Consumption seemed hardly abreast of American investigations in these exceptionally important domains of economic science, and I have therefore taken the liberty here and there to add whole paragraphs and pages. This added matter, however, is purely expository and supplement- ary, and is in no wise discordant with the avowed purpose of Professor Gide's book. For he has assured me personally and declared repeatedly, that his primary object is to give the student an idea of all the solutions which have been proposed for mooted problems ; and certainly the work of American, English, and Austrian economists in the field of distribution is entitled to as much consideration as the exploded doctrines of the older schools. Except for these changes, I have tried to adhere closely to the thought of the author. Wherever it has seemed neces- sary to choose between good English style and fidelity in vi TRANSLATOR'S PREFACE rendering the thought or attitude of the original, I have not hesitated to sacrifice the former to the latter. Some of the peculiarities of style are due to this ; for the others I must bear the blame. It would be ungrateful not to acknowledge the assistance rendered in the preparation of this book by Dr. Alvin S. Johnson, of Columbia University, who offered many sugges- tions with regard both to the contents and the style, and by Mr. William T. Foster, of Harvard University, for carefully reading the greater part of the proof and pointing out innu- merable possibilities of improvement in English. I am also greatly indebted to Professor Gide himself for the keen and constant interest he has shown in the present translation. C. WILLIAM A. VEDITZ. BATES COLLEGE, LEWISTON, MAINE, November, 1903. FROM THE AUTHOR'S PREFACE TO THE EIGHTH EDITION THE first edition of this book was published twenty years ago. During this period grande mortalis cevi spatium the progress of sociological thought has been so rapid that opinions which were then held to be revolutionary now incur the danger of being regarded as commonplace. The small school then in its infancy which I named the "school of solidarity," and which adopted a line of thought between "liberalism," on the one hand, and "collectivism," on the other, has grown to eminence; what was then a small, unfrequented path is now a highway traversed by the masses. What I have endeavored to do is to give a general descrip- tion, rather than an analysis, of the economic world of the vast domain in which we live and move without knowing very well whither we are going. I have sought to arouse curiosity and interest in economic problems rather than always to furnish cut-and-dried solutions. I have tried not so much to convey absolute conviction based on scientific laws that are still imperfectly understood, as to impart a sincere and fervid desire to discover the truth. I have, moreover, tried to make political economy, which in France has long borne (without much protestation) the name of tedious literature, appear to the beginner as an attractive and captivating subject. I know from personal testimony vii viii FROM THE AUTHOR'S PREFACE that among the readers of various nationalities who have studied political economy in these pages, there are at least a few who have found the science interesting, who have learned to love it, and who will continue to be devoted to it. CHARLES GIDE. CONTENTS BOOK I. GENERAL NOTIONS PAGE I. The Object of Political Economy 1 II. Whether there are Natural Laws in Political Economy . . 3 III. The Formation of Economic Science ...... 7 IV. Differences of Opinion concefning Method .... 13 V. The Various Economic Schools of Thought .... 22 1. The Liberal School - 23 2. The Socialist School " 28 3. State Socialism . . . \ 32 4. Christian Social Reform 35 5. The Doctrine of Solidarity 38 VI. The Wants of Man 40 VII. ' What is Wealth? 46 VIII. What is Value? 49 1. Utility 52 2. Labor 59 IX. What is Price? 64 BOOK II. PRODUCTION PART I. THE FACTORS OF PRODUCTION , , CHAPTER I. LABOR I. On the Part played by Labor in Production . . . .71 II. How Labor Produces 73 III. The Evolution of Ideas concerning the Productivity of Labor . 75 IV. Pain as a Factor of Labor 80 V. Time as a Factor of Labor 83 CHAPTER II. NATURE I. Environment 86 II. Land .89 III. Raw Materials 91 IV. The Law of Diminishing Returns 92 ix X CONTENTS PAGE V. Motive Forces 96 VI. The Illusions to which Machinery has given Rise . . . 103 VII. Whether Machinery is Detrimental to the Working Glasses . 110 CHAPTER III. CAPITAL I. The Two Concepts of Capital 116 II. The Distinction between Wealth which is Capital and Wealth which is not Capital ........ 120 III. What is meant by the "Productivity " of Capital ? . . .124 IV. The Durability of Fixed and of Circulating Capital . . .127 V. How Capital is formed 129 PART II. THE METHODS OF PRODUCTION CHAPTER I. THE ORGANIZATION OF PRODUCTION I. The Stages of Industrial Evolution 132 II. How Production is regulated . 137 III. Crises 142 IV. Overproduction and the Law of Markets 147 V. Competition . . .151 CHAPTER II. ASSOCIATION / I. The Successive Forms of Association 156 II. The Association of Capital .159 III. Large-scale Production ........ 161 IV. Is the Tendency toward Large-scale Production Inevitable and Desirable ? 166 CHAPTER III. THE DIVISION OF LABOR I. The Successive Forms of the Division of Labor . . . .173 II. The Conditions of the Division of Labor 176 III. The Advantages and Disadvantages of the Division of Labor . 178 BOOK III. THE CIRCULATION OF WEALTH CHAPTER I. EXCHANGE I. The History of Exchange 184 II. Exchange Value -186 The Utility Theory 189 The Cost Theory 193 III. How Value is measured by Exchange 196 CONTENTS XI PAGE IV. The Advantages of Exchange 197 V. The Means of facilitating Exchange 201 VI. History of the Part played by Merchants 201 VII. The Means of Transportation 206 VIII. The Division of Barter into Sale and Purchase . . . .210 CHAPTER II. METALLIC MONEY I. The History of Money 213 II. Is Money a Superior Kind of Wealth ? 219 III. Disturbances caused by Fluctuations in the Value of Money . 223 IV. Whether Metallic Money will continue to decline in Value . 228 V. The Conditions which should be fulfilled by All Good Money . 232 VI. Gresham's Law . . . . 237 VII. The Necessity of employing Several Metals, and the Difficulties which result therefrom . . . ... . .241 VIII. Why Bimetallist Countries really have but One Money . . 246 IX. Whether it is Advisable to adopt the Monometallic System . 250 CHAPTER III. PAPER MONEY I. Whether Metallic Money can be replaced by Paper Money . 258 II. Whether the Creation of Paper Money is equivalent to the Creation of Wealth 265 III. The Dangers resulting from the Use of Paper Money, and the Way to prevent them 269 IV. American Paper Money 273 V. How even Paper Money may be dispensed with . . . 280 VI. How Improvements in Exchange tend to bring us back to Barter 286 CHAPTER IV. INTERNATIONAL TRADE I. The Balance of Trade 291 II. How the Balance of Accounts is maintained .... 298 III. The Advantages of International Trade 301 IV. Why International Trade necessarily is detrimental to Some Persons 307 V. The History of Protectionism 310 VI. The Doctrine of Protection . . . . . . .318 VII. The Doctrine of Free Trade 331 VIII. The Relative Importance of Foreign and Domestic Commerce . 346 IX. Some Moderate Forms of Protection ...... 35C X. Commercial Treaties . ... 353 Xll CONTENTS CHAPTER V. CREDIT PAGE I. Credit is only an Extension of Exchange 356 II. The History of Credit 359 III. Can Credit create Capital ? 363 IV. The Function of Banks . . . . . . . .367 V. Deposits .^ .... 368 VI. Discount 370 VII. The Issue of Bank Notes 375 VIII. Differences between Bank Notes and Paper Money . . . 378 IX. The Rate of Exchange 380 X. A Rise in the Rate of Discount 388 XI. Some Special Forms of Credit 393 1. Land Credit 393 2. Agricultural Credit 395 3. People's Banks 396 4. Building Associations 397 XII. Free Banks . 399 XIII. The Organization of Banks 402 BOOK IV. DISTRIBUTION PART I. THE VARIOUS SYSTEMS OF DISTRIBUTION CHAPTER I. THE PRESENT SYSTEM I. How the Distribution of Wealth is effected . . . .421 II. Why this System of Distribution does not seem Just . . 423 HI. The Origin of the Right of Property 428 IV. The Evolution of the Right of Property with Regard to its Object 430 V. The Evolution of the Right of Property with Regard to its Attributes 432 VI. The Inequality of Wealth 437 VII. The Right to be Idle 444 VIII. The Right to Relief . , . 447 CHAPTER II. THE SOCIALISTIC SYSTEMS I. Equal Sharing 455 II. Communism 459 III. Saint-Simonism and Inheritance 464 IV. Collectivism 467 V. Cooperation 478 CONTENTS Xlll PART II. THE VARIOUS KINDS OF INCOME CHAPTER I. WAGES PAGE I. Definition of Wages 487 II. History of the Wage System - , 488 III. The Laws of Wages - 492 1. The Wages Fund Theory ...... 497 2. The Iron Law of Wages 501 3. The Theories of the Productivity of Labor . . .505 IV. The Increase of Wages ........ 514 V. The Hours of Labor 521 VI. Trades Unions 528 1. Strikes 535 2. Arbitration and Conciliation 537 VII. Workingmen's Insurance 539 VIII. The Future of the Wage System . . . . . . 646 CHAPTER II. INTEREST I. The Ownership of Capital 553 II. The Legitimacy of Interest 556 III. History of Loans at Interest . . . ' . . . . 563 IV. The Laws of Interest 568 V. Does the Rate of Interest tend to fall ? , 577 CHAPTER III. THE RENT OF LAND I. The Law of Rent . 582 II. The Unearned Increment of Land . . - . . . . 590 III. The Legitimacy of the Rent of Land 593 IV. The Evolution of Property in Land 600 V. The Hire of Land 606 VI. Plans for nationalizing the Land . . . , . .614 VII. The Subdivision of Property in Land 620 CHAPTER IV. PROFITS I. The Nature and Definition of Profits 623 II. The Laws which determine Profits 627 III. The Legitimacy of Profits 632 IV. Profit-sharing . ' .642 V. Productive Cooperation 648 XIV CONTENTS BOOK V. CONSUMPTION PAGE I. The Nature and Laws of Consumption 655 II. Whether Production will always keep Pace with Consumption . 666 CHAPTER I. SPENDING I. Whether Spending helps Business 670 II. Luxury 673 III. Consumers' Associations 677 IV. The Cost of Housing 681 V. Absenteeism . 685 CHAPTER II. SAVING I. The Conditions necessary for Saving 688 II. Institutions to facilitate Saving 692 III. The Social Utility of Saving 694 IV. Investment 697 INDEX . , 701 PRINCIPLES OF POLITICAL ECONOMY BOOK I. GENERAL NOTIONS I. The Object of Political Economy THE heavenly bodies, the earth that we inhabit, the ele- ments that it contains, as well as the animals and plants that live on its surface, in fact, all the things that con- stitute the material universe and all the phenomena that take place therein, are the subjects of a distinct group of sciences known as the physical and the natural sciences. But in this vast world there are other subjects no less worthy of study, namely, men themselves, living in society ; in fact, they could not possibly live otherwise. The relations that unite men socially form the subject of a separate group of sciences, called the social sciences. As there are among men many kinds of social relations, moral, legal, economic, political, religious, and, finally, linguistic relations which serve as a vehicle for all the others, so there are many distinct social sciences, known as ethics, law, political economy, politics, the science of religions, and the science of languages. 1 It is true that the lines of demarcation among the social sciences, which all treat ultimately of man as a member of society, cannot be drawn so sharply as those that separate sciences having dissimilar subjects, such as geology, botany, and zoology. Hence the classification of social sciences will 1 We do not mention history in this list, because history has no distinct subject-matter of its own. Every social science, and even every natural science, has its history, which is the study of the same class of facts from the standpoint of their succession in time. 2 PRINCIPLES OF POLITICAL ECONOMY always be more or less artificial, made to facilitate study and to help overcome the limitations of our understanding rather than to indicate any natural separation of them. 1 Indeed, the frontiers of these sciences, especially of those most closely related to each other, ethics, jurisprudence, and politi- cal economy, will always be somewhat indefinite; some institutions, as, for example, property, inheritance, and the wage system, fall clearly within the scope of all three. This fortunate interdependence, moreover, is helpful to each of these sister sciences. We need only observe that the same subject may be studied from distinctly different points of view, and bear in mind the dissimilar standpoints of the moralist, the lawyer, and the economist. This is not diffi- cult. To do our duty, to exercise our rights, to satisfy our wants, are three quite different aims of human activity ; and only the last of these is the proper subject of economic science. We may say, therefore, that political economy has to do with the relations of men living in society, so far as these relations tend to satisfy the wants of life and concern the efforts made to provide for all that is generally under- stood by material welfare. 2 At present there is a tendency to divide the science into two studies, pure political economy and social economics, which 1 Augusts Comte considered it irrational to separate the sciences that treat of human societies. He maintained that there should be but one social science, covering all the aspects of social life, and to this science he gave the name "sociology," which has since become classical. He expressly con- demned every effort to make political economy a distinct science. It is in one sense true that all social sciences partake of the unity of human nature, but in the light of good scientific methods we cannot gainsay the right to keep the above-named social sciences apart as distinct fields of study. 2 Formerly it was customary to say (and it is often said to-day) that political economy is the "science of wealth." But this definition has the disadvantage of turning attention away from the real subject of economics, which is man and his wants, and concentrating it on exterior objects which are only means for the satisfaction of human wants. This is not a mere question of words, for the erroneous point of view has exposed many econo- mists to the justifiable reproach of reasoning as though man were made for wealth, and not wealth for man. NATURAL LAWS 3 differ less in their content than in the manner of approach- ing the subjects they both treat. On the one hand, pure political economy (sometimes called abstract economics or simply economics) is supposed to in- vestigate those relations that arise naturally among men living together, just as though we were studying the rela- tions among material lifeless bodies of any kind what Montesquieu called "the necessary relations which result from the nature of things." It does not undertake to pass judgment on these relations from either the moral or the practical standpoint, but attempts simply to explain what these relations are. In this respect it may be said to re- semble any natural or exact science, since it endeavors to explain matters just as they happen to be, without question- ing their desirability. On the other hand, social economics is supposed to study chiefly the voluntary relations which men have established among themselves in the form of social organizations, written laws, customs, or other institutions having for their object the improvement of social conditions. It purposes to inves- tigate and devise means by which better conditions may be attained. Hence it is more closely allied to the moral sciences. 1 II. Whether there are Natural Laws in Political Economy When we grant to any branch of human knowledge the name of science, our object is not the simple bestowal of an honorary title. We mean that the facts with which it deals are connected by certain necessary relations which have been discovered, and which are called laws. 1 The division here made must not be mistaken for that which distinguishes theoretical from applied or practical economics. Political economy always comprises a practical part which takes up the best means of utilizing the natural laws discovered by the science ; i.e. such means as banks, railroads, monetary and commercial systems, taxes, etc. Social economics, on the other hand, since it seeks to determine what ought to be, i.e. the relations which should in justice prevail among men, always embraces a theoretical part. 4 PRINCIPLES OF POLITICAL ECONOMY In some domains the regularity of occurrences is so obvious as to attract the attention even of persons least accustomed to scientific speculation. A mere glance at the firmament is enough to show the regular nightly progress of the stars, the monthly succession of the phases of the moon, and the annual journey of the sun through the constellations. In the most remote days of history, shepherds watching their flocks and sailors steering their vessels discovered the peri- odicity of these movements, and thus paved the way for a true science, the oldest of all sciences, astronomy. The changes that take place in the constitution of inor- ganic matter and organic bodies are not so simple as this, and the uniformity of their coexistence and succession is not so easy to comprehend. Many centuries, therefore, had to elapse before the human mind, bewildered by the com- plexity of things, succeeded in laying hold of the guiding thread, in finding law and regularity in these phenomena as well, and thus in establishing the sciences of physics, chemistry, and biology. Little by little the idea of a permanent regularity of phenomena has penetrated all domains of human knowledge, even those which at first seemed destined to remain forever closed to it. Even the winds and waves, which, from time immemorial, poets have made the emblem of inconstancy and capriciousness, have been brought under the sway of universal law. The great laws which govern currents of air and of water have been discovered, and now form the basis of meteorology. Even the chances of wagers, the probable combinations of numbers in a throw of dice, have been subjected to cal- culation. Hazard itself may henceforward be said to have its laws. The time was of course bound to come when the great idea of a natural order of things, after having step by step success- fully invaded all other fields of knowledge, should at last penetrate the domain of social facts. The honor of having first recognized and proclaimed the existence of a " natural NATURAL LAWS 5 government " of society is due, as we shall see, to Montes- quieu and the Physiocrats. Yet there are many who hesitate to put the social sciences on a level in this respect with the physical sciences. It seems to them that there is between these two classes of sciences an insurmountable barrier, and that the latter belong to the realm of inexorable Necessity, while the former belong to the realm of Liberty. They believe that the physical sciences have to do with matters that cannot help taking place, while the social sciences are concerned with things that may or may not take place, according as we choose. In the physical sciences, the savant can always foresee exactly what fact will succeed or accompany another given fact. Thus the astronomer can announce a thousand years in advance the exact minute when an eclipse will take place. The chemist combining two substances in a crucible knows just what compound will result and what its proper- ties will be. The same power enables the geologist to enumerate the various strata that will be encountered in piercing a tunnel or in sinking a mine-shaft. But, it is asked, can the economist, the historian, and the statesman tell us anything [in advance concerning social and political events ? Is it not true that, at the most, they can but venture conjectures which are as often as not discredited by actual occurrences ? Prophecy or prevision may sometimes be possible to the intuitive mind of a genius, but in the social sciences scientific prediction is impossible. The above argument is based on a twofold error, regard- ing the meaning of the expressions " natural law " and " free will." We are in the habit of representing natural law figuratively as an inflexible, unchangeable power, command- ing unconditional obedience. But natural law is really nothing more than the expression of certain relations which arise spontaneously among things or among men. These relations may, to be sure, be called necessary ones, but only when certain foregoing conditions are fulfilled. Atoms 6 PRINCIPLES OF POLITICAL ECONOMY of hydrogen and oxygen do not necessarily produce water ; but if one atom of oxygen is placed in contact with two of hydrogen under certain conditions of temperature, press- ure, etc., they will form water. Similarly, men are not obliged to buy and sell, but if a man disposed to sell meets a man disposed to buy, and if their offers are mutually accept- able, they will necessarily make a transaction at a price which may be determined ; and this transaction will be none the less a free contract. Free will is commonly understood to mean the power to do just as one pleases, without cause or reason. To act without an appreciable cause, however, is, as a little reflec- tion will show, precisely what a madman does. The conduct of every reasonable man is determined by motives, and there are always sufficient causes, known or unknown, for his actions. 1 Even those practical people who most vehemently deny that economists can foretell happenings in the economic world constantly employ the art of prevision in the ordinary course of their lives, and in the management of their everyday affairs. Every one who speculates and who is there that does not speculate to some extent resorts to prediction after his own fashion. The financier who purchases shares in a railroad company foresees, or thinks he foresees, the pro- gressive increase of traffic along a certain line ; and the high price he pays for these shares indicates (whether he wills or not) his firm confidence in the permanency and validity of an economic law. It is evident, however, that everybody 1 Renouvier, in his " Classification des SystemesPhilosophiques," has called attention to the fact that even if the conduct of men were the result of acci- dent, pure and simple, rational prevision and prophecy could readily take place within the limits we have indicated, because the mathematical doctrine of probabilities enables us to foretell, for instance, how often a given number will come out in a game of roulette. How much more ought it to be possible, therefore, to foretell the conduct of rational beings ! If we had to do with men infinitely wise, it is probable that the prevision of human conduct would become as infallible as the prescience of the movements of heavenly bodies. . THE FORMATION OF ECONOMIC SCIENCE 7 who travels, or sends goods by this railroad, does so only because he chooses to do so, i.e. because he wills to do so. Without doubt, economic prophecies are often shown to be false by subsequent events. 1 But if our previsions in polit- ical economy are uncertain, and do not penetrate far into the future, the reason for this must not be sought in the play of free will, but simply in our ignorance of the causes at work, just as in meteorology, for instance. Every thinking man is sure that wind, rain, hail, and storms are not the result of mere chance ; he does not for a moment doubt that they are governed by natural laws. Yet pre- visions in this domain are by no means more accurate than in the domain of economics. A commercial crisis can be foretold a much longer time in advance than the coming of a cyclone ; the trips of a railroad train between two cities are certainly less variable than the tides of streams, despite the fact that the former are regulated by man, < and the latter determined by the forces of nature. III. The Formation of Economic Science In a French book by Antoine de Montchretien, entitled, "Traicte' de I'CEconomie Politique," the science of political economy in 1615 first received the name now applied to it. The word economy, or economics, was, however, already in use before that date, and one of the books of Xenophon even bears this word as a title. But for the ancients it meant what we may call domestic economics, or household economy (oZ/co?, household, and Z/O'/AO?, law or rule). The qualifying adjective, political, indicated that the science had to do, not with the economy of the household, but with that of the body 1 As an argument against the existence of natural laws in social matters, the fact is adduced that many things do not take place in the way foreseen. But what does this prove save our ignorance ? Think, on the other hand, how often things fail to happen as willed or desired ! Does not this demon- strate that there are stronger forces at work in the world than the will or desires of men ? 8 PRINCIPLES OF POLITICAL ECONOMY politic, or the nation. This new designation arose at a time when an important historical transformation was taking place : the establishment of the great modern states of Europe. To- day, as we have already said, the name social economics is often used in place of political economy ; and although the etymological meaning of these words is exactly the same, the adjective political is preferable because, like economy, it is of Greek origin. At present, hoAvever, these terms have a different meaning, which we have already explained. Some of the questions which are to-day called economic, have at all times attracted the attention of mankind, such questions as money, commerce, and the means by which citi- zens and the state may grow wealthy. The mediaeval church fathers condemned luxury, the inequality of fortunes, and loans at interest. The authors of antiquity, Aristotle among others, carefully analyzed the nature of money, the separation of trades, and the methods of acquiring property. But they failed to perceive the bond that unites these different prob- lems. They did not conceive the possibility of making these matters the object of a completely distinct science, and re- garded them rather as the accomplishments of a philosopher than as the equipment of a scientist. Whatever was pro- posed regarding these matters was offered in the form of good advice to sovereigns and individuals, not as the firm results of an established science. The discovery of America gave the first impetus to the development of a true economic science in the course of the sixteenth and seventeenth centuries ; what had previously been mere incoordinate advice took the shape of a composite, coordinate, logical system of doctrines. Countries like France, Italy, and England, seeing with envious eyes how Spain was becoming wealthy by means of her mines in the New World, sought to discover how they too might procure gold and silver. This was precisely the title of a book published by an Italian, Antonio Serra, in 1613 (before that of Montchretien), viz., " A Brief Discourse on the Possible THE FORMATION OF ECONOMIC SCIENCE 9 Means of causing Gold and Silver to abound in Kingdoms where there are no Mines." It was believed that this means consisted in the sale abroad of manufactured products ; and, with this purpose in view, efforts were made to develop foreign trade and home manufactures by an elaborate, com- plicated, and vexatious system of regulations to which the name mercantile system has generally been applied. A strong reaction against these doctrines took place in the middle of the eighteenth century, especially in France. At this time the uppermost thought in the minds of people seemed to be a return to the u state of nature," and the repudiation of all artificial arrangements. All the literature of the eighteenth century is impregnated with this feeling. Its influence is manifest in the political science of the period, and in the writings of Rousseau and Montesquieu. Montes- quieu's book on the " Spirit of Laws " begins with the immortal phrase, " Laws are the necessary relations result- ing from the nature of things; " and in the preface of the same work he declares, " I have not drawn my principles from my prejudices, but from the nature of things." It was then that economic science really began. In 1758, one of the physicians of the French king Louis XV, named Quesnay, published his " Tableau Economique." x A group of eminent men soon became his disciples and adopted the name of physiocrats 2 or economists. The physiocratic school introduced two new ideas in economic science, ideas that 1 In 1755 Cantillon had published his " Essai sur la Nature du Com- merce," written as early as 1725. This book has recently been brought to light again by English economists, and is by one of them designated as the first methodical treatise on political economy. The work, however, was generally unknown, and has exerted an influence on the development of the science only through the physiocrats, who were familiar with it, and bor- rowed much from its contents. 2 Physiocracy is composed of two Greek words meaning the "government of nature." One of the most illustrious disciples of this school, Turgot, not only laid down its principles in his remarkable writings, but actually applied them during his terms of office as intendant of Limoges and later as min- ister to Louis XVI of France ; he decreed the freedom of trade, the abolition 10 PRINCIPLES OF POLITICAL ECONOMY were diametrically opposed to the mercantile system. These were : (1) The superiority of agriculture over commerce, and industry. The physiocrats regarded only the soil as the source of wealth, because it alone gives a net product. The classes of society other than farmers are sterile classes. (2) The existence of a "natural and essential order of human societies " these very words form the title of a book written by one of the physiocrats, Mercier de la Riviere which we should learn to recognize, and to which we should strive to conform. They therefore declared that it is useless to devise laws, regulations, and systems, when all that we need do is to let things alone. The first of these principles, although it brought about a fortunate reaction against the errors of the mercantile sys- tem, was partly erroneous, or at least exaggerated ; and the error or exaggeration led to the destruction of the new school. The second principle, on the other hand, served during nearly a century as the foundation of the whole edifice of political economy., And it is true that facts in themselves cannot form the basis of a science unless we have discovered that they are bound together by relations of cause and effect, that they form an " essential and natural order." The publication in 1776 of " An Inquiry into the Nature and Causes of the Wealth of Nations " by a Scotch professor, Adam Smith, marks an era in the history of political econ- omy. During nearly one hundred years this book has assured the unquestioned preeminence of the English school of economists. It procured for its author the title, not fully deserved, of "father of political economy." Adam Smith rejects the first physiocratic principle and gives industry its legitimate place in the creation of wealth. But he confirms and develops most brilliantly the second of interior duties and the tariff on wheat, and the liberty of labor (by abol- ishing trade corporations or guilds). THE FORMATION OF ECONOMIC SCIENCE 11 tenet, i.e. the existence of natural economic laws, and the let- alone policy, at least as a rule of practical conduct. He was, moreover, much superior to the physiocrats in ob- serving facts and in profiting by the lessons of history. His studies extended over nearly the whole field of eco- nomic science, which has scarcely been enlarged since his time. Only a short while after Adam Smith, three economists came forward almost simultaneously with theories that have occupied the minds of men for half a century. Two of these economists were Englishmen. The first, Malthus, is the author of a celebrated theory concerning the increase of population, 1 which, although it concerned a matter of a somewhat special nature, was destined to have a great influ- ence upon the whole science of economics. The second was Ricardo, 2 quite as celebrated because of his theory of the rent of land, but whose misuse of the abstract and purely deductive method of investigation later gave rise to a vigorous reaction. The third author of this group was a Frenchman, Jean Baptiste Say, 3 whose " Traite d'Economie 1 The Rev. Thomas R. Malthus first published his book anonymously in 1798 under the title, " An Essay on the Principle of Population as it affects the Future Improvement of Society." The Essay passed through six edi- tions in the author's lifetime, and in each of them he introduced various addi- tions and corrections. Although the last edition is dated 1826, that of 1817 is the last that was fully revised by the author, and presents the text sub- stantially as it has since been reprinted. A cheap edition is published by Ward, Lock & Co. (1890). A good selection of chapters from the book is contained in the "Economic Classics" edited by Professor W. J. Ashley, and published by the Macmillan Co. The student of Malthusian theories should consult James Bonar's "Malthus and his Work" (London, 1885) and a keen criticism of the Malthusian theory of population by Dr. Frank Fetter, " Versuch einer Kritik der Malthus'chen Bevoelkerimgslehre " (Jena, 1895). 2 David Ricardo's principal work is the " Principles of Political Economy and Taxation." The first edition appeared in 1817; the third, with many additions, in 1821. The best edition now in use is probably E. C. K. Gon- ner's, published in the " Bohn Library," London, 1891. 3 Say's book has been translated into English by C. R. Prinsep, who pre- pared a so-called "Fourth American Edition" in 1830 under the title "A 12 PRINCIPLES OF POLITICAL ECONOMY Politique," published in 1803, is remarkable for its clear style, its systematic arrangement and logical classification, rather than for depth of thought. Translated into all the languages of Europe, this book was the first truly popular treatise on political economy, and has served more or less frequently as a model for the innumerable well-known man- uals of economics that have been written since then. It was particularly Say's book that set forth clearly (with some exaggeration, but an exaggeration that was salutary at that formative period of the science) the prevailing concep- tion of political economy as a natural, purely expository science. Adam Smith had defined economics as "proposing to enrich both the people and the sovereign," thus giving a practical aim and purpose to the study. But Say, amending this definition, writes, " I had rather say that the object of political economy is to make known the means by which wealth is produced, distributed, and consumed," and he named his book accordingly. 1 Thus political economy was firmly established in its classi- cal form. From this time on, there arose a large number of " schools " whose differences of opinion we shall now briefly indicate. 2 Treatise on Political Economy, or the Production, Distribution and Con- sumption of Wealth." 1 "Traite d' Economic politique ou simple exposition de la maniere dont se forment, se distribuent et se consomment les richesses." 2 The best-known general histories of political economy are : Ingrain, "A History of Political Economy." Written from the stand- point of an adherent of the "historical" school. Blanqui, " History of Political Economy in Europe." Rather a history of economic policies than of economic theories and doctrines. This book, moreover, is not up to date, but does contain good chapters on antique, mediaeval, and early modern economic systems. Cohn, " History of Political Economy." Supplement to the Annals of the American Academy of Political and Social Science, Philadelphia, 1894. Cossa, " An Introduction to the Study of Political Economy." London, 1893. This book contains an Historical Part giving extensive biographical and bibliographical notices. It is, however, scarcely a book for beginners, besides being a poor translation of the Italian original. DIFFERENCES OF OPINION CONCERNING METHOD 13 IV. Differences of Opinion concerning Method 1 In scientific language the term " method " is used to desig- nate the road that must be followed to lead to the discovery of truth. The classical school of economics, especially as represented by Ricardo, preferred to employ the deductive method. This method starts from certain general data that are conceded to be beyond dispute, and then by way of ratiocination pro- ceeds to deduce an infinite series of propositions. Geometry may be taken as a type of the sciences that employ the deductive method. Law students will readily recognize that law itself, particularly Roman law, employs the deductive method ; the Roman jurist, starting from a few principles laid down by the Twelve Tables or found in the jus gentium, proceeded to construct that huge monument of learning called the Pandects. Similarly, in economic science, the classical school began with the celebrated axiom that " man Eisenhart, " Geschichte der National-Oekonomik." Second edition, Jena 1891. Probably the most available of German histories, very suggestive and deserving English translation. Moritz Meyer, "Die neuere Nationaloekonomie." A brief but good account of economic science since Adam Smith, with special reference to the historical and socialistic tendencies. Espinas, " Histoire des Doctrines Economiques. " Paris, Colin & Cie. An excellent little history for the period of Adam Smith and preceding epochs, but entirely inadequate for those that follow. Price, "A History of Political Economy in England" is a convenient little volume on the history of English economic theories. Roscher, "Geschichte der National-Oekonomik in Deutschland" is typi- cal of the thoroughness and erudition of the author, one of the foremost Ger- man economists of the historical school. Slock, " Les Progres de la Science Economique depuis Adam Smith." Second edition, two volumes. This book, written by a man who had charge of the book-reviewing department of the French " Journal des Economistes," from the " classical " point of view, is not chronologically arranged, but divided according to doctrines, each doctrine being considered separately in the changes that it has undergone since Adam Smith. 1 A fine discussion of methods will be found in Keynes, "Scope and Method of Political Economy." Macmillan, 1891. 14 PRINCIPLES OF POLITICAL ECONOMY always seeks to obtain a maximum of satisfaction with a minimum of trouble " and a few other principles, such as the law of the diminishing returns of land, and thence deduced a series of corollaries that still constitute the framework of economic science. A new school, called historical, or realistic, employs and recommends the inductive method, the method that Bacon introduced in the physical and the natural sciences a few cen- turies ago, and which has given such marvellous results. It starts from the observation of certain definite facts, and bases its general propositions upon these observed facts. For ex- ample : ihQ/act that all bodies fall, leads to the law of gravi- tation. In the field of economics this method consists in the patient and accumulated observation of all social facts as they are revealed to us, whether in the present by means of statis- tics or information supplied by travellers, or in the past by means of history. Indeed, history, by informing us how economic and social institutions arose, and how they have been transformed, is peculiarly fitted to throw light upon the true character of social facts. 1 Now institutions studied from the historical point of view are known to differ considerably from nation to nation, and from time to time within one and the same country. The twofold characteristic of universality and permanency, which the classical school attributed to economic phenomena, and to which it gave the pompous name of " natural law," thus vanishes into thin air. We no longer attempt to discover general laws governing abstract man, but historical laws governing the relations among men living in a given nation at a given epoch. For this reason the name " national " is sometimes applied to this school of political economy. 1 The historical school of economics, like the historical school of jurispru- dence founded by Savigny, first arose in Germany. It may be said to date from the publication of Professor Reseller's treatise on political economy in 1854, although books by Professor Hildebrand (1848) and Professor Knies (1853) decidedly manifested the same point of view. DIFFERENCES OF OPINION CONCERNING METHOD 15 The method just described is safer than the other, since it abstains from all sweeping generalizations. But is it as fruit- ful ? Probably not. It is indeed a delusion to suppose that the use of the purely inductive method can ever be as effica- cious in the social sciences as in the physical and the natural sciences. There are two reasons for this. First, because the observation of facts is more difficult in the social sciences. Although at first it may seem paradoxical to declare that it is harder to observe facts that concern us so closely as these, and in regard to which we are not only spectators, but actors also, yet this is the very reason which keeps us from seeing them clearly ! Furthermore, social facts are infinitely more diversified ; whoever has seen one grasshopper may be said to have seen them all ; but whoever has seen one miner cannot be said to know very much about the condition of mining laborers. In reality, the observation of economic and social facts is a task far beyond the capacities of any single person, and one which can only be accomplished by the collective labor of thousands who unite the results of their observation, or of states employing for this purpose the potent means of investigation which governments have at their disposal. 1 Joint observations of this sort have been made the object of a distinct science called statistics. The mere observation of facts, moreover, would never have given the marvellous results obtained in the natural sciences, were it not for the help of a particular method of observation, used under prearranged circumstances and called experi- ment. But in the social sciences experiments are difficult, if not impossible. The chemist, the physicist, and even the biologist (although the latter encounters greater difficulties) can always take a single fact, which he wants to study, and 1 One of the most elementary of social facts is assuredly the population of a given group. Yet is it not evident that a single observer is almost power- less to ascertain this fact ? Only our governments are in a position to under- take successfully such a task ; and only very recently have even our official censuses attained a tolerable degree of accuracy. 16 PRINCIPLES OF POLITICAL ECONOMY subject it to artificially determined conditions which may be varied at will. In order, for instance, to study the breathing of an animal, he can place it under the bell-jar of ari air- pump, and regulate the air-pressure exactly to suit the re- quirements of the experiment. But the economist, even though he be also a law-giver or an omnipotent despot, does not possess this power to experiment at will. The reasons for this are as follows : (1) He cannot make prearranged experiments unless he has at his service an all-powerful despot. Consequently, instead of directly arranging social experiments, he is obliged to wait for experiments to take place of their own accord, as it were ; a fortunate hazard may thus under certain peculiar circumstances provide experiments worthy of study. The application, for instance, of a new law, or the founding of a socialist colony, or the occurrence of an abnormal social crisis, may furnish the economist with the nearest approach to an experiment in the strict sense of the word. (2) Furthermore, and for the same reason, the econo- mist is obliged to study facts just as they happen to occur, without being able to isolate any of them from the mass of other connected facts with which it is interwoven. Suppose we want to study the effects of free trade. Sup- pose, too, that we could take two countries, place them, as it were, under a bell-jar during a sufficiently long period say half a century and subject one of them to a regime of absolute free trade and the other to a system of protection. Now, at the end of fifty years, if we should find that the first country had grown wealthy and the second had been ruined, would the problem of free trade thereby be solved ? By no means ! The experiment, to be sure, would furnish valuable information ; but a large number of causes other than the difference of commercial policy such as different natural environment, racial differences, differences in the prevailing legal institutions or in the energy of the people DIFFERENCES OF OPINION CONCERNING METHOD 17 may also explain the different results of the experiment in these two countries. 1 The new school, therefore, in ridiculing the procedure and methods of the deductive school, is too pretentious and not a little ungrateful. For, after all, the new school employs the same categories of thought as the old school. It has not remade economic science ; it has only introduced into it a new spirit. This is, to be sure, an achievement of which it may well be proud. The historical school has itself given rise to much criticism, inasmuch as, by dint of devoting its attention to the observation of facts and of those variations in economic phenomena that arise from time to time and from nation to nation, it shows too strong a tendency to fall into erudition, and to lose sight of those permanent and fundamental causes which everywhere determine economic phenomena. It incurs the risk of remaining purely descrip- tive. If we were required to give up the attempt to discover permanent relations and general laws, working themselves out under the changing manifestations of eco- nomic life, then we should be compelled forever to renounce the hope of building up a science of political economy. Howsoever dangerous for the science far-reaching hypoth- eses may be, they are infinitely less so than the confession that there is no uniformit}^ underlying economic life in all places at all times. No matter how justified, from certain points of view, the ridicule may be that has been aimed at the abstract man the economic man of the classical school, 2 we must nevertheless admit that there are certain 1 Two Australian colonies, New South Wales and Victoria, have a com- mon origin and the same natural environment. The first of these is subject to a system of free trade, while the second pursues a policy of protection. Although this experiment has lasted a long time, it cannot be said that it has solved the problem of protection versus free trade. Adhuc sub judice Us est. 2 The classical school regarded man from the exclusively economic point of view and assumed that his conduct is generally determined by intelligent self-interest or egoism. The adversaries of the school insist that this assump- 18 PRINCIPLES OF POLITICAL ECONOMY general characteristics possessed by all mankind. The best proof of this may be found in history itself, which teaches that wherever human societies are placed under analogous conditions the same social types have been evolved. Feudal- ism in Europe in the twelfth century, and in Japan until the nineteenth century ; the successive forms of property and marriage ; the simultaneous employment of precious metals as money ; identity of funeral rites ; and even the uniformity of fairy tales, some of which, according to modern folk-lore, recur in a more or less identical form among a large number of different peoples of the earth ; all these facts exemplify the fundamental identity of human nature the world over. Therefore we cannot reject absolutely the abstract method, nor the " let us suppose " so dear to the school of Ricardo and so obnoxious to the historical school, nor even the fictitious stories (mockingly called " Robinsonades ") of isolated indi- viduals used to illustrate economic principles. The laby- rinth of economic facts is far too complex and entangled for us ever to be able to see clearly through it by the aid of obser- vation alone, and to distinguish those fundamental relations which constitute the subject-matter of every science. 1 To bring light into darkness, and order out of chaos, we must make use not only of abstraction but also of imagination, i.e. of hypothesis. The proper method of economic investi- gation proceeds by three stages : tion involves three errors : (a) that man has no other than economic motives and interests ; (6) that man knows always what is best for him ; and (c) that he will always do what his intelligent egoism dictates. As the critics of the school regard these three assumptions as false, they claim that the economic science built upon them is necessarily erroneous. They maintain that the "economic man," whose sole preoccupation is the accumulation of wealth, whose exclusive motive is economic egoism, and who knows what that egoism dictates, is an unreal fabric of the economist's brain. 1 Chevreuil declared that " every fact is an abstraction." Although this dictum seems a strange one at the first glance, yet it is easily understood if we but consider that what we call a fact is previously something which has had to be separated out of a host of other connected facts, and for the ob- servation of which abstraction has had to be made of many other things. DIFFERENCES OF OPINION CONCERNING METHOD 19 (1) Observing facts, without any preconceived notion, especially those facts that at first seem most insignificant. (2) Imagining a general explanation which will enable us to establish between two groups of facts the connecting link of cause and effect ; in other words, by formulating an hypothesis. (3) Verifying this hypothesis by determining, with the help of experiment, if possible, or, at any rate, by means of specially conducted observations, whether or not the applied hypothesis exactly fits the facts it proposes to explain and connect. The above, moreover, is the procedure employed even in the physical and natural sciences. All the great laws which form the basis of modern science, from Newton's law of gravitation down through the list, are only verified hypoth- eses. We may go further than this, and declare that the great theories which have served as a basis for the scientific discoveries of modern times (e.g. the existence of ether, in the physical sciences, and the doctrine of evolution, in the natural sciences) are only hypotheses not yet verified. 1 The mistake of the classical school, therefore, did not con- sist in too frequent use of the abstract method, but in having too often mistaken the abstraction for the reality. For example : After having invented its "economic man," prompted solely by egoism (which it had a perfect right to do), its error lay in believing in the real existence of such a being, and in his existence alone in the economic world. It *As Stanley Jevons has observed in his "Principles of Science," the method employed for the discovery of truth in the sciences is similar to that unconsciously used by those who try to find the meaning of rebuses or ciphers on the back pages of some illustrated papers. In order to guess what their meaning may be, we imagine some meaning or other. Then we observe whether this really agrees with the figures or pictures before us ; if it does not, it is an hypothesis to be rejected. We then conceive another one, and so forth, until we obtain a more successful result, or lose courage altogether. "We shall find nothing in facts unless we have previously in our minds an image or a forecast of the truth underlying them. 20 PRINCIPLES OF POLITICAL ECONOMY beheld in these abstractions the very foundations of the eco- nomic edifice, whereas they represent merely the scaffolding necessary for the construction of the building but erected only to be done away with when once the work is finished. It is not the deductive method, but the dogmatic spirit, that we must be careful to avoid. Hence the deductive method has not been abandoned. On the contrary, it has recently been revived, in a more absolute form than ever, by two new schools of economic thought. The first of these is the so-called mathematical school. 1 This school considers the relations which arise among men in any given circumstances as relations of equilibrium, like those which are studied in mathematical mechanics ; and, as in mechanics, this school regards the social economic forces as susceptible of being expressed by algebraic formulae. To accomplish this, a problem must be reduced to a certain lim- ited number of factors, excluding all others, just as in mathe- matical mechanics. The second, or psychological school, also called the Austrian school, because of the nationality of its most eminent repre- sentatives, 2 devotes its attention almost exclusively to the theory of value, which it regards as the foundation of all economic science. And as value is, according to this school, only the expression of human desires, economic science is reduced to a study of human desires and the causes which 1 This school, it is commonly supposed, was begun in France by Cournot, the author of "Recherches sur les Principes Mathe'matiques de la The'orie des Richesses," published in 1838. This book, of which an English transla- tion was made by N; T. Bacon, in the "Economic Classics" (Macmillan, New York, 1897), had no success whatever until the subsequent reintroduc- tion of mathematical methods in economic science by Jevons, Marshall, and Edgeworth in England, by Walras in Switzerland, Pantaleoni in Italy, Gos- sen and Launhardt in Germany, and Irving Fisher in the United States. 2 Professors Karl Menger, von Boehm-Bawerk, and Wieser. The doctrines of this school, which are rapidly gaining ground everywhere, may be found summarized in Professor William Smart's " Introduction to the Theory of Value." The most prominent American protagonists of the school are Pro- fessors J. B. Clark and S. N. Patten. DIFFERENCES OF OPINION CONCERNING METHOD 21 intensify or diminish them ; the result is a very subtle psychological analysis. Besides, was not the old classical principle (called hedonistic, from a Greek word signifying pleasure or enjoyment), which consists in seeking a maximum of gratification at a minimum cost of effort, an entirely psy- chological principle ? It is evident that these two schools carry the deductive method to its extreme logical consequences. Nevertheless, we must concede that they have not committed the error, into which the old deductive school had fallen, of being led astray by their own speculations. They do not regard the hedonistic principle, or their abstractions, as anything more than hypotheses necessary for the establishment of a science in the strict sense of the term. 1 While the abstract and hypothetical method is thus revived by the modern mathematical school, Say's natural- istic method may also be said to live again in the biologico- sociological school, which considers political economy as a kind of annex to natural history and biology ; and which, regarding human societies more or less as organisms, trans- poses physiological laws to the domain of sociology. 2 But this school, which for a time prospered, has lost much of its influence. Many sociologists protest against the com- 1 In his "Elements d'Economie Politique pure," M. Walras of Lausanne writes, "Pure political economy is essentially the theory of the determina- tion of prices under a hypothetical regulation of absolutely free competition." Fantaleoni, in his " Principii di Economia pura," even declares, "Whether the hedonistic and psychological hypothesis (that of the maximum of pleas- ure with the minimum of effort) whence all economic truths are deduced, coincides or fails to coincide with the motives which actually determine men's actions, is a question which in no wise detracts from the accuracy of truths deduced therefrom." 2 This point of view is represented principally by Schaeffle, " Bau und Leben des socialen Koerpers"; Lilienfeld, "La Pathologie sociale " ; Rene" Worms, " Organisme et Socie'te'." These authors emphasize the following ideas : Every organic body is composed of innumerable cells, each having its own life and individuality, so that every living being is really only an association of millions and billions (more numerous, therefore, than the largest human 22 PRINCIPLES OF POLITICAL ECONOMY parison of society to an organism. Herbert Spencer him- self, who most brilliantly developed these analogies in his " Principles of Sociology," has protested against the attempt to treat living organisms and human societies as similar. 1 V. The Various Economic Schools of Thought Regarding both the right method of study, and the solu- tions proposed for economic problems, there is a divergence of opinion among economists almost as great as among phi- losophers. This is incontestably a sign of inferiority. There is little consolation in the fact that political economy is societies) of individuals which, as Claude Bernard said, " are united but yet remain distinct, like men holding one another by the hand." Each organized being is subject to the law of the physiological division of labor. In very low organisms all the functions are merged together in a shapeless and homogeneous mass ; but as organization is perfected, the various functions of nutrition, reproduction, locomotion, etc., become differ- entiated, and each comes to possess a special organ. In fact, it may be said that the more divided the physiological labor is, the higher is the rank of the organism. Each living being is the seat of a perpetual movement of exchange and circulation, an exchange of services and even of materials; for it is impos- sible for a function of the organism to become specialized in one single organ, as we have just seen, unless the other parts also fulfil other functions which are essential to life, and communicate the ensuing benefits. Herbert Spencer remarks that "the entire class of men engaged in buying and selling com- modities of all kinds, on large and small scales, and in sending them along gradually formed channels to all districts, towns, and individuals, is along with these channels fulfilling an office essentially like that fulfilled in .a living body by the vascular system." Credit itself is as indispensable for the due working of living beings as it is for that of social organisms. For, as Herbert Spencer says, "If an organ in the individual body or in the body politic [is] suddenly called into great action that it may continue responding to the increased demand, there must be an extra influx of the materials used in its actions ; it must have credit in advance of function discharged." 1 Another eminent sociologist, Tarde, has still more energetically broken away from this tendency by declaring that "the science of sociology will only begin to develop when it has cut the umbilical cord which unites it to its mother, biology." But even this is too great a concession, for we do not at all regard biology as the mother of sociology. THE LIBERAL SCHOOL 23 scarcely more than a century old, and in the hope that these disagreements will disappear in time. Other sciences which are no older, and some of which a generation ago were almost unknown, have already found it possible to establish a group of principles sufficiently well-founded to obtain the almost unanimous acceptance of those interested in these sciences. We might be justified in hoping for the same agreement sooner or later among economists, if the disagreement con- cerned only the observation of phenomena and the ex- planation of their interrelations. But unfortunately this divergence of ideas concerns the very purpose and aim to be accomplished, the ideal to be worked for, and the means suitable for its realization. It cannot cease, therefore, until the moral, political, and social unanimity of mankind is a realized fact. In contemporaneous economic thought, we may point out five schools or tendencies that are clearly distinguishable. SECTION 1. THE LIBERAL SCHOOL The first of these schools is called liberal, because of the celebrated formula which for a long time served as its motto : " laisser faire, laisser passer." l But is it really a " school " ? To this insinuation its partisans object with some loftiness, and maintain that they represent the science itself. They assume, and for the most part receive even from their opponents, the simple name of "economists." The begin- nings of this school coincide as a matter of fact with the 'origin of economic science itself. The doctrines of the school are very simple, and may be summed up in three points : 1 Its adversaries sometimes call it, ironically, the "orthodox" school. In its origin it is directly descended from the physiocrats (one of whose predecessors, Gournay, is said to have originated the maxim "laisser faire, laisser passer ") and J. B. Say. Its principal representatives in the nineteenth century have been Dunoyer, Bastiat, Baudrillart, Courcelle-Seneuil, and L6on Say, in France; Ferrara, in Italy; Francis Walker, in the United States. 24 PRINCIPLES OF POLITICAL ECONOMY (1) Human societies are governed by natural laws which we could not alter, even if we wished, since they are not of our own making. Moreover, we have not the least interest in modifying them, even if we could ; for they are good, or, at any rate, the best possible. 1 The part of the economist is confined to discovering the action of these natural laws, while the duty of individuals and of governments is to strive to regulate their conduct by them. (2) These laws are in no wise opposed to human liberty; on the contrary, they are the expression of relations which arise spontaneously among men living in society, wherever these men are left to themselves and are free to act accord- ing to their own interests. When this is the case, a harmony is established among these individual interests which are apparently antagonistic ; this harmony is precisely the natural order of things, and is far superior to any artificial arrangement that could be devised. (3) The part of the legislator, if he wishes to insure social order and progress, must therefore be limited to developing individual initiative as fully as possible, to removing what- ever might interfere with such development, and to prevent- ing individuals from meddling with one another. Therefore The English economists who succeeded the great founders of the science have been ironically designated as the Manchester school, consisting of such authors as MacCulloch, Senior, Cairnes ; they may be considered as belong- ing to the liberal school, except that they are not quite so optimistic as the French liberals, but even more dogmatic than they. John Stuart Mill's fine book on the "Principles of Political Economy," first published in 1848, is the first to manifest any leaning toward socialism. Most French economists have remained faithful to the classical or liberal school. M. de Molinari is its most ardent disciple, and M. Paul Leroy- Beaulieu is probably its most eminent representative in France to-day, where the monthly "Journal des Economistes" defends the tenets of liberalism, while the " Revue d'Economie politique," edited by Professors Paul Cauwes and Charles Gide, inclines to the historical school. 1 " The laws which govern capital, wages, and the distribution of wealth are as good as they are inevitable. They bring about the gradual elevation of the level of humanity." LEROY-BEAULIEU, "Precis d'Economie politique." THE LIBERAL SCHOOL 25 the intervention of governments ought to be reduced to that minimum which is indispensable to the security of each and of all, in a word, to the policy of " let alone." l This conception certainly lacks neither simplicity nor grandeur. Whatever may become of it in the 'future, it possesses at least the merit of having helped to establish the science of political economy ; and if other doctrines are bound permanently to take its place, it will, nevertheless, remain the foundation on which new theories are built. The most serious complaint that can be made against this body of teaching is its marked tendency to optimism, which appears to be inspired far less by a truly scientific -spirit than by a desire to justify the existing order of things. Undoubtedly, from a consideration of the economic organ- ization of a society and of the institutions which are its groundwork, the conclusion may be drawn that they are beneficial, at any rate in certain aspects ; for the very fact of their existence and duration shows well enough that they have a value which is at least relative ; further, that they are natural is a just conclusion to draw, for they are evi- dently determined by the series of previous states which produced them. But in no wise can it be inferred that they are the best possible ; such a conclusion is altogether illogical. 2 1 " "We assert that these natural laws govern the production and distribu- tion of wealth in the manner that is most useful, i.e. most conformable to the general good of the human species. Observation of these laws, together with the smoothing away of natural obstacles which impede their action, and especially the prevention of any artificial obstacles, is sufficient to render the condition of man as good as is consistent with his acquirements and his industry. Our gospel, therefore, is summed up in these four words, Laisser faire, laisser passer.' " DE MOLINARI, " Leslois naturelles." Bastiat's famous work, the "Harmonies e"conomiques," is nothing but the development of similar ideas. 2 Auguste Comte protested in the name of science against "the systematic tendency to optimism, which is clearly theological in origin " (Cours de Philosophic Positive, 48th lesson). But this doctrine cannot offer even the excuse that it agrees with theology, as Comte supposes ; for Christian theol- ogy is nothing less than optimistic. On the contrary, in its eyes the actual 26 PRINCIPLES OF POLITICAL ECONOMY The idea that the prevailing economic order is the sponta- neous product of liberty, and that it could be replaced only by an order founded on constraint and therefore worse than the present one, is not well-founded. The present order of things is, at least in part, the result either of war and brutal conquest (e.g. the appropriation of the soil of England and Ireland by a small number of landlords, originating histori- cally in conquest, usurpation, or confiscation), or of legisla- tive enactments passed by certain classes of society in their own interest (e.g. laws of inheritance, fiscal laws, etc.). Therefore, if the world were to be made over again, and if it could be rearranged under conditions of absolute liberty, there is no proof that it would be at all like the world of to-day. Nor is it any more legitimate to conclude that because natural laws are permanent and immutable, existing eco- nomic facts and institutions should also possess this char- acter of permanence and immutability. That, too, is a sophism, not to say word-jugglery. If, on the other hand, as contemporary science shows a tendency 'to believe, the natural law par excellence is that of evolution, then it must be conceded that natural laws, far from excluding the idea of change, always presuppose it. When it is maintained, for example, that the wage-system is bound to disappear, because, just as it has succeeded serfdom and slavery, so it too will be replaced in turn by cooperation or some other system not now nainable, we may, of course, criticise this line of argument ; but we cannot maintain that it is con- tradictory to natural laws, for these very laws cause the same plant to produce, successively, first seed, then flower, then fruit. Not only do economic facts and institutions change, but our will is by no means powerless to bring about these changes. Indeed human will is every day, and in the most efficacious order of things and all the manifestations of human liberty are irretrievably vitiated by the Fall. THE LIBERAL SCHOOL 27 manner, exercised on physical facts for their modification according to our needs. This reasoned human influence on natural phenomena is not in the slightest incompatible with the idea of natural law. On the contrary, it is closely bound up with it. 1 We need only open our eyes to perceive man's marvellous power to modify natural phenomena. Undoubtedly there are some things, which, by reason of their magnitude or their remoteness, escape all human influence. Such, for example, are astronomical, or geological, or even meteorolog- ical phenomena ; we must submit to them in silence ; our faculty of prevision cannot enable us to avoid the approach of a comet or the shock of an earthquake. But how many other domains there are in which our science is almost su- preme J Most of the compounds of inorganic chemistry (including the most important ones) have been produced by the scientist in his laboratory. When we watch the cattle-raiser in his stalls, the horticulturist in his gardens, ceaselessly modifying animal or vegetable forms and creat- ing new varieties, it seems as if animate Nature herself sub- mitted to the process of alteration at our pleasure. Even atmospheric phenomena do not entirely escape the power of human industry, which makes bold to assert that by clear- ances or by new plantations, it can modify the weather, and, repeating the miracle of the prophet Elisha, bring down rain and dew from heaven whenever it wishes. How much truer it is, therefore, that our influence may be exerted on economic facts, precisely because they are acts performed by man, and because we have immediate control over them ! 2 Without doubt, here, as in the domain of physi- 1 As M. Espinas wittily remarks in his book on " Les Soci6te"s animates," "If human activity were unable to change the order of things, the act of boiling an egg would have to be regarded as a miracle." 2 Even the representatives of the determinist school, those who go so far as to deny free will (and surely the " liberals " cannot be among them), recognize that man has the power of modifying the order of things in which he lives. They make only the reservation that every modifying act of man 28 PRINCIPLES OF POLITICAL ECONOMY cal phenomena, our influence is confined within certain limits that science seeks to determine, and which all men, whether acting individually by means of private enterprise, or acting collectively under legislative regulation, should strive to keep in mind. In this connection we may appro- priately be reminded of Bacon's old adage to the effect that facts can only be modified on condition that we recognize the natural laws which govern them, and conform to these laws : naturoe non imperatur nisi parendo. Alchemy strove to turn lead into gold ; chemistry has abandoned that use- less quest, having found that these two bodies are simple elements, or at least irreducible ones; but it has not re- nounced the attempt to convert charcoal into diamond, for in this case it has established the presence of one single body in two different states. The Utopian uselessly tortures nature to obtain what it is powerless to give ; but the man of science seeks only what he knows to be possible. The sphere of this "possible" is infinitely more vast than the classical school imagines. SECTION 2. THE SOCIALIST SCHOOL The socialist school is as old as the classical school ; older, we may even say, for there were socialists long before there was any science of political economy. It was, however, only after economics had taken a scientific character that social- ism, by antagonizing the newly established science, was firot clearly formulated. As the doctrines of this school are especially of a critical nature, and show considerable diverg- ency, they are much harder to formulate than those of the preceding school. 1 Yet they may be summed up as follows : All sects of socialists believe that the organization of modern societies is tainted by certain deep-seated defects, is itself predetermined by certain causes. This is, however, a problem of metaphysics not to be discussed here. 1 Socialism, if we leave out of consideration a long line of precursors extending as far back as Plato, is represented in the nineteenth century THE SOCIALIST SCHOOL 29 and that the present social organization is therefore bound to disappear sooner or later. In their opinion, this organization is not in the least a natural product of liberty, but the result of many acts of injustice and spoliation which have been hallowed by written laws. They maintain that the source of these evils lies in free competition and in individual or pri- vate property. They seek to prove that these two institutions tend to sacrifice the general interest to private interest, and constantly to increase the wealth of a small number of per- sons while multiplying the number of those that are poor, thus realizing more and more the old motto : paucis humanum genus vivit. principally by Saint-Simon, Fourier, and Proudhon, in France ; by Owen, "William Morris, and the Fabian Society, in England; by Karl Marx, Las- salle, Rodbertus, and Friedrich Engels, in Germany ; by Colins, de Paepe, and Vandervelde, in Belgium. Socialism, in the United States, aside from numerous small religious communities organized on a socialistic basis, is almost entirely of foreign importation ; although Edward Bellamy's romance "Looking Backward" has probably been the most widely read socialist Utopia of modern times. French authors have contributed most to the older Utopian socialism ; but the Germans have given modern socialism, called collectivism, its distinctive physiognomy. The theory called anarchism is due principally to Proudhon and the Russians Bakunin and Kropotkin. It has been widely propagated only among the Latin races, i.e. in France, Spain, and Italy. Russian nihil- ism, generally confounded with anarchism, has nothing to do with it. From the very extensive bibliography of socialism and anarchism we refer the student to the following books : Bae, "Contemporary Socialism." Kirkup, "History of Socialism." Graham, "Socialism Old and New." Zenker, "History of Anarchism." Laveleye, " Socialism of To-day." Schaeffle, "Quintessence of Socialism." Dawson, " German Socialism and Ferdinand Lassalle " and " Bismarck and State Socialism." R. T. Ely, " Labor Movement in America." Winterer, "Le Socialisme Contemporain." Bourdeau, " L'Evdlution du Socialisme." Kautsky, "Karl Marx' Oekonomische Lehren." Flint, " Socialism." "Die Geschichte des Socialismus in Einzeldarstellungen," published by Dietz at Stuttgart, and written by a number of well-known socialists in several volumes. "Fabian Essays on Socialism." Janet, "Les Origines du Socialisme Con- temporain." Metin, " Le Socialisme en Angleterre." Von Waltershausen, "DerModerne Socialismus in den Vereinigten Staaten." Webb, "Social- ism in England." 30 PRINCIPLES OF POLITICAL ECONOMY They therefore prophesy a new order of things in which private property, if not completely abolished, will at any rate be continually reduced. According to the extent of their demands in this direction, they may be classified thus : those who favor the entire suppression of private property in all kinds of wealth are called communists; those who favor the suppression of property in the instruments of production are called collectivists ; those who favor the suppression of property in land and buildings are called nationalists. As for the details of the future society there is much dis- agreement and doubt. The old socialists (Sir Thomas More, Saint-Simon, and Fourier), who are sometimes disdainfully called " Utopian " and whose doctrines are nowadays some- what perhaps too much discredited, attempted to build up a complete social structure based on an a priori concep- tion of justice. The others, who proudly assume the title of scientific socialists (Karl Marx, Lassalle, Friedrich Engels) assert that this future society will issue forth from the pres- ent society like a butterfly from its chrysalis. They refuse to describe its features. The most interesting and original part of their thesis consists in the attempt to prove that the society of the future is already contained, in an embryonic state, in the womb of our modern societies, which are nearly ready for its birth. 1 They point out certain features of present society, which, in their opinion, are the prelimi- nary symptoms of a socialistic state : production on a large scale, trusts, machine industry, the development of public services, etc. The classical school maintains that the socialists deny the existence of natural laws. This is by no means true, for the " scientific socialists " are ultra-deterministic. The liberal school j,n its use of the term " natural law " implies 1 So far as any attempts have been made to outline the collectivist society of the future, a description may be found in Schaeffle's " Quintessence of Socialism," Gronlund's "Cooperative Commonwealth," and G. Renard's " Le R6gime Socialiste." See also the " Fabian Essays " (London). THE SOCIALIST SCHOOL 31 the idea of stability and immutability, but the contem- poraneous school of socialists employs the same term as im- plying the idea of change and of ceaseless transformation. They do not agree with Bastiat in regarding human societies as turning round a fixed point in an eternal and changeless equilibrium. They consider society to be like a plant or an animal, which from birth to death undergoes constant trans- formation. We must admit that the latter point of view is in better harmony with contemporary science. Besides, most socialists expect a revolution, and regard it as indis- pensable for the substitution of the new social order for the old. Coming from evolutionists, this opinion may at first appear surprising ; they seek to justify it, however, by call- ing attention to the fact that the process of evolution often involves a crisis, i.e. the sudden and perhaps violent passage from one state to another. As illustrations of this they men- tion the chrysalis, which, before becoming a butterfly, must tear away its cocoon ; or the chicken, which, to leave the egg, must break the shell with its beak. All these schools (save one alone, the anarchist school, which, on the contrary, is violently individualist) are natu- rally disposed to extend as far as possible the functions of the government, since their aim is to transform into public agencies all that which to-day springs from private enter- prise. 1 It is impossible in this chapter to estimate the value of the criticisms directed by socialists against the present social 1 It is only, however, as a transitional step that socialism asks for the ex- tension of the functions of the government. For it professes the greatest contempt for the State as it is to-day, the bourgeois State, as it terms it, which looks after its interests and carries on its enterprises by the same methods as individuals. In its plans for reorganizing society, this school avoids the word "state," and prefers to use the term " society." The State, in the socialist plan, is to lose all political character, and to become purely economic ; it is to become something analogous to the administrative council of a huge cooperative society embracing the entire country. It is in this respect that true socialism, proletarian socialism, called "social democ- racy" in Germany differs from state socialism. 32 PRINCIPLES OF POLITICAL ECONOMY order ; we shall hereafter refer to them repeatedly. Suffice it to say here, in explanation of the rapid growth of socialism, that these criticisms contain a large share of truth, and have, taken all in all, exerted a salutary influence on the thought and tendency of the century. But as a positive doctrine, i.e. as proposing a new system to be substituted for that under which we live, socialism remains conjectural. The ideal future state announced as coming seems to be neither realizable nor, from many points of view, even very desirable. All the proposed systems, after having won over a few enthusiastic disciples, have been abandoned or continue to exist only as vague hopes ; and as for the programme of so-called scientific socialism, many of its disciples are beginning to doubt that it has pointed out the true course of economic evolution. (This subject will be discussed under the title " Collectivism " in Book V.) SECTION 3. STATE SOCIALISM This doctrine should by no means be confounded with the preceding one. It represents, on the contrary, an antidote for social democracy, and is generally as popular with es- tablished governments as the other is with the revolutionary parties that seek to overthrow them. It is closely connected in its origins with the historical school, of which we have spoken in the preceding division. The historical school was first distinguished from the classical school only in point of method ; but it soon came to differ from it in its tendencies and its practical programme. It began by absolutely rejecting the characteristic principle of the liberal school, that of "laisser faire." It gave a practical aim to political economy ; it regarded the old separation of art and science, at least in the social sciences, as antiquated, and thus returned to the position of the earlier economists. Al- though this school concedes that we cannot modify economic institutions so completely as to transform history, it main- STATE SOCIALISM 33 tains that with due regard for history we can, and should, modify these institutions to some extent. 1 It maintains that science should include art, and that the past is allied with the future. That which, is, that which will be, and that which ought to be, are all inseparable and should be studied simultaneously. The small importance attached by this school to the idea of natural law explains precisely why it attaches so great an importance to positive laws made by legislators, and considers them one of the most potent factors of social evolution. 2 Far from sharing the dislike or the misgivings of the liberal school in this respect, it favors a considerable extension of the functions of the state. This school has exerted a wide influence in recent years, not only in the thoughts of men, but in legislation as well. Most of the laws, enacted during the past twenty years, known as labor laws, as well as a strong movement in favor of an in- ternational regulation of the conditions affecting labor, are largely due to the influence of this school. It has certainly rendered a great service to science in widening the narrow, factitious, too simple, and irritatingly optimistic point of view that prevailed in the classical school. It has aban- doned entirely the attitude of systematic abstention from all practical matters, and to the question, " What should be done ? " it is not satisfied to give the sterile answer, " Laisser faire." It has also been helpful in showing that the extreme mis- trust of the state, manifested by the liberal school (which 1 For instance : whereas the classical school considers property in land and the wage system permanent institutions due to necessary and general causes, the historical school considers them simple " historical categories," that are due to various causes, and have taken very different forms, according to time and place. 2 " The laws with which political economy is concerned, are not laws of Nature ; they are the laws enacted by legislators. The former are beyond the will of man; the latter are its product. 1 ' DE LAVELEYE, "Elements d'Economie politique," p. 17. 34 PRINCIPLES OF POLITICAL ECONOMY would leave to the state hardly more than the work of pre- paring the way for its own progressive abdication) is not scientifically well-founded. History has shown the state to be a very active factor of social progress (e.g. the abolition of slavery, of serfdom, of guilds, and the enactment of indus- trial laws), and an institution whose powers are steadily in- creasing. Individual initiative is often powerless to bring about great social modifications. The great objection to state socialism is that the state, even when it accomplishes reforms that are good in themselves, usually can do this only by means of laws, i.e. by means of constraint. But in every association, even voluntary, it is fully admitted that the minority should bow to the will of the majority. Moreover, the state does not always act by means of coercion, prescrib- ing or forbidding this or that ; very often it acts by way of example, when it employs labor ; or by way of assistance, when it supports social institutions, financially or otherwise, or when it places at the disposal of its citizens such institutions as schools, pension funds, or insurance organizations. Another grave objection which has been raised against state socialism is that too often the state has shown the most deplorable incapacity in economic matters, and has at times become the instrument of parties, rather than the eco- nomic organ of the whole nation. 1 But these defects are due less to the essential nature of the state than to its present organization. We must not forget that the state, even in countries that are most advanced from a political point of 1 Professor Leroy-Beaulieu, in his "Precis d'Economie Politique," gives an excellent summary of the various objections urged by the liberal school against the extension of the functions of the state. His objections are : (1) The state lacks initiative and activeness, because it is not subject to the spur of egoism and competition. (2) It possesses no real superiority over individuals, either from the point of view of capacity, or impartiality, or even in continuity of purpose, when we consider the origin, the manner of working, and the inevitable vicissi- tudes of every form of government, especially that form which is tending to become universal, i.e. democracy. See Herbert Spencer, "Man versus the State." CHRISTIAN SOCIAL REFORM 35 view, we may say, especially in these countries, was or- ganized for the purpose of political functions, and by no means with a view to economic functions. The division of labor in matters of government is still embryonic ; governmental power is unstable ; franchise systems, even that which is called " uni- versal," and which does not always represent the will of the majority, are crudely organized; all these circumstances unfit the state for the accomplishment of economic purposes. But it is reasonable to hope that when the state is consti- tuted with a view to its new functions, it will be able to exert a better and stronger influence in the economic domain than it has thus far exerted. SECTION 4. CHRISTIAN SOCIAL REFORM This school may be divided into two branches, which differ widely in their ultimate goals, but which have the same starting-point and correspond naturally to the two great divisions of the Christian church. 1 The Catholic /School 2 firmly believes, with the classical school, in the existence of natural laws, which it terms laws of Providence, and which govern social facts as well as the facts of the physical world. Only, it believes that the opera- tion of these providential laws may be seriously interfered 1 The chiefs of this school belong either to the Church (von Ketteler, the Bishop of Mayence, Pastor Friedrich Naumann, Cardinal Manning, the Archbishop of Westminster) or to political life (Count de Mun in France, Prince Liechtenstein in Austria, and M. Decurtius in Switzerland). In England the names which most frequently recur in connection with Christian socialism are those of F. D. Maurice, Kingsley, Vansittart-Neale ; in the United States, those of R. T. Ely, W. D. P. Bliss, G. D. Herron, and R. Heber Newton. Consult: Nitti, "Catholic Socialism"; Kaufmann, "Christian Socialism" ; Joly, "Le Socialisme Chretien" ; Peabody, "Jesus Christ and the Social Problem. " 2 Gide's distinction of the Catholic and Protestant schools of social reform, although perfectly clear to a French reader, is scarcely intelli- gible in this country, where Protestants and Catholics often have adopted similar social reform programmes, and where membership of the same religious community by no means indicates an agreement concerning social questions. 36 PRINCIPLES OF POLITICAL ECONOMY with by the evil use of human liberty, and that this is pre- cisely what has taken place. Through the fault of man, the world is not what it ought to be, not what God wanted it to be. Differing from the liberal school, Catholic reformers are by no means optimistic ; they do not consider the social order as good nor even as naturally tending toward better- ment. Above all, they have no confidence in the let-alone policy for establishing harmony and assuring progress, since, on the contrary, they regard liberty, or at least what is called liberalism, as the true cause of social disorganization. The vehemence of the criticisms which the Catholic school directs against the present social organization, against capital- ism, against profit, against interest (which the Church in the Middle Ages designated as usury usura vorax), against stock companies, against free trade and all forms of internationalism, and, above all, against free competition, has led the liberal economists to give it the name of Catholic socialism. It objects strenuously, however, to this designation, and despite many points of view which suggest a community of thought, it differs toto orbe from the socialist school. First of all, it by no means proposes to abolish the fundamental institutions of the present social order, property, inheritance, the wage-system, but rather to restore and to strengthen them. Furthermore, it in no wise believes in evolution or the unlimited progress of mankind, and is much less inclined to seek its ideal in the future than in a return to institutions of the past, such as rural life, and especially guilds of employers and employees. Finally, it professes as little con- fidence in the principle of equality as in that of liberty, and counts on reestablishing social peace by means of three kinds of authority : that of the father, in the family ; that of the employer, in the workshop ; and that of the Church, in society as a whole. It is of course understood that these three kinds of " social authority " imply commensurate duties. Generally speaking, this school is not hostile to the inter- vention of the state, which is, "after the Church, God's CHRISTIAN SOCIAL REFORM 37 minister for good." It even formally favors such interven- tion to assure Sunday rest to the laboring classes, the regula- tion of labor within just limits, etc. However, one section of the Catholic school is as much opposed to state interven- tion as the liberal school, and this problem has given rise to very lively discussion among Catholic social reformers. The strongest objection that can be urged against this doctrine, omitting all controversy in the field of politics or religion, was long ago formulated by John Stuart Mill, when he said that there is no instance of any class of society, in the possession of power, ever having used this power in the interest of the other classes of society. There is great danger that any guardianship by the upper classes, if ever they were entrusted with the task of solving the social problem, would confirm Mill's statement. The Protestant school shows quite as little sympathy with the present economic order as the Catholic school. It like- wise denounces competition and the pursuit of mere material gain. It regards property above all as a social trust. It believes that the world must be radically transformed in order to approach more closely to the " Kingdom of God," the advent of which all members of the Church should anticipate and work for, even on earth. Faithful to its democratic traditions, which make of each Protestant church a small republic, it aims to apply the same democratic regime to industry. It does not attempt a solu- tion by means of guilds, which, in its opinion, experience proves unsuitable, and which seem to develop collective ego- ism. It proposes the so-called cooperative form of associa- tion, and maintains that cooperation is the exact antithesis of competition. The " Christian socialists " as they were called in the days of Kingsley and Maurice for this reason played an important part in the English cooperative move- ment of the middle of the nineteenth century. As for state intervention, it is difficult to discover among Protestants any general programme concerning this point. 38 PRINCIPLES OF POLITICAL ECONOMY We can readily understand that a unanimity of opinion is even less likely to exist among Protestant social reformers than among the Catholics. Opinions vary all the way from Pastor Stoecker's state socialism (in Germany) to Herron's evangelical communism (in the United States). In England, Protestant socialism has been very favorable to the nation- alization of land. In France, it has generally advocated the doctrine of social solidarity, which we shall now examine. SECTION 5. THE DOCTRINE OF SOLIDARITY In this rapid review we cannot omit a school which is only a few years old, but whose influence is rapidly increasing, the school that takes " solidarity " for its motto. The fact of solidarity, i.e. the mutual dependence of man- kind, clearly demonstrated by the division of labor, exchange, and (as regards successive generations of men) by heredity, did not escape the attention of the classical economists. Bastiat often speaks of it in his "Harmonies Economiques." But he regarded it as a natural law, which did not require the assistance of individuals to work itself out. The school of solidarity, on the other hand, conceives solidarity as the desirable result the express aim toward which we should bend our will. Hence it regards as the foundation of soli- darity to say nothing of the natural phenomena of inter- dependence which are unconscious, and therefore have no moral worth those voluntary contractual associations and institutions that are created deliberately with a viaw to developing this feeling. It differs from the liberal school by repudiating the principle of competition and the struggle for life. It endeavors to substitute the principle of coopera- tion between opposing interests, and the idea of a " union for existence." To those who object that this belittles indi- viduality, it replies that individuality is no less developed by helping others than by helping one's self. 1 1 Vinet, the Protestant critic, has admirably said that "to give one's self, one must own one's self." THE DOCTRINE OF SOLIDARITY 39 It differs from the revolutionary school because it does not believe in the efficaciousness of revolution or expropriation as a means for transforming man or even his social environ- ment. It works, however, for the realization of the principal desiderata of socialism, such as the insurance of all persons against sickness, accident, etc. ; the greatest possible equality of opportunity for all ; the transformation of property, inher- itance, the wage-system, and taxation ; the limitation of money power ; the attenuation of competition, etc. As means to these ends v it advocates association in all its forms, and particularly cooperative association, because this is the most complete of all. But it is not hostile to state intervention whenever labor legislation, sanitary laws, or laws concerning pure food tend to prevent the degradation of the masses ; or whenever certain kinds of obligatory insurance or precautionary regulations tend to train the various classes of the nation in the practice of solidarity. It does not forget that the state is itself the oldest and most impressive form of solidarity among men. The fact that this solidarity is obligatory, instead of purely voluntary, does not diminish its power. Doubtless the habit of soli- darity does not acquire its full moral value until it becomes voluntary ; but the solidarity imposed by law may be indis- pensable in preparing the way for the fuller development of free cooperation. This doctrine has succeeded in attracting adherents from all classes and parties : the faithful believers in the old idealistic French socialism of Fourier and Leroux ; the dis- ciples of Auguste Comte ; the mystical and eesthetical fol- lowers of Carlyle, Ruskin, or Tolstoi ; those who work in the Church, and those who work in biological laboratories. But its popularity is perhaps due to the fact that its program is still quite indeterminate. 1 1 This school counts more of its adherents among philosophers and sociolo- gists, especially those of France, than among economists strictly speaking. Consult the article on "Solidarity" in Gide's volume on "Cooperation,'* 40 PRINCIPLES OF POLITICAL ECONOMY VI. The Wants of Man The wants of man are the underlying motive of all eco- nomic activity, and consequently the starting-point of economic science. Every living being requires for its development and the accomplishment of its purposes some help from with- out, and must assimilate certain elements of the outside world. From the plant (and even from the crystal) up to man, this necessity increases with the increase of individu ality. Every want felt by a living being gives rise to a desire, and consequently to an effort to obtain possession of the necessary exterior objects, 1 because their possession implies gratification, whereas the lack of them means suffering. 2 the works of Carlyle, Ruskin, and Professor R. T. Ely ; Paulsen, " System of Ethics" ; and a recent book by Le"on Bourgeois, " Solidarite," third edition, Paris, 1902. 1 Want or desire exists only when it is directed toward a particular object recognized as capable of satisfying it. In this sense, M. Tarde observes that "the first cause of every economic desire is invention" ("La Logique Sociale," Chapter 7). Eor it is evident that the desire to smoke and to drink spirits could arise only after the discovery of tobacco and after the preparation of alcoholic beverages. Similarly, the habit of cycling owes its origin to the invention of the bicycle. We are told that "necessity is the mother of invention." This is also true in the sense that invention, or the search for objects and devices that will procure satisfaction, is itself the result of natural wants or instincts, such as hunger, cold, fear, etc. The discovery of tobacco and of alcoholic drinks, or at least the widespread consumption of these things, must evidently re- spond to a need of the nervous system that is felt by many persons; the inven- tion of the bicycle is the result of the general need for rapid transit. 2 The wants of man are innumerable. It would be useless to attempt to enumerate them. They may, however, be classified, according to primitive archaeology and our knowledge of the customs of savage tribes, under the following heads : (1) Food. This was certainly the first of wants, inasmuch as the existence not only of man but of every organism depends directly on it. The life of animals and of savage mankind is entirely taken up with the quest for food. In all civilized societies, too, it plays the greatest part. More than half the total wealth of society is produced for use as food. (2) Struggle for life, i.e. defence and combat. Next to food, with which it is closely allied, this want is most important. Even among animals it is of THE WANTS OF MAN 41 The wants of man have several characteristics, each of which is important because some great economic law is based on it. 1 These characteristics are the following : (1) Human wants are unlimited in number. This feature distinguishes man from the inferior animals and is the main- spring of civilization in the strictest sense of the word. To civilize a people is to increase its wants. The wants of humanity are at first like those of a child. At birth the child needs nothing but a little milk and a warm covering ; but soon he requires more varied food, more com- plicated garments, and toys ; each year gives rise to new needs and new desires. The more he learns and sees, the more numerous and intense are these desires. We are to-day conscious of a thousand wants that were very great moment, although it does not give rise to any industry among them, unless we regard in this light the traps that some insects prepare for their victims, like the spider's web. Usually, the weapons used by animals are purely natural. (3) Housing. The need of shelter is felt even by animals, and gives rise among them to many curious industries. (4) Ornament. It may cause some surprise that we give this want so emi- nent a place. Yet prehistoric archseology and the accounts given by travel- lers among primitive peoples show that this need is experienced even earlier than the need for clothing. It is the first need that distinguishes man from animals. The'ophile Gautier has remarked that " no dog ever conceived of wearing earrings ; but the stupid Papuans, who eat clay and earthworms, hang colored berries and shells from their ears, while they go about stark naked." After these four fundamental wants, others arise and mark the beginnings of civilization. These civilized wants fall under the head of religion (charms, idols), clothing (which varies according to the requirements of climate, weather, good manners, social rank, and aesthetic taste), recreation and art (musical instruments, games, carved bones and stones), transportation and intercourse (boats, chariots, social clubs), instruction (stone or bronze tablets, papyrus, parchment, books), and comfort, the last of all. The present relative importance of wants is discussed in Book V. 1 Although the study of human wants is of fundamental importance to political economy, it has been almost entirely neglected, if we except Fourier's somewhat fantastic contributions to the subject. It has, however, very recently been made the subject of an important book by Tarde entitled "La Psy- chologic e"conomique " (Paris, 1902). 42 PRINCIPLES OF POLITICAL ECONOMY unknown to our grandfathers, wants of comfort, hygiene, cleanliness, education, travel, intercourse. It is certain also that our grandchildren will feel new wants. If we should discover, on another planet, beings superior to men, we should find among them a multitude of wants of which we in this world know nothing. Nations are doomed if they are too easily satisfied, and if their desires do not extend outside the small circle of necessity. Nations whose people are content with a handful of ripe fruit and a sleeping-place in the shade will succumb in the international struggle for life. They are destined to disappear quickly from a world in which they scarcely know how to subsist. 1 Is this unlimited multiplication of wants commendable ? Is it necessary ? Is it not to be desired that wants should cease increasing so rapidly ? Admitting that the increase of wants gives rise to an increase of production and of wealth, is not nature making a dupe of man, inasmuch as with the satisfaction of every want another want immediately takes its place ? Is it not true, therefore, that man is con- stantly in pursuit of a constantly receding goal, and is unable ever to acquire peace of mind? An example of this is furnished by our working classes, whose envy of others increases with their own well-being. Would it not, therefore, be better to diminish our wants than to increase our wealth ? Let us not be deceived. If we desire a diminution in the number and intensity of wants that aim at wealth, which to-day make up too great a part of our social activity, this is in perfect agreement not only with Christian ascetics and mystics like Tolstoi, but even with such economists as John Stuart Mill. But this desire is conditioned on the assump- tion that these wants will be abandoned in order that nobler ones may take their place ; for if we simply gave them up 1 The rise of wants through invention, and their propagation by imitation, are studied by M. Tarde in the book already mentioned, and in " Les Lois de 1'Iinitation." THE WANTS OF MAN 43 without filling their place, that would mean the retrogression of social life toward the animal state. Moreover, it must be remarked that even purely economic wants are not devoid of moral value, 1 for every new want constitutes a new social bond ; generally we can satisfy our wants only with the aid of others, and this fact strengthens the feeling of solidarity. The man who has no wants the hermit suffices unto himself, which is precisely what a man should not do. As for the working classes, we should rejoice, not regret, that new wants and desires constantly plague their minds; for without new wants they would have remained in an eternal condition of slavery. (2) Wants are limited in intensity. This is one of the most important propositions in political economy, for on it, as we shall see, is founded a new theory of value. Wants are limited in intensity because every want is satia- ble, i.e. a certain amount of a certain kind or kinds of wealth will satisfy it completely. It is evident that a man needs only a certain amount of bread to satisfy his hunger, and a certain amount of water to slake his thirst. We may say that a want decreases in intensity up to the point of satiety. Then the want is extinguished and is replaced by disgust or even suffering. 2 It is torture to suffer thirst; but it was also torture, in the Middle Ages, to undergo the "watering operation," by which the victim was compelled to absorb excessive quantities of water. The more natural a want is, i.e. the more physiological its nature, the more clearly drawn is its limit. It is easy to tell how many pounds of bread and how many pints of water a 1 The theory of historical materialism, taught especially by the school of Marx (and by Loria in his book on the Economic Bases of Social Organiza- tion), considers economic wants the source of all other wants, political, aesthetic, religious, etc. 2 This is like the well-known mathematical series which diminish until they reach zero and then increase, as minus quantities, below zero. The de- grees of want-intensity are the positive quantities of the series ; the degrees of dislike are the negative terms ; zero is the point of satiety. 44 PRINCIPLES OF POLITICAL ECONOMY man needs. But the more artificial or social a want is, the more elastic is the limit marking its satisfaction. It is cer- tainly not an easy matter to tell how many horses would satisfy a sportsman, or how many dresses would lead a fash- ionable woman to cry " Enough ! " or the number of rubies desired by an Indian rajah, or how much money would com- pletely satisfy the wants of a civilized man. Nevertheless, we may say that even for these wants there is a limit ; in these respects, too, satiety is inevitable. At all events each new possession gives less pleasure than the preceding one. 1 (3) Wants are competitive, i.e. one want can often be developed only at the expense of other wants which it abolishes or absorbs. According to the proverb, the old must make room for the new ; similarly, one want takes the place of another. This simple fact is the basis of an impor- tant economic law called the law of the substitution of wants. Progress consists generally in replacing inferior wants by higher wants. To combat drunkenness, for example, tem- perance societies have found nothing more successful than "temperance restaurants" in which an effort is made to accustom people to drinking tea and coffee. We should also note that a material want may give way to an intellectual want (the saloon to the reading-room) or a moral want (when, for example, a laborer deprives himself of a drink in order to pay his dues to a benefit society, a labor organiza- tion, or a reform club). (4) Wants are complementary ; they form groups. This seems to be antagonistic to the above-named principle, yet it is not so. Are not the persons engaged in any branch of production competitors as well as co-workers ? Similarly, 1 In the 'case of money, satiety seems to be most infrequent and improbable. Why ? For the simple reason that money is the only kind of wealth which has the property of satisfying, not only a specific want, but all possible wants ; consequently it is desired until all our wants are entirely satisfied. This puts the point of satiety exceedingly far off. Nevertheless, it is evident that an extra dollar does not provide a millionnaire with a pleasure at all comparable to that which it procures for a beggar. THE WANTS OF MAN 45 there is competition among wants of the same sort, among wants that are interchangeable ; but there is harmony among wants of different kinds. The want of food is allied, in civil- ized societies, with the want of tables, chairs, table-cloths, napkins, glassware, knives, and forks. In order to obtain a maximum of enjoyment, many pleasures must be combined, and thus give rise simultaneously to large groups of wants. (5) Wants, even acquired or artificial wants, tend to become a matter of habit. They become, as the popular expression aptly puts it, our "second nature." This, as we shall see, is of great importance in the determination of wages. The customary plane of existence the standard of living cannot easily be lowered. There was a time when workmen wore neither shirts nor shoes, when they had neither coffee nor tobacco, when they ate neither meat nor white bread ; but to-day these wants are so deep-seated, they form so fundamental a part of our nature, that a workman, if he were deprived of them and suddenly reduced to the condition of his social equals in the time of good King Henry, would probably perish. If we add, finally, that a habit which has been transmitted from generation to generation tends in time to become established through heredity, and that our senses are every day becoming more subtle and more exacting, we shall understand the despotic power that may eventually be acquired by a want that originally seemed to be futile or insignificant. It must not be supposed, however, that wants once ac- quired are perpetual. There is, as we have said, a competi- tion or rivalry among some wants. Some of them are vanquished and disappear. The show-cases of our museums are filled with objects that at one time satisfied a real want, but which now correspond to no human desire save that of the collector of curios. But wants perish only when they are supplanted by others that are more strongly felt or whose satisfaction affords greater enjoyment. 46 PRINCIPLES OF POLITICAL ECONOMY VII. What is Wealth ? We have said that man, in order to satisfy his wants, is obliged to make use of parts of the outer world, of objects generally known as wealth or riches. In ordinary speech the word " wealth " is synonymous with the word " fortune " and means extensive valuable possessions. It seems strange, therefore, to apply the term "wealth" to a loaf of bread. Yet this is perfectly correct and scientific, if we mean by " wealth " all that can satisfy human wants. The capacity for satisfying human wants is called " utility." Accordingly, to avoid confusion, the term "utilities" would perhaps be better than the term "wealth." The utility of a thing presupposes the discovery of a rela- tion between its physical properties and some human want. Thus, bread is useful because we require nutrition and be- cause wheat contains nutritive elements. Again, diamonds are much desired because it is the nature of man to take pleasure in the contemplation of brilliant objects, and be- cause diamonds have a refractory power superior to that of any other known body and productive of brilliant rays of light. Thus utility depends, first, on a want felt by man, and, secondly, on an object capable of satisfying that want. Of these two features of utility, man, not the object, is the more important. One might be disposed to believe the contrary, viz., that the anticipated satisfaction consists in properties of things, that the utility of gold is of the same nature as its weight or its lustre or its inoxidizability, in other words, that utility attaches to the objects themselves, like a quality which appeals to the senses. This is not so. Utility arises only with desire and vanishes with the extinction of desire. As a shadow follows a butterfly from one flower to another, so utility accompanies desire, and abides only where desire rests. It is subjective, not objective. It matters little that an object has qualities that may satisfy the wants of man, if WHAT IS WEALTH? 47 man is not aware of the fact, or if, because of insufficient power, he is unable to utilize the object. In both cases the object in question is not a utility, and therefore is not wealth. Potatoes were not wealth until Parmentier, with great diffi- culty, propagated their use as food. The falls of Niagara did riot represent economic wealth until we learned how to utilize their motive power. Every object in the world might be useful to man and capable of increasing wealth. But at present some objects are as little entitled to be called " wealth " as the fertile lands or precious stones which as- tronomers discover on the planet Mars. Contrariwise, it matters little that an object has received from nature none of the properties adapting it to the satis- faction of our wants if only we think that it possesses them. For hundreds of years men have attributed wonderful prop- erties to various relics, more or less authentic, which have therefore been regarded as incomparable wealth. There are many mineral waters and patent medicines that command high prices, although their curative powers are exceedingly doubtful. How many things there are whose value and whose utility is due to a passing whim or fancy ! There are many costumes that are no longer worn, paintings that are no longer admired, coins that have no purchasing value, and remedies that do not cure. The list would be long if it were to include all kinds of wealth whose utility was as flit- ting as the want that gave rise to them. Nevertheless, if the desire of the collector of relics (perhaps the most intense of all desires) should happen to fix on one of these kinds of dead wealth, these worthless objects would acquire a new lease of life and might possess a value greater than that which was originally attributed to them. In the opinion of scientists alcoholic drinks do not possess any of the good qualities sometimes attributed to them ; they furnish neither strength nor warmth. But what does this matter from the view-point of the economist ? Millions of men in all countries unfortunately believe them to possess 48 PRINCIPLES OF POLITICAL ECONOMY certain desirable qualities ; they therefore constitute wealth, wealth that is estimated at many millions and by means of which many governments obtain a large part of the public revenues. Hence we must define wealth as all that mankind believes to be useful and can utilize. 1 It is unfortunate for a science to borrow its terminology from everyday speech. It is plain, for example, that in political economy the word " utility " has an unusual mean- ing. For this reason it has been proposed to substitute some newly coined word. In the first edition of this book (published in 1883) we proposed, and have since then em- ployed, the word "desirability." This word has the two- fold advantage of placing the emphasis on the subjective side of economic utility, and avoiding all reference to the real or imaginary, moral or immoral, causes that may give rise to desire. In his " Course of Political Economy," published in 1896, Professor Vilifredo Pareto suggested, and has since then employed, the word " ophelimity," which possesses the same advantages but has the inconvenience of being intelli- gible only to those who are familiar with Greek. But neither of these terms has been generally accepted in the language of economics. We must, therefore, be satisfied with the word "utility," giving it the particular meaning that we have attached to it. Another confusion due to the same cause is the belief that since utility is a property of things it can be possessed only by matter; that, consequently, all wealth is material. Many economists, even to-day, declare that the term " wealth " implies material goods, for wealth is that which can be weighed, measured, and accumulated. This mistake could never have arisen if, instead of the 1 This is the reason why M. Tarde regards faith and invention as the sources of all wealth : faith, because it is necessary that we believe in the use- fulness of the object ; invention, because it is necessary that we be able to use it. WHAT IS VALUE? 49 term " wealth," we had used the term " utility " ; for it is evident that acts may be useful quite as well as things. How great is the utility of the services rendered by our fellow- men ! Although the expression has an unpleasant sound, is it not true that we " make use " of our friends, of our em- ployers, of our subordinates, as well as of things ? It may be objected that our fellow-creatures cannot be counted and evaluated in the same way as material wealth, unless they are slaves, i.e. unless they have become things. In reply to this, it must be said that persons are of course not things and cannot be regarded as wealth. But their acts and their labors, the prescription written by a physician, the lesson given by a teacher, the advice of a lawyer, the performance of an actor, the playing of a musician, the service of our domestics, why should not these be regarded as wealth? Are not all of these acts useful ? Are they not all paid for ? After all, this problem is, in the main, a simple question of terminology. It is an easy matter to bring all the dis- putants to an agreement, without doing violence to every- day language, by reserving the word " wealth " for corporeal objects, and by designating as " services " all the acts of man that are capable of furnishing enjoyment or utility. VIII. What is Value? In ordinary speech the words " value " and " wealth " (or "riches") are synonymous. Both involve the idea of utility. A thing that serves no purpose cannot be wealth or value. But if we look into the matter more closely we shall see that these two words do not express quite the same idea, and that sometimes they may imply even contrary ideas. The idea of wealth is allied to that of abundance ; to have too much of everything would be the acme of wealth. The idea of value, on the other hand, is most closely allied with that of scarcity ; the objects that are most scarce, other things being equal, possess the greatest value. 50 PRINCIPLES OF POLITICAL ECONOMY Suppose that the magic wand of some fairy, or simply the unlimited progress of science and industry, had made all objects as abundant as the water of the rivers or the sand of the seashore ; men then would only need to help themselves to as much as they required of all things. Would not this be the maximum of wealth ? And yet, is it not evident that on this hypothesis all things, because of their superabundance, would have lost all value ? In fact, they would then have no more value for an individual than the water or sand to which we have compared them. Is it not plain, moreover, that in such a fairyland as this all men would be equally wealthy, just as to-day the sun shines equally on the million- naire and the beggar ? * The idea of value, at least in the ordinary acceptance of the term "money value," implies the thought of exchange, while the idea of wealth implies nothing of the kind. This distinction is a consequence of the preceding one, for the pos- sibility of exchange involves scarcity. There is no market and no purchaser for things that are everywhere abundant, for water, air, or even for land in newly settled countries. Yet these things are wealth, but have no value. There are also goods which, although scarce, cannot be exchanged, be- cause they are by their nature not transferable. Health, for 1 J. B. Say regarded this problem as the knottiest in political economy, and expressed it in these terms, " Since wealth is composed of the value of things possessed, how can a nation be wealthiest when things are at the lowest price ?" And Proudhon, in his " Economic Contradictions," defied any thoughtful economist to answer the question. The supposed difficulty is due to the fact that the first clause of Say's phrase contains a false defini- tion. It is not true that "wealth is composed of values." But the second clause is correct, a nation is " wealthiest when things are at the lowest price," because here the word "wealth" or "riches" is taken in its true sense, viz., abundance. Madame de Se'vigne', who cared little for economics, understood this per- fectly well when she wrote from her castle of Grignan, in 1673: "All our barns are full of wheat, and I haven't a cent. Surrounded by wheat, I am suffering want." She meant to say that the harvest had been a rich one, but that it nevertheless possessed little value. WHAT IS VALUE? 51 example, which would certainly possess great value if it could be purchased, or a fine system of navigable rivers, represents great wealth but not value. Robinson Crusoe had certainly accumulated great wealth on his lonely island ; but it was not value until the arrival of the first vessel brought him into relations with the rest of mankind and made it possible to exchange this wealth. It is for this reason that the problem of value usually forms part of the study of exchange, and we shall here simply define it. But the most essential characteristic of value is the idea of a relation between two things, or rather (as the things them- selves are of secondary importance), a relation between two desires or two wants. In other words, value implies not only a desire which might be conceived as existing alone but the preference given to one thing over another, i.e. a com- parison of desires. Value cannot be conceived without a weighing of two things, or a comparison between them. Wealth and utility may exist of themselves, like the wants which they supply. When we say that a thing a gun or a horse is useful, we make a statement that is perfectly clear and intelligible. But if we say that a gun or a horse is worth, such a statement is incomplete and meaningless unless we add how much it is worth. We must add that it is worth so much money, or, if we are living among savages, so many pieces of calico, or so many elephant tusks ; that is to say, we must compare it to some other kind of wealth. Value, like weight or size, is therefore a relative notion. If there were only one object in the universe, it could not be called large or small, light or heavy ; nor could we say that it had much or little value. When we say that an object has " great value " the element of comparison, although not expressed, is understood. We mean that it has great value expressed in money, in which case we compare it to pieces of coin ; or else we mean that it occupies a high rank among riches, in which case we compare it to all other wealth con- 52 PRINCIPLES OF POLITICAL ECONOMY sidered collectively. Similarly, when we say, without any comparison, that platinum is very heavy, we really mean either that it has a high specific gravity compared to water (the standard of comparison) or that it occupies a comparatively high place in a list of elements arranged according to weight. 1 This matter is worth investigating. Why do we attach value to an object ? A little reflection shows that there are two different, and, in a way, opposite answers to this question. We may value things because of the pleasure they give us ; or, we may value them because of the effort, the trouble or the pain involved in their acquisition. These are, as a mat- ter of fact, the two ideas Avhich underlie the concept of value, and which we hold to be true and inseparable. Economists have usually placed all the emphasis on one of these two ideas, and minimized the significance of the other. The innumer- able theories of value that have been offered may be classi- fied under these leading ideas ; the element of pleasure is foremost in those theories which found value on utility, while the element of pain is emphasized by the theories based on cost or labor. We shall explain each of them briefly. SECTION 1. UTILITY Utility, the quality which some things have of satisfying our wants, is, as we have seen, the characteristic of wealth. It would seem natural, therefore, to regard it as the cause of value. This was indeed the explanation given by the first economists the physiocrats, Condillac and J. B. Say. When two objects satisfy the same want, this explanation of value is satisfactory. The degree of value in such a case seems to correspond exactly to the degree of utility. Of 1 It follows that we ought never to speak of a rise or fall of all values. For if value is nothing more than an order, a classification, or a hierarchy estab- lished among articles of wealth, how is it conceivable that all values can rise or fall simultaneously ? Those that rise in the scale must take the place of others which therefore fall. UTILITY 53 two fruits we prefer the more savory; of two sheep the fat- ter ; of two houses the more comfortable ; of two farms the more fertile ; and if the two objects, for instance two bushels of wheat, provide the same amount of gratification, they have as a rule the same value. But if we consider objects satisfy- ing different wants, for instance a loaf of bread and a hat this theory fails to tell which is the more useful. It fails therefore to explain value. It may be suggested that we should classify our wants according to reason, or ethics, or hygiene, just as the seven prismatic colors are classed according to the amplitude of their vibrations. Shall we then put at the head of the list those objects that satisfy the most essential wants, and, among these, place first those that best satisfy our essential wants ? If we do this, we shall have a long list of objects possessing value, each occupying the place to which its relative utility entitles it. A glance at such a list would show that the value of a commodity is not directly propor- tionate, but often inversely proportionate, to its rational utility. What, on the other hand, are the things that would occupy a low place in a list arranged according to values? Wheat, coal, iron, water, just the objects that satisfy the most fundamental and essential human wants. The goods that would stand highest in this list of values would be gold, diamonds, lace, perhaps a broken piece of porcelain coming from a collection, or a rare edition of an old volume that no one has read or ever will read, all objects that serve only to satisfy our curiosity or to please our vanity. Nor can it be objected that this condition of things is due to man's foolishness, that if men were wise the order of values would be identical with the order of rational utili- ties. It is not our province to investigate what goods man ought to prefer ; the theory of value should explain that which is, not that which ought to be. The above objection, moreover, is not valid. Even if the earth were inhabited only by wise men, a glass of water would not be worth a 54 PRINCIPLES OF POLITICAL ECONOMY cent more than it is now, although nothing is better adapted to the satisfaction of a fundamental human want. We must not forget what we have already said : that the value of any object varies constantly according to circumstances. It would therefore be manifestly absurd to say that the value of a commodity is determined by its utility. For there are many utilities, many uses for one and the same thing, and we must consequently ask, if utility determines value, What utility ? The utility of a given object is not the same* for A as for B. Again, an object may possess a degree of utility in the evening which it did not have in the morning. To escape this difficulty, an attempt has been made to supplement the notion of utility by that of scarcity. Utility alone cannot create value ; it remains, so to speak, latent unless it is combined with the quality of scarcity. Value is in this sense scarce-utility, as expounded by Walras (the elder) in France, and Senior in England. This modification of the preceding explanation enables us to solve many of the difficulties that troubled us. The idea of scarcity alone, however, is insufficient, unless we make it include much that the word does not really contain. For example, strawber- ries at the end of the season are as scarce as at the begin- ning, but they have less value because they are less desired. This explanation, moreover, does not satisfy the mind ; for at first it is difficult to understand the close relation between these two elements that seem to have nothing in common : utility and scarcity. A more recent school claims the merit of having discov- ered the logical tie that binds these two ideas. It shows that they are related and may be reconciled by means of the so-called theory of final utility. We shall explain later the meaning of this expression. This school of economists has returned to the idea of utility. Only, it has demonstrated that scarcity, i.e. limitation in quantity, far from being independent of utility, and artificially grafted upon it by economic theory, is really inseparable from it. As mathe- UTILITY 55 maticians say, each is a " function " of the other ; each has the same basis, namely, the fact that wants are limited in intensity. This they prove by the following demonstration : When we raise the old objection to the utility theory that water is very useful and yet has no value, what do we mean ? If we refer to all the water in existence, it is absolutely false to maintain that it has no value ; it would possess a great value if it were in any one's possession and were put on sale. If we refer to the water that happens to be contained in a particular glass or pail, we cannot say absolutely that it is useless or useful, for that depends on circumstances. Let us suppose, for example, that the quantity of water at my disposal is contained in seven pails. The first of these pails I shall use to still my thirst, and it is therefore very useful. The second pail is also useful, although less so, because I intend to use it for cooking. The third is still less useful, for it serves only for washing. The fourth is for my horse, the fifth to water my flowers, and the sixth to wash the floor of iny kitchen. The seventh pail is of no use whatever ; consequently, I make no effort to obtain it. If some one should insist on bringing me ten, twenty, or even a hundred pails of water, these additional pails would be a posi- tive nuisance. Can we now say that a pail of water is use- ful or that it is useless ? These pails of water represent a long series of varying utilities, ranging from infinity to zero, and falling even below zero. Yet every one knows that these pails all have the same value. This value is deter- mined by the utility of one of them. The question that now arises is : Which one determines the value of the others ? The first ? Or the second ? No, the last ; because the priva- tion only of the last pail needed can affect me at all. If there are a hundred pails at my disposal, and six pails are all I can possibly use, I do not care a whit for what becomes of the other ninety-four. But if I have only six pails and my reservoir will furnish no more, each of the six pails has a certain value. This value, to be sure, cannot be greater 56 PRINCIPLES OF POLITICAL ECONOMY than that of the sixth pail, because only my inability to use this pail will cause me any anxiety. If the first pail should by an accident be overturned, should I loudly lament its loss and feel bound to die of thirst ? Of course that would be absurd. It is evident that I should not go without drinking- water, but I should be obliged to use one of the other pails in place of the missing one. Now which pail should I sacri- fice for this purpose ? Evidently, the one which is least useful to me, the sixth. This is why the sixth pail deter- mines the value of the others. Suppose now that my supply of water is abundant enough to furnish ten or even twenty pails of water. It is then clear that for some of thes.e pails I shall have absolutely no need, and their utility for me is zero. At the same time, this circumstance reduces the value of all the other pails to zero, and this is precisely the actual condition of things as regards water in most countries. This fact also explains why, according to this theory, value is determined by final utility or marginal utility, i.e. the intensity of the last want satisfied. 1 1 This theory may be summarized as follows : Value is determined by subjective utility, which is not the utility of a thing in general but its utility for him who possesses it. This utility is not the same for each unit possessed, but decreases as the number of units pos- sessed increases. The utility of the last unit possessed, i.e. the least useful, determines and limits the utility of all the other units. Final utility must be distinguished from total utility. The latter consists of the sum of utilities of all the pails of water, i.e. of the total of a series of decreasing quantities ; it is therefore always much greater than the final utility. This circumstance explains why the total utility of water is enor- mous although the (final) utility of a pail of water is small. The foregoing is true only of water for household purposes. If water is used for irrigation or for motive power, it acquires a value and a consider- able one because for such purposes as this it does not exist in sufficient quantity to satisfy the needs of all ; and in this event the thousandth pail or the ten-thousandth pail would still have a (final) utility and confer a value on the whole quantity. In his excellent book, now unfortunately forgotten, on " Le Commerce et le Gouvernement," the philosopher Condillac foreshadowed this explanation of value and in this respect was more advanced than his contemporaries, the UTILITY 57 This theory is evidently founded on the law that we have already stated, viz., that the wants of man are limited in in- tensity. It is admirable as a correct and delicate psycho- logical analysis of human desires ; but in basing value on a single principle it does not appear to have succeeded any better than preceding theories. What the theory designates as final utility is nothing else than what we have called the degree of desirability, i.e. the sum of those elements that constitute economic desire. 1 Among these elements there is especially one that cannot be brought into the formulae of this theory, viz., limitation of the quantity. This point is, to be sure, implied in the theory by regarding the final utility in mathematical language as a " function " of the quantity. But in this event we must admit that the " quantity " is in turn determined by other causes more fundamental. If we lived in a world where production physiocrats: "The value of things grows by scarcity, and diminishes by abundance. Abundance may reduce it to zero. A superabundance of goods is always valueless when we cannot make use of the surplus, for then it is entirely useless." Franklin put this even more tersely, " When the well is dry we know the value of water." 1 The celebrated theory of final utility outlined above owes its wide ac- ceptance primarily to the works of three economists who published it almost simultaneously about thirty years ago : Professor Jevons in England, Walras in Switzerland, and Karl Menger in Austria. Jevons outlined the doctrine in his " Theory of Political Economy," published in 1871, and at almost the same time the same doctrine was expounded in French and German by the other two authors. There is no reason to believe that any one of these three scientists knew anything of the others' work. Each of them regarded his expo- sition of the theoiy as the first and only one. A few years later, however, it was discovered that an obscure German author named Gossen had in 1854 for- mulated the same doctrine of marginal utility. Still later it was maintained that the French economist and engineer Dupuit developed the same theory in 1844. The honor of its invention has recently been restored to the Germans in an essay by C. W. A. Veditz on Thuenen's Wertlehre" (Halle, 1896), in which the author shows that the final utility theory was clearly foreshadowed, if not explicitly stated, by the German economist von Thuenen, who wrote in 1826. In the United States the principal protagonists of this theory are Professor J. B. Clark and Professor S. N. Patten. Its principal advocates abroad are Boehm-Bawerk and Wieser. 58 PRINCIPLES OF POLITICAL ECONOMY did not exist ; if, for instance, all the objects that serve our wants fell from heaven like the manna of the Jews, then the supply of goods would be a fixed and unchangeable quantity in the problem of value. But this is not true. Supply is alterable, and therefore of only relative importance. There is not a thing in the world, even among the products of nature, and certainly not among the products of human industry, the supply of which is so rigorously fixed that we cannot increase it by additional effort. When we say that diamonds are rare we do not mean that nature has put a specific number of them into commerce and then destroyed the means of their pro- duction ; we simply mean that it requires much effort or great good fortune to find them, and that consequently the number of diamonds can be increased only with difficulty. When we say that chronometers are rare we do not mean that there is in the world only a fixed number of them; for we might produce almost any number. But as the manufac- ture of a good chronometer requires considerable time and a special kind of craftsmanship, the quantity is limited by the available time and labor. It would be unsafe, even, to affirm that the number of paintings by Raphael is absolutely fixed ; for it is not impossible that some day we may discover, hidden away in some old attic or church, hitherto unknown works of this artist. In forming a concept of value, therefore, we cannot neglect to consider the means of increasing the quantity of a given kind of wealth. There are even cases when the mere possibility of voluntarily increasing the quantity is sufficient to diminish desire and reduce value. Such a case would be, for example, the discovery of a method for crystallizing carbon to produce diamonds ; even before the industrial application of this method the value of diamonds would fall. Finally, this theory, which explains facts very well Avhen we have to do with isolated man (like Robinson Crusoe), does not explain them when we enter the real world of exchange, except by means of complicated abstractions. Indeed, as LABOR 59 values are entirely subjective, a given object has as many values as there are buyers and sellers in the market. We must therefore still ask : How is a uniform market price evolved from this great variety of values ? (See Book III, the section on Exchange Value.) SECTION 2. LABOR The second theory is in a manner the inverse of the first. While the first clings to the idea of the gratification afforded by goods, the second emphasizes that of the effort made to get them. It occupies an important place in the science of economics. First developed by Adam Smith, vigorously expounded by Ricardo, it has been accepted by economists belonging to many different schools from the optimists like Bastiat to the socialists like Karl Marx. 1 Of course this theory does not deny that utility, i.e. the power to satisfy want or desire, is the fundamental condition, the sine qua non of value. It would indeed be foolish to sup- pose that a useless thing can have any value, whatever may be the labor that it has cost. But, according to this school, although utility is the condition of value, it is not the cause of value. The basis of value, it'is claimed by this school, is human labor ; and things are worth more or less according to the amount of labor required to produce them. This theory seems to possess two advantages over the pre- 1 " It is natural," says Adam Smith, " that what is usually the produce of two days' or two hours' labor should be worth double what is usually the produce of one day's or one hour's labor." " Wealth of Nations," Book I, Chapter VI. Ricardo speaks of labor * as being the foundation of all value, and the relative quantity of labor as almost exclusively determining the relative value of commodities." Chapter I, Section 2, "Principles of Political Econ- omy and Taxation." " The value of a commodity is determined by the quantity of labor expended during its production." KARL MARX, "Capital," Chapter I. Despite this apparent identity in the thought of these three writers regard- ing value, their explanations of it are at bottom quite different. But we cannot here discuss this difference. 60 PRINCIPLES OF POLITICAL ECONOMY ceding one : (1) That of being more scientific, because it gives as the basis of value a precise quantitative notion, something that can be measured. To say that a certain watch has twice the value of another because it represents twice as much labor, satisfies our mind ; the explanation seems to be valid ; at all events we can verify it if we choose. But to say that it is worth twice as much because it is twice as much desired, does not sound clear and convincing ; for what do we know about it, and how can we tell ? (2) It also satisfies better the idea of justice, because it gives as the basis of value a human element, labor. This is one reason why the theory has attracted so many generous-minded men. If we could succeed in showing that the value of all things that have become some one's property, beginning with the soil itself, is directly proportionate to the labor that they have cost, it would not necessarily follow that the wealth belonging to each person is equivalent to the product of his labor 1 (for he may have appropriated value created by the labor of others), but the problem of attributing to each per- son a value equal to the product of his labor would at least be very much simplified ; it would, upon such a theory as this, be easier to found our social organization on a principle of justice. We wish, therefore, that this theory could in truth be regarded as the expression of existing conditions. Unfor- tunately, the explanation is unsatisfactory, for the following reasons : (1) If the cause or essence of the value of a thing con- sisted in the labor requisite for its production, then value would necessarily be unchangeable, for as Bastiat himself 1 The optimistic school of economists actually affirms that wealth is propor- tionate to labor, and endeavors to show that except for those perturbations, exploitations, and thefts that occur even in the most civilized societies, the sum of values in any person's possession is the fruit of his labor and saving, or of his ancestors' labor and saving. The socialists, particularly Karl Marx, claim that all wealth, all capital, is the result of a deduction from the product of the labor of others. LABOR 61 admitted, "past labor is not susceptible of a more or less." But every one knows that the value of objects varies con- stantly. It is evident that these variations are absolutely independent of the work of production. Besides, it is a priori absurd to think that the value of a commodity may thus de- pend on a fact that is irrevocably past. The labor put into an object is a matter of the past, and cannot now be changed. "What's done, is done." To this, of course, the reply may be made that we should consider not past labor but present labor, not the amount of labor especially devoted to the particular object that we have in mind, but the generic labor necessary under existing social conditions to produce an object like it. 1 This may be well and true, but there remain other objections more difficult to remove. (2) If labor were the cause of value, equal labors would always correspond to equal values, and unequal values to un- equal labor. But we constantly see objects that have cost 1 The American economist, Henry C. Carey, maintained that the cost of "reproduction" determines value. He meant that the actual amount of labor expended in making a chair, for example, does not determine its value, but the amount of labor that would now be required to make another chair just like it, i.e. the cost of again producing such a chair. Karl Marx declared that we need not care for the individual labor which may have been employed in producing a given object, but for the social labor requisite for the production of that object, measured by the number of hours necessary, on the average, to produce it. Bastiat, to solve the same difficulty, says that we must Consider, not the labor performed by him who produced the object, but only the labor saved to him who seeks to possess it. And as helping some one to avoid labor is, according to Bastiat, to " render him a service," this author defines value as "the relation between two services exchanged," and declares that the cause and measure of value is the service rendered. This idea, by which social relations are regarded as an exchange of services, is both very ingenious and very modern, but as an explanation of value it amounts to mere tautology. To the question, Why is a diamond more valuable than a pebble ? it replies. Because in giving me a diamond you render me a greater service than in giv- ing me a pebble. No one would gainsay so puerile a proposition ; but it is sufficient to reply that if the service rendered by the transfer of a diamond is greater than that rendered by giving up a pebble, this is simply because 62 PRINCIPLES OF POLITICAL ECONOMY the same amount of labor selling at different prices: for example, two pieces of meat from different parts of the same cow. On the other hand, objects which have cost different amounts of labor are sold at the same price : for example, a bushel of wheat from land that produces ten bushels an acre, and a bushel of the same quality from land that pro- duces thirty an acre. The phenomenon known to political economists by the name of rent is nothing else than the excess of the selling price of an article over its cost of production, i.e. its cost in labor. Now rent exists everywhere, more or less. 1 (3) If labor were the cause of value, value would be absent where labor is absent. But there are innumerable things that have a value of their own without the interven- tion of labor, e.g. springs of mineral water or of petroleum, guano deposited by sea-fowl, sandy beaches that are particu- larly valuable for planting vineyards, building lots on the prominent streets of large cities, etc. 2 There are also things that acquire an increased value without the addition of any labor, e.g. wine that has been stored in wine-cellars. the diamond has more value than the pebble. Thus we have reasoned in a circle. As a matter of fact, it is not the service rendered by him who yields an object, that determines its value, but, on the contrary, it is the value of the object yielded, that determines and measures the service rendered. It should be noted that to the very extent that these amendments correct the fundamental " labor" theory, they also deprive it of the merit of satisfy- ing our ideal of justice. The theory of value and our ideal of justice would be in perfect harmony if we could prove that the value of any object in a per- son's possession is proportionate to the trouble that was required of its pos- sessor to produce it. But this harmony no longer exists if we limit ourselves, like Bastiat, to proving that value is simply proportionate to the trouble saved (i.e. not incurred}, or if, like Karl Marx, we measure value by average labor (which is independent of individual labor). 1 Ricardo did not deny rent. It was he who discovered it for land. The explanation he gives of it serves but to emphasize the fact that two objects of the same quality, i.e. the same utility, have necessarily the same value how- ever unequal may be the labor they have cost. 2 Ricardo did not deny the indubitable fact that there are objects " whose value depends only on scarcity, because no labor can increase their quantity." LABOR 63 (4) Finally, and above all, if labor is the cause of value, what is then the cause of the value of labor itself? For labor has an incontestable value ; it is bought and sold, or rather, it is hired every day at a certain price. It is easy to explain the value of labor by the value of its product, just as the value of a farm is determined by the value of its crops. But if in turn we pretend to explain the value of a product by the value of the labor which produced it, we are reasoning in a circle. The above theories are the two important explanations of economic value. We must choose between them, unless we care to adopt them both. Indeed, I believe that this is just what we are obliged to do, not for the sake of eclecti- cism, but because we thus approach nearer to the truth. The human mind is naturally disposed to seek a single cause for the phenomena under study; but is it not reasonable to suppose that value has two sides, two poles as it were, each of which contains a part of the truth utility as well as labor, pleasure as well as pain ? Let us ask ourselves these questions: Why do we attrib- ute a certain value to a given object ? Why do we want a given object? A little reflection will suffice to show that two different, and in a sense opposite, answers may be given to these questions. We may place a value upon things because they afford us pleasure, or we may do so because they have cost us some expenditure of effort or pains. Even an isolated man like Robinson Crusoe certainly did not classify the objects he possessed solely according to the satisfaction he anticipated from their possession. He had also another criterion of value, viz., the difficulty he would encounter in replacing these objects. Probably the utility of his watch But he considered them insignificant exceptions to the rule, and gave as typical examples : valuable paintings and statues. The objects, however, which have a scarcity-value constitute a class of exceptions that is more important than the rule. 64 PRINCIPLES OP POLITICAL ECONOMY was small, for as he lived alone and had no engagements to fulfil he needed it little ; but as he knew that it would be impossible for him to replace it, he doubtless attributed a greater value to it than it would otherwise have possessed. There is consequently all the more reason why we, who are living in a society and who are interested in values princi- pally for purposes of exchange, cannot ignore this matter of pain or cost. As sellers we must think of the difficulty of replacing the object that we relinquish. As purchasers we are concerned with the difficulty of procuring the object that we want. 1 In summarizing our answer to the question, What is the cause of value ? we cannot assign one exclusive cause, for there are more than one ; but we may say : Things have more or less value according to the intensity of our desire for them. The intensity of our desire for things varies according to the insufficiency of their quantity for the satisfaction of our wants. The quantity of things is more or less insufficient, according to the difficulty we experience in increasing it. IX. What is Price? To obtain a definite idea of the size, the weight, or the value of things, it is not sufficient to compare them with one another. , A common measure is necessary. For meas- uring lengths the term of comparison was originally a part of the body (foot, ell, etc.), and is now, according to the "metric system" introduced first in France, a part of the earth's circumference (the meter, kilometer, etc.). For measuring weights the term of comparison chosen in the 1 Professor Marshall declares that value is determined both by the final utility and by the cost of production; value " maintains an equilibrium between these two opposite forces, like the keystone of an arch." Euskin says that value is the product of two factors, one of which is labor, as, and the other the demand, y. Whence, if x or y equals 0, then the value, xy, also equals 0. ( " Unto This Last. ' ' ) WHAT IS PRICE? 65 metric system is the weight of a fixed volume of distilled water. The old or original English pound was derived from the weight of 7680 grains of wheat, all taken from the middle of the ears and well dried ; hence " grains " form the lowest fractional parts of a pound. The standard British pound at present is a piece of platinum preserved in the office of the Exchequer, at the temperature of 62 Fahr. A number of authorized copies of it have been made and de- posited at several institutions. The yard, as the standard English measure of length, is the distance between two marks on a metal rod imbedded in the masonry of the Houses of Parliament. A common measure enables us to compare two things in different places (which cannot be brought together for direct comparison), or to compare the same thing at different times in order to ascertain what changes have taken place in it. By means of the yard-measure we can compare the stature of the Lapps with that of the Patagonians, and tell exactly how much taller the former are than the latter. The same standard of comparison, if it has not been entirely forgotten, in a thousand years will enable our descendants to compare themselves with the man of to-day and ascertain whether or not mankind has decreased in stature. In order to measure value it is not sufficient for us to com- pare two values one with another (as is done in barter), but we must take the value of some definite object as a basis of comparison. But which object shall we choose ? Each nation and every period seems to have had its own measure of value. Homer declared that the armor of Diomedes was worth a hundred oxen. Until a few years ago, a Japanese would have said that it was worth so many hundredweight of rice. An African negro would have put its value in yards of colored calico, and a Canadian trapper would have expressed it in fox-skins or otter-skins. It is, nevertheless, a remarkable fact that almost all civilized people have agreed in choosing as their measure of values, as their standard, the 66 PRINCIPLES OF POLITICAL ECONOMY value of the precious metals, gold, silver, and copper, but especially the first two. They all use a little ingot of gold or silver, called a dollar, or pound, or franc, or rouble. To measure the value of any object, they compare it with the value of that small weight of gold or silver that serves as the monetary unit ; that is to say, they try to find how many of these bits of metal must be given up for the commodity in question. If, for instance, ten are needed, they say that the commodity is worth ten dollars, or ten pounds, etc. That is its price. The price of a thing is, therefore, the expression of the relation between the value of the thing and the value of a certain weight of gold or silver ; or, to put it more briefly, it is its value expressed in money. As in all civilized coun- tries money is the sole customary measure of values, the term "price" has come to be synonymous with "value." Why have the precious metals been chosen as the common measure of values ? Because they possess two properties that enable them to fulfil this function admirably, or, at all events, better than any other known object. These two properties are : (1) Great value in small bulk, which makes them very easily transportable ; (2) A degree of chemical un- changeableness that guarantees almost unlimited durability. By virtue of the first of these properties the value of precious metals is of all values that which varies least from one place to another. By virtue of the second quality the value of these metals varies least from one year to another. This double invariability, relatively speaking, in time and in space, is the essential condition of every good measure. Yet we shall see (in the section on Money) that when we take long periods of time into consideration not centuries, but even generations this chosen measure is found to be very defective. Can we find a better one ? Several have been proposed, the principal one being wheat. This seems a most astounding choice ; for if we consider the value of this com- modity in different places or at different times we find that WHAT IS PRICE ? 67 there are few goods whose variations in value are more marked. At a given time a bushel of wheat may sell for $2 in France, $ 1 in London, and 50 cents in one of our western states ; and from year to year the value of crops varies greatly, according as they are good or bad. To this the reply is made that though the value of wheat is incomparably more variable than that of the precious metals when only short spaces of time are considered, yet it is far more stable when longer periods are observed. Wheat satisfies a physiological need that is permanent and varies little. No other commodity (at least in civilized societies) possesses to the same degree the double characteristic of being almost indispensable up to a certain limit, determined by the quantity necessary to nourish a person, and of being almost entirely useless beyond this limit, since no one cares to consume more than his hunger demands. Hence, despite the sudden and wide oscillations in its production, the law of demand and supply tends always to restore its value to a level determined by physiological need ; it does this, moreover, with greater effectiveness whenever pro- duction has temporarily deviated from its proper level. It must be acknowledged that wheat does offer, so far as variations in value are concerned, virtues and defects that are precisely the opposite of those which mark the precious metals. For this reason it has often been used by statisti- cians as a good basis on which to estimate the cost of living at various periods. A better measure, it appears, would be labor. In fact it may be maintained that men will be willing to devote more labor to making a thing when the thing is greatly desired, or, in other words, when they believe it to possess greater value. Just as in exchange we measure the value of a com- modity by the sacrifice of some other commodity which some one is disposed to make in order to procure it (for instance, by the amount of money which the purchaser will yield for it ) ; similarly, may we not measure its value by the amount 68 PRINCIPLES OF POLITICAL ECONOMY of time and trouble which men will devote to its produc- tion ? It is in this sense that Adam Smith said, " Labor was the first price, the original purchase-money that way paid for all things." l What we really want to find is a practical and convenient measure. How, then, can we take labor as a measure, since it is never the same for two persons, and varies continually in intensity and in quality ? It has also been suggested to take, as the common measure of value, the wages of a workman of the lowest class, of a manual laborer who earns just enough to live. This meas- ure is proposed on the supposition that the amount neces- sary to keep a man alive is a fixed, definite quantity. But we need only refer to what has been said concerning the wants of man to be convinced that this supposition is en- tirely contrary to facts. Hence we conclude that, for want of something better, we must be satisfied to use gold and silver as the measure of value, and to express prices in money. 1 This theory must not be confounded with that of Karl Marx, by which labor is regarded as the cause of value, a doctrine which we have already rejected. Here we are considering labor not as the cause but as the effect of value, or rather as the effect of desire, since desire gives rise to value. If we admit that labor is an effect of value, nothing would be more scientific than to measure the cause by the effect. We measure weight by the pen- dulum much better than with scales, for scales permit us only to compare weights as exchange enables us to compare only values while the pendu- lum measures the intensity of weight itself. If we could measure value by labor, we should then be able to tell whether in a few centuries the economic desires of mankind are more er less intense than to-day. BOOK II. PRODUCTION PART I. THE FACTORS OF PRODUCTION THANKS to a tradition dating from the time of the first economists, three agents of production have always been dis- tinguished: land, labor, and capital. This threefold division has the advantage of simplicity, and there seems to be no need to abandon it, at least not in an elementary book like this. It requires, however, some correction. Classical political economy has always shown an unfortunate tendency to re- gard these three factors as equally important. This ten- dency was doubtless due to a desire to justify the claims of each in the ultimate distribution of products, by attributing ivages to the laborer, rent to the owner of land, and profit to the owner of capital. But we must abandon any such effort as unscientific. Here we have to do only with production, and from this point of view it is at once evident that these three factors play unequal parts. Of the three, labor is the only one that can claim to be an agent of production in the exact sense of the word. Only man plays an active part in production ; nature is absolutely passive, and merely obeys man, often after long resistance. Nevertheless, whenever we have to do with material wealth, nature is indispensable to production. 1 It may be called, therefore, a factor of pro- 1 When we are considering non-material products, or services (see p. 48), it is plain that human labor is sufficient, unless we maintain, with a cer- tain degree of subtilty, that these services can be transmitted only through the medium of natural agents ; the song of a singer, the advice of a physician, can, to be sure, reach our ears only by means of sonorous air vibrations. 69 70 PRINCIPLES OF POLITICAL ECONOMY duction, for it is not only a necessary concomitant of labor, but must exist before labor. The activity of man ac- complishes nothing in a vacuum ; it does not really create, but must find in the outside world those indispensable ma- terials on which it operates. These materials are furnished by nature. The third factor, capital, also plays a purely passive part, and therefore should not be called a productive agent. It is not even a primary factor of production ; it is only a factor of secondary importance. Logically, as well as chronologically, it is derived from the two others. Capital, as we shall explain in detail later, is a product of labor and of nature, set aside for productive purposes. Its right name is "instrument" of production, in the wide sense of the term. 1 1 The classical economists generally designated as profits the share of the capitalist in the distribution of goods. But modern economists have confined this term to the remuneration received by the industrial projector, and have used the term interest to designate the share due to capital. It is the indus- trial projector who directs production by uniting the requisite land, labor, and capital ; it is he, moreover, who is directly responsible for the outcome. (See the Chapter on Profits.) CHAPTER I LABOR t I. On the Part played by Labor in Production To accomplish its purposes, and principally to obtain the necessities of existence, every organism must perform work. The seed must work its way through the hardened crust of earth. The oyster, clinging to its bed, opens and closes its shell to draw nourishment from the water. The spider spins its web ; the wolf hunts its prey. Nor is man exempt from this universal law ; he too has to toil to satisfy his wants. With plants this toil or striving is unconscious ; with ani- mals it is instinctive ; with man it is a voluntary, conscious act, called labor. But is there not some wealth that man can obtain without work, wealth that nature lavishly bestows on him ? This is a difficult question. First of all it must be observed that there is not a single object among those that are called prod- ucts that does not in some measure presuppose the inter- vention of labor. The word product (productum), which means " drawn from somewhere," implies this. But what, except the hand of man, could have performed this draw- ing or producing ? Even the fruits which nature has given man, he must take the trouble to gather. This is labor, and under some circumstances exceedingly arduous labor. People seldom realize what an important part labor plays even in those products that are often inaccurately termed "natural." They are too ready to believe that everything that grows on the earth is due to the generosity of nature. As a matter of fact, nearly all the plants that supply man with food have been so modified by cultivation and by the labor of hundreds of generations, that botanists can seldom 71 72 PRINCIPLES OF POLITICAL ECONOMY discover their original types. Wheat, maize, and beans have been found nowhere in the wild state. Even such plants as do grow wild are wonderfully different from their culti- vated congeners. Between the acid berries of the wild vine and our grapes, between the succulent fruits of our gardens and the bitter or even poisonous wild-fruit, there is a vast difference ; so great, indeed, that our fruits may be regarded as artificial products, that is to say, as creations of human industry. A proof of this is the fact that if the constant labor of cultivation be relaxed for a few years, these prod- ucts speedily degenerate, i.e. they revert to a state of nature and lose all those properties with which human industry had endowed them. It is true, however, that some wealth is not the product of labor, precisely because it is not a product ; i.e. it exists before any act of production. I refer to the soil and all the organic objects or inorganic substances with which it supplies us, the bubbling spring of water or petroleum, the growing forest, the natural prairie, the stone-quarry, the coal or metal mine, the waterfall that turns the mill-wheel, the guano bed de- posited by sea-birds, or the sea teeming with fish. Yet, to understand the part played by labor even in this " unproduced " wealth, we must bear in mind two points : (1) This natural wealth does not exist, as wealth, i.e. as use- ful and valuable objects, until human intelligence has been able, first, to discover its existence, and, secondly, to per- ceive that it possesses qualities which render it fit to satisfy some of our wants. Take any piece of land, say wheat- growing land in America. Why is this land wealth ? Be- cause some explorer or pioneer, following in the footsteps of Columbus, discovered this particular spot. Now discovery, whether of a new world or merely of mushrooms in the forest, always presupposes labor of some kind. (2) Natural wealth cannot be utilized, i.e. cannot be made to serve for the satisfaction of human wants, until it has undergone a certain amount of labor. In the case of virgin LABOR 73 soil, it is necessary to clear it of trees and underbrush. In the case of a mineral spring, it must be made possible to col- lect and store the water. Even mushrooms and fish must be gathered or caught and then prepared for use by cooking. II. How Labor Produces We must distinguish three varieties of labor : (1) Manual labor. When we consider the infinite variety of products which result from human industry we are likely to suppose that labor is a very complex power which defies all analysis. Yet it is nothing of the sort. Labor is noth- ing more than muscular energy directed by intelligence. It cannot produce any other effects than those of any motive force a weak motive force viz., a movement or change of place. This movement may be a displacement of the object itself, or of its component parts. In the latter case we say that there is a change of form a transformation but every change of form is really only a displacement. The exquisite shapes assumed by clay under the hand of the potter or the statuary, the rich and ingenious patterns wrought in lace by the fingers of the lace-maker, are only the effects of the arrangement or displacement of molecules of clay or threads of tissue. All that man's labor can do is to stir, separate, connect, insert, superpose, and arrange ; all these are only different kinds of motion and transposition. Take the vari- ous processes in the production of bread : ploughing, sow- ing, reaping, winnowing, grinding, sifting, kneading, baking, these are nothing but movements of matter. Analyze any industry, and no other factor can be found, for this is the only part man plays in the work of production and is the limit of his power. All the profound transformations that take place in the constitution of matter, changes which modify its physical or chemical properties and help in production ; the mysterious evolution of a plant from its seed; the fermen- tation that turns a sugary syrup into alcohol ; the chemical 74 PRINCIPLES OF POLITICAL ECONOMY process that transforms carbon and iron into steel ; these are not man's work. All he does is to put the proper mate- rials in the right place, the seed in the ground, the vintage in the vat, the ore in the furnace. Nature does the rest. When we consider how feeble, relatively, this motive power of man is, and how limited its field of action, we are astounded that it has nevertheless been potent enough to transform the world. . (2) All physical labor, properly so called, must be preceded by purely intellectual labor which we may call invention. It is because of discovery and invention that the patrimony of mankind is increased every day by some new conquest. From the soil that makes the mud of our streets we have learned to manufacture aluminum ; industry has converted the apparently worthless residue of coal into perfumes or into dyes more splendid than Tyrian purple. Yet the list of things which we know how to utilize is short when com- pared with the immense number ' of those that serve no human use. Of the 140,000 known varieties of the vege- table kingdom, we have learned to cultivate and use less than 300. Of the hundreds of thousands of species in the animal kingdom, there are barely 200 that we employ for any pur- pose whatever. In the inorganic world the proportion is" even more unfavorable. But the list of our riches is every day being lengthened, and there is every reason to believe that if our science were perfect there would not be a single blade of grass or a grain of sand for which we had not dis- covered some use. Invention does not mean, as might be believed, the rare idea that springs from the mind of a man of genius ; it is a requisite of every productive act, even the most humble. There is no movement of the arms or fingers in any produc- tive act that was not invented by some one. It should be noted that every invention, once made, may serve for an indefinite number of productive acts, or acts of reproduction. It is precisely this possibility which makes LABOR 75 it difficult for the law to protect the property rights of inventors. (3) Finally, it must be remembered that all collective labor (i.e. all labor, save when a man works alone and for him- self ) requires direction or supervision. Each laborer ' in a productive enterprise is not allowed to do as he pleases, in- dependently of each other laborer ; he must be told what to do, according to a general plan. This planning or directing is itself a very effective kind of labor, the importance of which increases as production is conducted on an increasingly large scale. Misdirected labor is apt to be valueless ; hence the labor of intelligent direction is a value-creating function. III. The Evolution of Ideas concerning the Productivity of Labor It is interesting to follow the succession of economic doc- trines regarding this problem of the productivity of various kinds of labor. The title of " productive," originally ap- plied to only one kind of labor, has gradually been extended in its application, and is now bestowed on all kinds without exception. (1) The physiocrats confined the epithet "productive " to agricultural labor (including hunting, fishing, and mining, as similar in nature), and denied it to all other labor, even that of manufacturing. The reason assigned for this discrimi- nation was that the above-named pursuits furnish all the materials for wealth, while other occupations simply work up these materials. (2) The definition of the physiocrats was unquestionably too narrow. The raw product of agriculture and of mining is usually altogether unfit for consumption ; it must undergo numerous modifications which are effected by manufacturing industries. The latter are the indispensable complement of farming, and without it the process of production is as incom- plete as a play with the last act suppressed. Of what use 76 PRINCIPLES OF POLITICAL ECONOMY is the ore at the mouth of the mine, unless it is destined to go to the foundry ? Of what use is wheat before it has passed through the hands of the miller and the baker ? With- out the weaver's labor flax would be as useless as the nettle. How then can we refuse to call these labors productive ? Without them all these kinds of wealth would be useless to us ; in other words, they would not be wealth at all. As for the contention that agriculture and mining create wealth, and that manufacture or industry in the narrower sense of the term only transforms it, we must call this an error. The farmer creates nothing ; he too simply trans- forms the elements that are contained in the soil and air. He makes wheat from water, potassium, silicon, phosphates, and nitrogen, just as the soap-maker manufactures soap from soda and fatty substances. Therefore, ever since Adam Smith wrote on this subject, no one has hesitated to regard manufacturing as productive labor. (3) With regard to the labor of transportation there has been more hesitation, because transportation seems to make no change whatever in the article transported. Is not a package of goods the same when sent from New York as when it reaches San Francisco ? This feature of identity, it was urged, distinguishes transportation from manufacturing. But the distinction is scarcely philosophical, since every displacement involves an essential modification of bodies. Indeed, it is the only modification that w^e can make in matter. Besides, if we decide that displacement is not essential enough a modification to entitle it to be called pro- ductive, then we cannot call mining productive either. For what distinction is there between the work of the miner, who transports coal from beneath the earth to its surface, and that of the wagoner who takes it away to such places as re- quire it, unless we pretend that displacement is productive only when it takes place vertically, and not so when it takes place horizontally ? It is scarcely necessary to add that just LABOR 77 as manufacture is the indispensable complement of agricul- ture and mining, so transportation is the complement of the preceding operations. What Avould be the use of stripping bark in the Brazilian forests, of extracting guano in the Peruvian islands, of hunting elephants in South Africa for their tusks, if there were no means of taking these products to the places where they are needed? What profits it a farmer to have the finest crop in the world, if there is no way to carry it to the consumers ? (4) With regard to commerce or trade, the hesitation has been even longer. It may be said that commerce or trade, reduced to its simplest terms, i.e. buying for the purpose of selling, does not imply any creation of wealth. No doubt those who engage in trade may make much money, but this does not augment the general wealth. In fact we shall see that the multiplication of traders and middlemen may become a veritable social scourge, and even involve a loss of wealth for the community. But we must observe, on the other hand, that commerce cannot very well be separated from transportation. It was at a late period in the history of economic science that these two operations came to be distinguished. Even to-day, merchants are still the real directors of transportation ; the carrying industries only execute their bidding. Moreover, they also preserve and store up goods, and sometimes even subject them to slight modifications. The cloth merchant cuts his goods into conveniently-sized pieces ; the grocer roasts his coffee. Finally, even when commerce is nothing more than exchange pure and simple, the mere act of trans- ferring a thing to the person who will utilize it must be regarded as productive ; for to make useful a thing that was not useful before, is the whole secret of productiveness. (5) Finally, discussion has been keenest with regard to services, such as those rendered by the liberal professions. It may seem strange, for instance, to apply the term " productive " to the labor of the judge who gives a decision, or of the sur- 78 PRINCIPLES OF POLITICAL ECONOMY geon who amputates a leg. Where are their " products " ? Where is the " wealth " that they have produced ? It is sufficient, however, to note two facts in this connec- tion: (a) That production has for its direct object the satis- faction of human wants, and only indirectly the creation of wealth. The fact that an act of man may satisfy the wants of his fellow-men directly, without the intervention of wealth, that is, without the use of any material objects, should not rob it of its productive character; (5) that in the social organism, thanks to the law of the division of labor which we shall explain later, there is such a solidarity and interdependence in the labors of men that it is not possible to separate them, and immaterial services are an indispen- sable condition of the production of all material wealth. Take the production of bread. We need not hesitate about classing as productive the labor of ploughmen, sowers, reapers, wagoners, railroad employees, millers, and bakers, beginning with Triptolemus, the legendary inventor of wheat, and including all his successors who have discovered any of the varieties of cereals or who have invented the rotation of crops or the methods of improved agriculture. But we can- not stop at mere manual labor, strictly speaking. It is clear that the labor of the superintendent or of the landlord, although he may not himself put his hand to the plough, is as important for the production of wheat as the labor of the shepherd in the production of wool, although he may not shear the sheep himself. Nor can we ignore the work of the engineer, who devises the system of irrigation used on the farm, or that of the architects and builders who have constructed the farmhouses and the barns. Must we stop here ? If we do, what is to be said of the labor of the constable who keeps off the tramps, or the county attorney who prosecutes them, or the justice who sen- tences them, or the soldier who protects the harvest from foreign invaders that are even more dangerous than native thieves ? Do they not also contribute to the production of LABOR 79 wheat ? And what must be said of the work of those who trained the farmer and his employees, the instructor who taught them the first principles of agriculture or the means of acquiring them, and the doctor who keeps them in good health ? Is it a matter of indifference, even from the view- point of wheat-production, whether or not the laborers are well-instructed and healthy, and that they enjoy the advan- tages of social order, security, good government, and good laws ? Should we disregard, as of no importance in the pro- duction of wheat, even such apparently alien labors as those of authors, poets, and artists ? May not the taste for farming be developed by novelists who depict the beauties of rustic life, or by poets who celebrate the pleasures of the country, and teach us to repeat, after the author of the " Georgics," Fortunatos nimium sua si bona norint Agricolas ! Where, then, should the line be drawn ? Productive labor has been extended to the farthest bounds of society, like the concentric circles made by throwing a stone in a pond. Undoubtedly, the various kinds of labor we have enumerated do not contribute in just the same way to the production of wheat ; some act directly, others indirectly ; but none of them, beginning with the ploughman's toil and reaching to the work of the President, could be suppressed without affecting the raising of wheato There is even no necessity for determining which of these labors is most useful economically. According to the order of importance of the wants that they supply, we might be in- clined to put at the top of the list the work of discovery and invention, then farming, then manufacturing, transportation, and last of all commerce and public services. But it should immediately be objected that if a country is poorly governed, or if it has no means of transportation, all its agricultural wealth is of no avail. What we need is a proper coordination of these various productive functions and labors. Unfortu- 80 PRINCIPLES OF POLITICAL ECONOMY nately this perfect coordination is far from realized even in civilized societies. Some nations expend millions for the de- velopment of means of transportation without first ascertain- ing whether there will be any products to transport. Again, the number of persons engaged in petty trade or employed in government offices is increasing every day, while agri- culture is being more and more abandoned. 1 IV. Pain as a Factor of Labor All productive labor involves toil. This is a law of su- preme importance in political economy. If labor did not involve unpleasantness, all economic phenomena would be entirely different from what they now are. If men worked only for pleasure, it would no longer be necessary to have private property as a stimulus to toil, and the most serious objection to communism would lose its force. Fourier, the socialist, understood this perfectly. The basis of his scheme of a future society was to make labor attractive. He insisted that labor was painful solely because of our defective social organization ; he boasted that in his " phalanstery " labor would be made attractive to all persons by having the choice of occupations free, by changing them frequently, by working only a short time, by an appeal to the spirit of emulation, and by a hundred other devices, some of which are ingenious and some fantastic. He proposed to make 1 The recent census figures regarding the number of persons engaged in gainful occupations show the following distribution : 1870 1880 1890 1900 Agriculture, fisheries, mining 49% 46% 40% 38% Manufactures 20 20 22 22 Commerce and transportation 10 11 15 16 Liberal professions 3 3 4 4 Personal service 18 20 19 20 This table indicates that the number engaged in the first two groups, which are the only directly productive ones, has fallen from 69 to 60 per cent, in 30 years ; while the number of the other three groups, which are unpro- ductive in the old acceptation of the term, has risen from 31 to 40 per cent. LABOR 81 the work of the farmer, the smith, the carpenter, the shoe- maker, etc., just so many kinds of sport. There is really noth- ing absurd about this. Labor is after all only a form of human activity, and activity is not necessarily painful. To act is to live ; absolute inaction is a torture, so cruel that when prolonged in solitary confinement it may cause insanity or death. There is no essential difference between labor and a host of exercises that are regarded as pleasures, though they often require a greater expenditure of energy than that in- volved in labor ; for example, mountaineering, boating, gar- dening, and dancing. King Louis XVI found amusement in making locks. Why should not all men work for the love of it? The answer is that man finds pleasure in action only in so far as the exercise of this activity is itself a gratification and the performance of a natural function. But when it is viewed as the condition of an ulterior enjoyment, as the effort which must be made to achieve an aim fixed before- hand (and this is the very essence of labor), then it becomes disagreeable. Between a man who rows for pleasure and a boatman who rows to earn a living, between a tourist who climbs a mountain and the guide who accompanies him, between a girl who spends her evening at a ball and the dancer who appears in a ballet, I see only one difference the first rows, climbs, or dances, solely to row, climb, or dance, while the others do so to earn their living. This dif- ference, though a purely subjective one, causes the same kinds of activity to be regarded by the latter as labor and by the former as pleasure. Some men find their pleasure in gardening ; but they would find it less agreeable if they were obliged to raise vegetables for sale in the market. The man who follows a road for a walk may take pleasure in this activity even though the road may not be particularly attrac- tive ; but the man who must traverse it every morning and every evening to reach his destination always finds it long and wearisome. Now labor is the path that almost all man- 82 PRINCIPLES OF POLITICAL ECONOMY kind must follow in order to earn a livelihood ; hence, in accordance with the old curse in Genesis, " they labor in the sweat of their brow." 1 Doubtless even the humblest labor has its joys, the joys of a duty fulfilled and a natural law voluntarily accepted ; but these austere joys are felt only by a chosen few, and we should fall into the most chimerical optimism if we believed that a change of environment and of social organization would some day lead all men to labor solely for pleasure. In order to induce men to work, and in order to counter- balance the unpleasantness always associated with toil, a motive of some kind is needed. Formerly, when work was done by slaves, the whip, i.e. constraint, furnished the incen- tive. For the altruist of the future, the sense of a social duty voluntarily performed will perhaps be sufficient. But for the man of to-day as a general rule the motive is self- interest. Every man who labors is subjected to the influence of two opposing forces. On the one hand is the desire to procure enjoyment or the means of obtaining enjoyment ; on the other is the dislike for work, or rather for the unpleas- antness of work. According as one of these desires out- weighs the other, man will continue or will abandon his labor. As Professor Stanley Jevons ingeniously observes, the pain endured by the worker increases with the continuation of labor, while the pleasure derived from the reward of labor constantly diminishes as the more pressing wants are satis,- 1 Socialists and anarchists have bitterly condemned the Bible for repre- senting labor as something humiliating and infamous, as the consequence of the Fall, and as a kind of punishment. They are evidently not very familiar with the text. In reality, the Bible represents God Himself as the first of workers, since He wrought six days and rested the seventh. The institution of a day of rest (which presupposes labor) dates before the Fall. Man, we are expressly told, was placed in the Garden of Eden " to cultivate it." The doctrine taught by the Bible is this : In the world as made by the Creator work was attractive ; but evil having entered it through the fault of man, labor lost the character of joyous and vivifying activity, which had previously been attached to it by the will of God. LABOR 83 fied. Of the two desires, one prompting him to work, the other urging him to stop, it is clear that the latter must triumph eventually. Take a laborer drawing buckets of water from a well. Fatigue increases with each successive bucket he has to draw. The utility, moreover, of each suc- cessive bucket decreases ; the first of them probably is neces- sary for drinking and cooking, the second serves for watering cattle, the third for cleaning, the fourth for watering the garden, the fifth for sprinkling the road. At which number will he stop ? This depends partly on his power of support- ing fatigue, but chiefly on the number and intensity of his wants. The Esquimau, who uses water only to quench thirst, will stop at the first or second bucket ; but the Dutchman, who cleans his house from roof to cellar, may have to draw fifty buckets before he thinks he has enough water. If in addition to the stimulus of present and actual wants there is also that of future wants, if, for instance, in a land where water is scarce the worker thinks of filling a well in anticipation of days of drought productive activity is greatly increased. But the disposition to compare imme- diate toil with remote gratification a faculty which is called foresight belongs only to civilized races, and, among these, only to the wealthier classes. The savage and the poor are equally improvident. V. Time as a Factor of Labor All labor not only involves a certain amount of displeas- ure, but also requires a certain amount of time. Between the time when labor begins and the time when it produces the anticipated results, a shorter or longer period must necessarily intervene. This is one of the essential condi- tions of all production, a condition that is absolutely general. Nature herself is subject to it : long months pass by before the seed slumbering in the soil is transformed into wheat, and many years are required to change the acorn into the sturdy oak. 84 PRINCIPLES OF POLITICAL ECONOMY As a general rule the time of waiting is proportionate to the productiveness of the enterprise. Labors that furnish man with only a day's food, enabling him to live "from hand to mouth," such labors as fishing or hunting or gathering wild fruit, do not require more than a few hours. The time needed to complete those great industrial and engineering enterprises that are the glory of the present day, such as mines, artesian wells, railways, tunnels, and canals, is long and proportionate to the magnitude of the results. It will be many years before the Isthmian Canal will be completed, although it was begun in 1881. The element of time, an indispensable factor in all pro- ductive enterprises, is, as we shall presently see, one of the principal reasons for the importance of capital and the privi- leged position of those who happen to own it. It is plain that the men employed in building railroads or digging canals must subsist while engaged in such enterprises ; the requisite food and materials must be advanced by those who possess capital. It is not enough to note that time is an indispensable factor of all production ; we must add that man has only a limited amount of time at his disposal, not only because life is short, but also because many deductions must be made from a man's time ; of these deductions, three deserve special mention : (1) Man cannot work every hour of the day. Time for sleep and for meals must be deducted, and experience has shown that nothing is gained by trying unduly to lengthen the working-day. Custom and law fix this period at about ten or twelve hours, and there is a strong tendency to reduce it to eight hours, i.e. one-third of a day. (2) Man cannot work all the days of the year. There is no country in which there are no holidays. England and America rigorously obey the rule to observe the Sabbath. Countries which, like France, pride themselves on being above the sabbatical superstition, make Monday a holiday. LABOR 85 Moreover, days of illness must be taken into account. So, after all, it is rare for even the most industrious workman to reach an average of 300 work-days a year. 1 (3) Man cannot work all the years of his life. He must deduct the years of infancy, and also the years of old age (if he is fortunate enough to attain them). From the viewpoint of productivity those countries are most favored which count the largest number of persons between the ages of eighteen and sixty years, i.e. persons who are actively productive. Unfortunately, the majority die before attaining the end of this productive period, and a large number do not even enter upon it. 2 1 The average in France, according to official statistics, is 295. 2 According to the census of 1900, the number of persons in the United States between the ages of 15 and 60 was 597 per 1000 of the population ; in France the number is 610 per thousand, and in Germany, 565. The average age of decedents, according to the census of 1900, was 35.2 years. In France, of every thousand persons born, 644 reach the age of 18 years, and 360 pass the age of 60 years. The average duration of human life in civilized nations is about 33 years. It is probably within the truth to declare that one-quarter of the number of persons born die before the age of 6, one-half before the age of 16, and only one person of each 100 born reaches the age of 65. The average duration of human life is a matter of great economic impor- tance, inasmuch as a very slight increase in the average means a great gain of productive power. The productive years of life of a population must sup- port not only themselves, but also the unproductive years. (Consult RT Mayo-Smith, Statistics and Sociology, Vol. I.) Many European nations are severely handicapped in their productive powers by the existence of large standing armies, consisting of men in the prime of life who not only are not productive, but who absorb a large part of the products of those that are engaged productively. The total peace establishment of Germany, France, Italy, Austria, Russia, Great Britain, and Turkey in 1902 was 3,283,905 men. CHAPTER II NATURE THE term " nature " does not signify a definite, specific factor of production, but the sum total of those elements and productive forces that are furnished by our natural en- vironment. 1 Before we can produce anything we must have a favorable environment, land, and raw material that can be utilized. Nature also provides the forces that are used to propel machinery. I. Environment Some historians and philosophers may have exaggerated the influence of geographical environment on the political, literary, and artistic development of peoples ; but it would be difficult to exaggerate this influence so far as it concerns economic development and productive power. 2 (1) Climatic conditions. Tropical lands may have wit- nessed the growth of brilliant civilizations, but they have never given rise to great industrial nations. Nature in the tropics seems to discourage productive activity, both by her generosity and by her outbursts of violence. In those blissful climes where food is the gift of nature, and there is no need 1 The term "land " was formerly used instead of " nature." These two expressions are, in fact, equivalent, if land is supposed to include not only the soil fit for cultivation, but the whole terrestrial globe and the atmosphere which surrounds it. To be sure, the only portion of the universe that can serve as the field for our economic activity is our planet, and only the superficial crust of that. As savage tribes, however, have been known to make use of the crude iron found in meteoric stones, and as every motive force (winds, water currents, and the caloric energy stored up in coal) is, according to science, due to solar heat, the term "nature " is more accurate than the term " land." 2 It is well known that Montesquieu attributed a decisive influence to climate. One branch of the school of Le Play, headed by M. Demolins, 86 NATURE 87 for clothing or even housing, man learns to rely on nature and to avoid all effort. In those regions, moreover, physical forces are so exceedingly violent, their various manifesta- tions (torrential rains, floods, earthquakes, cyclones) are so irresistible, that man is cowed and does not even conceive the bold idea of mastering and utilizing them. He scarcely pro- vides for self-defence. In our temperate lands, on the other hand, nature is so niggard as to compel man to rely in a great measure on his own efforts. But the forces she displays are so gentle as to allow human industry to tame and utilize them. In these climates she may be said to foster productive activity both by what she refuses and by what she gives. (2) Geographical configuration. Who can estimate the in- fluence that England's insular position has exerted on her political, industrial, and commercial development ? The con- tinent of Africa, known to man from the remotest antiquity, and the seat of the oldest known civilization (that of Egypt), has to this very day remained beyond the pale of all economic progress, principally for want of a good system of navigable rivers. The same cause accounts fundamentally for the fact that North and South America, discovered hardly four centu- ries ago, are covered with an elaborate network of commercial routes running in all directions. The rivers of the New World flow into the ocean by large estuaries, and are so in- tricately joined that we can pass from the tributaries of the Plata into those of the Amazon and thence into the Orinoco, considers environment the starting-point of all social science. It distin- guishes three kinds of soil, which give rise to three distinct types of primitive societies : the steppe to the pastoral races, the seashore to fisher tribes, and the forest to the hunter peoples. These are the fundamental types of simple societies, i.e. those which subsist solely on the spontaneous products of the soil. But this school goes farther, and by means of the same theory explains the origin of all complex or civilized societies. Thus the primitive state of the soil is made the origin, as well as the sole cause of all present varieties of property, family, government, etc. This theory has been expounded in a very interesting manner by M. Demolins in his recent book, "Comment la route crde le type social." 88 PRINCIPLES OF POLITICAL ECONOMY or from the basin of the Mississippi to the Great Lakes, almost without leaving the waterway. But the rivers of Africa, though they are quite as large as those of America, do not invite commerce ; a barrier of impassable cataracts or pesti- lential swamps makes the invasion of modern enterprise next to impossible. (3) The geological nature of the soil and subsoil is quite as important ; it creates agricultural and mineral wealth. The dread with which England calculates the time when her coal mines are liable to fail her, shows well enough how much she owes them for her industrial development. 1 A nation is supported not only by its soil but also by its sub-soil, i.e. by its supply of coal, metals, petroleum, and all the other mineral resources that it possesses. Countries that possess both a fertile soil for agriculture, and a sub-soil that is rich in industrial raw materials, enjoy a great natural advan- tage over those that are not thus provided ; they can support a larger population, or, at all events, a relatively wealthier one. In 1900, there were in the United States 581,221 per- sons engaged in mining and quarrying, and the total value of our mineral production exceeded $1,000,000,000. 2 At first sight it would appear that man is powerless to modify the environment with which nature has surrounded 1 In 1866 Jevons declared that the English coal mines would be exhausted in a century, and Mr. Price Williams in 1889 made the same prophecy after a careful study of statistics regarding coal mining in that country. There seems to be no doubt that China possesses an enormous supply of coal. The coal fields of China, Japan, Great Britain, Germany, Russia, and India contain apparently about 303,000,000,000 tons, which is enough for 450 years at the present rate of consumption. If we add the North and South American coal fields, the supply is about doubled. It should be borne in mind, moreover, that improved machinery has greatly increased the yield per miner. 2 For the year 1901 the exact amount was $1,086,529,521. The most im- portant items in this total were : Coal, $348,910,469 (at the mines); pig iron, $242,174,000 ; clay products, .$110,211,587 ; copper, $87,300,515 ; gold, $78,666,700 ; petroleum, $66,417,335 ; building stone, .$55,615,926 ; iron ores, $49,256,245 ; silver, $33,128,400 ; lead, $23,280,200. LAND 89 him, and that his only resource is to adapt himself to it as best he can. Yet he does succeed in exerting some modi- fying influence on this environment, although his influence necessarily is limited. He cannot create mines where there are none, but by judicious agricultural improvements he can make soil cultivable, and change marshes, stagnant ponds, and even gulfs, into arable tracts. He cannot alter the geo- graphical lines drawn by nature, but with a little complaisance on her part he can modify them ; for instance, by completing a network of inland water communication. He can overcome such barriers as mountains and arms of the sea, by construct- ing roads above, or, better still, beneath them. He can sepa- rate Africa from the old continent, and South America from the new, and thus change these two peninsulas into islands. Climatic conditions he certainly cannot alter ; but, by plant- ing extensive forests, and by means of systems of cultivation not yet entirely understood, perhaps human industry will yet be able greatly to modify the rule of storms and winds. 1 II. Land A certain amount of the earth's surface is necessary for man to stand on. More is necessary for him to sleep on, still more for building a house, and much more for raising wheat and pasturing flocks. When the population of a country increases beyond a certain density, the question of surface becomes a serious one. When human beings in obedience to their social instincts swarm in one of those huge centres like London, Paris, or New York, the space for housing becomes insufficient ; plots of land acquire higher value than the buildings erected on them, even though they be palaces of costly marble. 2 As we shall see when dealing 1 In fact, some scientists have proposed to alter the course of the great maritime currents, such as the Gulf Stream, for the purpose of distributing heat and cold to the continents, just as water and gas are distributed in cities. 2 As much as $450 per square foot has been offered for land in New York City at the corner of Wall Street and Broadway. Cf . the interesting article on this subject in the Tale Review for 1902, by Richard M. Kurd. 90 PRINCIPLES OF POLITICAL ECONOMY with house-rent, the social consequences which result from this state of affairs are most deplorable for the working classes. It would of course be absurd to fear that some day there will not be room enough on the earth for men to live on; yet it is not unreasonable to ask whether there will always be enough space to supply food. Considerable ground is required to supply food for one man, although the minimum requisite amount is always being diminished by the prog- ress of civilization and agricultural methods. People that live by hunting must have several square leagues per man ; pastoral races need several square miles ; agricul- tural nations require only a few acres. The limit falls as we pass from extensive to intensive methods of farming. 1 In China, where farms are as small as our garden plots, the prevailing method of cultivation enables several persons to subsist on the produce of an acre. Yet the minimum of necessary space, though constantly reduced, still exists and is sufficient to cause some anxiety regarding the destiny of the human race. The discovery of the New World, Australia, and South Africa has assured us sufficient territory for many genera- tions. Yet with an annual increase of the human species scarcely less than fifteen millions, these reserves for the future will some day certainly be exhausted. There is now 1 In Greenland among the Esquimaux, and among the native inhabitants of the Amazon forests who live by hunting, the density of the population is about one per thousand square miles. Among the Kirghises and Turcomans of Central Asia (who are shepherd peoples) the density is less than one per square mile. In Russia, an agricultural nation, it is 15 per square mile ; in industrial nations like England and Belgium it is 557 and 533, respectively, per square mile. In 1900 the density of the population of the United States was 25.6 per square mile ; in 1890 and 1880, respectively, it was 21.2 and 17.3 ; but at the time of the first census, in 1790, it was only 4.9. The density varies greatly from one state of the union to another, and is greater in the cities than in country districts. In Rhode Island it is 407.0 and in Nevada only 0.4 per square mile. RAW MATERIALS 91 no hope of discovering new worlds. Before half a century has elapsed, the last vacant spot doubtless will be taken into possession, and the last boundary line will be drawn. Then the human race will have to content itself with fifty-two million square miles of land area, without the hope of ever increasing it by new conquests or discoveries ; and our only consolation will be to repeat the line that Regnard, with a pride scarcely justified, wrote on a rock in Lapland : " Hie stetimus tandem nobis ubi defait orbis." III. Raw Materials The inorganic substances that compose the earth's crust, and the organic substances due to plant and animal life on its surface, supply industry with the raw materials that are indispensable to all wealth and that form its basal element. Some of the necessary raw materials nature has spread about with lavish profusion, while others she has given but spar- ingly. Even those that exist in large quantities may be scarce in certain regions. Drinking water is generally men- tioned as an example of superabundant wealth ; yet nearly all great cities find the supply of water insufficient, and resort to expensive engineering works to procure it. Only one substance is everywhere provided in unlimited quantities, viz., air. But when we are in quest of special qualities of healthfulness, coolness, or warmth in the air, then it cannot be said to be equally at every one's disposal. If at Newport, Bar Harbor, and any other celebrated seaside resorts a foot of land commands a high price, it is not because people are willing to pay a high price for the land itself, but because of the unequalled air and sunshine to be found at these places. Those materials that are superabundant but unequally distributed, human ingenuity can transport to places where they are lacking. It is for this reason that transportation must be regarded as an act of production. But since matter, owing to its weight and inertia, sometimes offers considerable 92 PRINCIPLES OF POLITICAL ECONOMY resistance to any attempt at removal, and since the labor and expense necessary for overcoming this resistance increase in proportion to the distance to be covered, the industry of transportation cannot entirely do away with the inequality of natural conditions. As for those natural substances that exist in limited quantities, it is possible that man, by discovering the pro- cesses of nature which brought them forth, may actually re- produce them. We may some day be able to make diamonds by crystallizing carbon ; or if the supply of coal should ever become exhausted, we may succeed in extracting fuel from the carbonates of lime found in large quantities in the earth's crust. It is also possible that we may find substitutes for those materials that are not obtainable in sufficient quanti- ties. We sometimes succeed in doing this, and should al- ways succeed if our knowledge were wide enough ; for there is such an infinite variety of organic and inorganic substances many of which possess similar characteristics that they could to a certain degree take each other's place. IV. The Law of Diminishing Returns As land and raw materials are limited in quantity, the production in which they are the necessary factors also must be limited. And such is indeed the fact. Hunting, which played so great a part in primitive societies, has disappeared from the list of productive industries in civilized countries, for the very good reason that, despite the regulations estab- lished for its protection, it has ceased to give a satisfactory remuneration. Even in the wilds of Africa, and in the uninhabited territories near the poles, the hunt for elephants, ostriches, beavers, otters, and whales is becoming unprofit- able. The scarcity of fish in the seas which border our shores is a subject of lamentation for our sea fishermen, who are now obliged to pursue fish out on the high seas and to equip themselves with larger vessels. The disappearance of LAW OF DIMINISHING KETUKNS 93 forests, and consequently of wood for carpentry, is an ac- complished fact in several European countries, particularly England. To be sure, there are industries in which a change of processes may avert, for a time, the threatening calamity. Instead of hunting ostriches, we may raise them ; instead of catching fish in the seas or rivers, we may hatch them ; in- stead of merely cutting down trees, we may at the same time plant them. This would amount to changing these occupa- tions from simply extractive industries into productive ones, like agriculture, in which we do not merely let nature work, but assist and guide her. There are, however, two important limitations even in agriculture : (1) Agricultural production is limited by the supply of mineral substances that are indispensable to plant-Hfe. Every plot of land, even the most fertile, contains only a fixed amount of nitrogen, potassium, phosphoric acid, etc. A part of these essential substances is removed with every crop that is raised on the land. It is true that the farmer aims not only to restore to the soil a part of the substances that each harvest has removed, but also to enrich it by adding new substances. But it must be borne in mind that the sources from which the farmer derives these enriching substances are themselves limited. Natural fertilizers restore to the soil only a part of what the animals that pasture on it have con- sumed, and chemical fertilizers consist of minerals (phos- phates, nitrates, guano, etc.), the supply of which is small and easily exhaustible. (2) Moreover, agricultural production is limited by the time and space necessary for vegetable and animal life ; these conditions are much more rigid, and less subject to modifi- cation, than those of industrial production. The farmer is reduced to an almost passive part in production ; he must wait patiently for nature to accomplish her part of the work according to laws which he knows but imperfectly and which he cannot change. It takes months to transform the seed 94 PRINCIPLES OF POLITICAL ECONOMY into ears of wheat ; and it takes years for the acorn to become an oak. . Again, every plant requires room in which to spread its roots and to breathe ; this space cannot be restricted. It is different with the industrial worker. The mechanic in his shop generally subjects matter to simple transformations whose physical and chemical laws are much less mysterious than those of organic life. The proof of this lies in the fact that these laws have been tamed, as it were, and obliged to work with mechanical precision at man's command. The industrial worker is not tied down to an inexorable succession of seasons ; he can ignore climate and weather, and keep his machinery and furnaces going day and night, summer and winter. 1 Doubtless, there is not a single piece of land of which the farmer could, not, if need be, increase the yield. Only, after a certain point has been passed, he cannot do this except at an increased cost in labor. There must consequently be a point at which the effort made to increase the crop is incom- mensurate with the result. Suppose an acre of land produces 40 bushels of wheat, and that these 40 bushels represent 20 days' labor, or, if we prefer to express the same thing in money, an expense of |20. 1 We may, nevertheless, ask the question : Since the limitations encoun- tered by farming are due to the fact that it is concerned with living organisms, why should we not try to surmount this obstacle by courageously giving up the assistance rendered us by the mysterious forces of animal and plant life, and seek to manufacture food'just as a scientist manufactures chemical sub- stances ? All the tissues of living beings, animals or plants, are made up almost exclusively of oxygen, hydrogen, nitrogen, carbon, and mineral salts. All these materials exist in superabundant quantities in the earth's crust and in the atmosphere. The problem, therefore, seems to be theoretically solva- ble ; in fact, some chemists believe that we are on the verge of its practical solution. If chemists should ever succeed in solving it, they will have dis- covered more than the solution of a chemical problem, or even the problem of Life ; they will have found the solution of the social problem, or, at least, they will have revolutionized all the laws of economics. For if food could be manufactured, agriculture would be useless, and man would use the earth merely to walk and build on. Every small piece of land could then feed a population as dense as that of the most populous quarters of our large cities. LAW OF DIMINISHING RETURNS 95 To make an acre produce twice as much wheat (i.e. 80 bushels), more than 40 days of labor or more than $40 of expenditure would be necessary. To double the product it would be necessary to triple, perhaps to quadruple, the labor and expense. This fact is expressed by the law of dimin- ishing returns* according to which the returns are not directly proportionate to the increased expenditure of labor or capital. 1 This law is certainly borne out by the experience of every day. Ask an intelligent farmer whether his land could not produce more than it does. He will reply : " Certainly, the wheat crop would be larger if I chose to use more manure, to apply more thorough labor, to clear the land of the smallest weeds, to have the earth carefully dug up by manual labor, to use the hoe more thoroughly, and to protect the har- vest from insects, birds, and parasitical weeds." Then ask him why he does not do all this, and he will reply that it would not pay ; the increase of crops would cost more than it would be worth. There is therefore in the output of any piece of land a point of equilibrium which marks the limit, not beyond which it is impossible to pass, but beyond which no one cares to pass because there is no advantage in doing so. 2 If things were not as they are in this respect, if we could increase the crop of a given piece of land indefinitely, upon the sole condition of proportionately increasing labor and expenditure, the tillers of the soil would not hesitate to do this : instead of increasing the size of their farms, they 1 It is, of course, true that improved methods of cultivation may for a time put off the point of diminishing returns. 2 It may appear strange to speak of the limitations of agricultural produc- tion at a time when the superabundance of farming products is such that Euro- pean farmers are complaining, and governments in Europe feel called upon to protect them by customs duties excluding foreign cereals, cattle, etc. But this may be said to be an accident, due to the recent cultivation of large areas in new countries with sparse populations, on which extensive cultivation is easily practised because land is cheap and abundant. This fact explains the postponement of one effect of the law of diminishing returns, and its tempo- rary suspension, but it does not abrogate the law. 96 PRINCIPLES OF POLITICAL ECONOMY would reduce them to the smallest possible area, because the smaller the area the easier it is to manage a farm. But in this event the earth's surface would be entirely different from what it is. The simple fact that things are not as we have just supposed, and that poorer and less favorably situ- ated land is in fact constantly brought under cultivation, demonstrates that in reality we cannot expect a piece of land under given conditions to yield more than a limited crop. (See the section on Rent.) V. Motive Forces "We have explained that production consists in changing the place or the form of matter. The resistance offered by matter to these changes may sometimes be considerable, and man's muscular energy is not very great. In all times, therefore, and especially since the abolition of slavery has made it impossible to employ the strength of his fellows, man has endeavored to supplement his strength by using the motive forces provided by nature. There are not very many of them, and they have often been overestimated. There are really only four or five which man has been able to utilize in production : the muscular energy of animals, the propelling power of wind and of water, the expansive power of vapors (especially of steam), and recently, although thus far in a small measure, electricity. Man makes use of these natural forces by means of machinery. Machines are only tools, with the difference that most tools are manipulated by hand, whereas machines are worked by natural forces, such as waterfalls and steam. 1 Now it is a difficult problem to 1 When the instruments worked by man are complicated, they are some- times also called machines, e.g. sewing-machines ; but this terminology is not correct. Besides, tools and implements can also multiply the power of man. Aided by a hydraulic press, a child can exert a pressure that is theo- retically unlimited. With a lever and a place on which to rest it, Archimedes could have moved the world. Yet it has been calculated that had Archimedes found this necessary point of support, and worked several millions of years, he could have raised the world only a few inches ; for a law of mechanics MOTIVE FORCES 97 utilize natural forces and make them turn wheels, propel planes, or work shuttles. Much has been written of the importance of farm machin- ery in the economics of agriculture, but the fact is too often overlooked that the machinery is valueless unless driven by some other power than human muscle. The power of steam and of falling water applied through the agency of the steam- engine and the water-wheel gives great effectiveness to labor in factories. The corresponding power of the farm at the present time is principally that of horses and mules, although in California, Hawaii, and Louisiana the steam-engine is used to a limited extent in ploughing and in transporting cane from the fields to the sugar-houses. 1 In our manufactures the four important motive forces are steam, water, electricity, and gas. Steam, which in 1870 furnished 51.8 per cent of the motive power for manufac- tures, now supplies 77.4 per cent. Water-wheels, which in 1870 provided 48.2 per cent, now furnish only 15.3 per cent. Electric motors in 1890 represented only three-tenths per teaches that every gain of power is counterbalanced by a loss of speed. With the aid of mechanical devices a man may be enabled to lift a thousand times as much as he can lift with his arms, unaided ; but it takes a thousand times as long to do it. Now, as time is valuable, the advantage resulting from the use of implements is practically restricted. When, however, ma- chines are operated by means of natural forces, there is no limit to the increase of power. There are vessels that have machinery capable of producing 30,000 horse- power, which is equivalent to the strength of 300,000 rowers, or even 900,000, as it would be necessary to have three relays every twenty-four hours. These rowers could propel such a vessel three or four miles an hour, whereas modern methods secure a speed of 25 to 30 miles. Assuming that such a vessel as this employs 200 men, the power of each may then be said to be multiplied by 4500 through the use of modern propulsive machinery. The Sunday editions of some of our newspapers contain more printed matter than this whole volume. If the amount were the same, the circula- tion only 100,000, and all the work had to be done in writing in the same time now occupied by printing (i.e. about four hours), three million persons would be required to publish such a paper. 1 In 1900 there were in the United States 5,739,657 farms, having a total of 21,646,731 horses, mules, and asses. 98 PRINCIPLES OF POLITICAL ECONOMY cent, and now they produce 2.7 per cent of the power used in manufactures. In 1890 the gas-engines used in manufac- turing produced only one-tenth of one per cent of the total power utilized, whereas in 1900 they furnished 1.3 per cent. 1 A few decades ago the use of power in any considerable quantity was limited practically to manufacturing opera- tions; but within the last ten or twelve years the use of electricity for lighting and for the operation of street rail- ways has developed enormously. During 1900 there were over twelve hundred electric railway lines in operation in the United States, and over thirty-three hundred central stations for the distribution of electric current for lighting and power purposes. The modern office building, often housing a population equal to that of a small town, is almost wholly a creation of the past ten years, and the power required in these great structures, not only for lighting purposes, but for the operation of elevators, pumping water, compressing air, and operating refrigerating and ventilating machinery, forms a large item when the number of these buildings in the United States is taken into consideration. 2 The use of electricity, moreover, as an agency for the transformation and transmission of the energy developed by falling water, has entirely changed the conditions under which such primary power can be utilized to advantage. The practical possibility of transmitting power thus devel- oped over long distances has removed the necessity of build- ing mills adjacent to water powers. Again, the use of steam power, either directly applied or electrically transmitted, is becoming more and more general in mining and quarrying, in public works of every description, in the sinking of 1 According to the Twelfth Census of the United States, the aggregate motive power employed in our manufacturing establishments in 1900 was 11,300,081 horse-power, as compared with 6,954,655 horse-power in 1890, 3,410,837 horse-power in 1880, and 2,346,142 in 1870. 2 Very interesting data regarding the new uses of power, and especially of electricity, are given in Vol. VII of the Twelfth Census, from which nearly all of the above facts are taken. MOTIVE FORCES 99 foundations, in the erection of buildings, and in nearly every branch of industry. Thus the amount of power used apart from manufacturing operations is increasing rapidly. It should be noted that the more powerful these natural forces are, the more time and trouble it has taken man to utilize them and make them subservient to his purposes. Their resistance increases with their power. The " harness- ing " of Niagara Falls, for example, was so stupendous an undertaking that our forefathers, scarcely conceiving its pos- sibility, left it for modern engineering to accomplish. The domestication of various animals such as the horse, camel, ox, elephant, reindeer, and Esquimau dog supplied man with the first natural force for carriage, draught, and tillage. This was an important conquest, for animals are relatively stronger than men. A horse's strength is esti- mated at six or seven times that of man, and the food a horse requires is by no means of greater cost. But the number of horses in a country is limited, especially in countries with an increasing population, for they require considerable space whence to obtain food ; therefore the motive force they af- ford is, in populous countries, of comparatively little account. The motive force of wind and water has always been used for transportation, but its industrial application has until re- cently been confined to turning windmills and water-wheels. The expansive power of gases, or rather the heat gen- erated by combustion, (of which this force is only a transfor- mation,) is artificial in the sense that it is not created by nature, but by man. For this reason it possesses inestimable advantages. Man can generate it where he pleases, when he pleases, and in the manner and quantity that suit him. It is mobile, portable, continuous, great or small according to demand. The power of steam can be raised to many times the atmospheric pressure ; theoretically, at least, there is no assignable limit to the possibilities of its increase. 1 1 Water heated to 516 degrees Centigrade not an exceedingly high tem- perature should develop a pressure of 1,700,000 atmospheres, which is more 100 PRINCIPLES OF POLITICAL ECONOMY The prehistoric inventor whose name will remain forever unknown, but whom the gratitude of mankind has deified as Prometheus, who first caused a spark to spring from the fric- tion of two pebbles, never suspected when he looked on this flame, which was probably due far more to chance than to his genius, what a marvellous power he was granting to human industry. Fire ministered first of all, no doubt, only to the humble wants of domestic life. Later it was used for the extraction, the founding, and working of metals. Its utiliza- tion as a motive force dates from the time that men dis- covered the explosive power a spark could communicate to some substances, e.g. gunpowder ; and in this form it is still employed not only to hurl projectiles for a mile or two, but also to bore tunnels and break rocks. But it was not until Newcomen, in 1705, and James Watt, in 1769, used it for producing steam in a closed reservoir, and thus created the wonderful instrument of modern industry which we call the steam-engine, that fire, or rather heat, became the guiding spirit of industry. 1 We are therefore justified in asking, with some degree of anxiety, what will become of human industry when the supply of coal runs short and our fires must be extinguished ? Probably we shall then return to the forces of nature and learn to make better use of them. Already we have begun to do this. Much has been said recently of the " white coal," which consists of glaciers ; the water that runs from them in torrents has been made to propel water-wheels and is thus than sufficient to lift the Himalaya Mountains. The only difficulty would be to find some means of containing this pressure. 1 1 call the steam-engine a wonderful instrument because of the services it has rendered. But in reality it is a very defective device. It utilizes only a small part, at most a tenth, of the heat generated by the combustion of coal. Much of it is lost from the furnace to the boiler, and some between the boiler and the engine proper. Hence the remark made by a well-known French engineer, Le Bon, " I hope that before twenty years have passed, the last specimen of this rude machine will have taken its proper place in museums, side by side with the stone hatchets of our primitive ancestors. " MOTIVE FORCES 101 used to manufacture paper. In the mountainous regions of Savoy, Switzerland, and Italy, hydraulic energy produces sev- eral thousand horse-power, which is employed in producing electricity and in manufacturing aluminum and carburetted calcium. Elsewhere the same power is employed to furnish illumination for towns or motive force for street railways. Progress in this direction probably has been as rapid in the United States as anywhere else. Here electrical transmission has rendered possible the advantageous utilization of water power in several distinctly new forms, such as : the large central stations for distributing power to numerous plants ; the use of remote mountain water powers for the operation of single plants, often many miles distant, of which so many notable examples are to be found in the far West ; and the more advantageous use of larger streams on the Atlantic coast, usually in closer proximity to the mills, but under conditions which would present many difficulties without the useful agency of the electrical current. The development of electric power transmission at Niagara Falls has been the largest and most conspicuous of its kind, although as to the length of transmission and the voltage at which the current is sent over long distances it is by no means the best example that can be found. There are two separate and distinct enterprises on the American side of the Falls, one of which has an ultimate capacity of one hundred thousand horse-power. The potential power of the main stream is estimated to be equal to at least six or seven million horse-power. 1 1 A large amount of Niagara current is employed in electro-chemical and electro-metallurgical operations. In the immediate vicinity of the Falls the current is now used for electric lighting, and about one thousand horse-power is also delivered to the street railway trolley system. Factories on the spot, working up raw material into food, textile fabrics, etc., utilize several hundred horse-power, and the current is also used for the manufacture of "merry-go- rounds," as well as for operating ventilating blowers in the public schools. The current is carried from Niagara to Buffalo for use by the street railway system, so that at all hours of the day and night Niagara is transporting the public of a great city more than twenty miles distant. Current from the same 102 PRINCIPLES OF POLITICAL ECONOMY It is certain that in glaciers and in all running waters there are almost unlimited quantities of stored-up energy. It has been estimated that the motive force of the streams of France alone amounts to thirty million horse-power an amount of physical energy almost equivalent to that of all men of work- ing ages in the entire universe. The waves which the wind causes on the surface of the seas, or the rising tide which twice every day presses against thousands of miles of coast-line, really constitute inexhaustible stores of motive power. Un- fortunately, these forces of nature, which might lift the world, still seem too savage and too untamable to be controlled. But if they could be transformed into electricity, the energy they provide might be made transportable and divisible. The cur- rent of the Rhone River, which has uselessly expended itself in wearing away pebbles, is now employed to work the looms of the Lyons silk factories. Motive force is at present dis- tributed to the small establishments that require it, just like water and gas ; the mere turning of a spigot or pressing a button is sufficient to obtain it. Very lately it has been sug- gested to draw from the source of all energy the sun itself all the heat we require. But even admitting that this could be done, the force borrowed from the sun would more than any other natural force have the disadvantage that we should probably be unable to develop it wherever, whenever, and to the extent that we want it. The sun does not shine everywhere nor always. If ever England should depend on it to work her factories, what a terrible calamity this would source is used in several miscellaneous industries at prices which compete so favorably with those of steam, oil, natural and artificial gas, that the demand is rapidly increasing. Electric current is now transmitted from the Sierras, in eastern California, as far as San Francisco ; this constitutes the longest electric power transmis- sion in the world, the distance being about two hundred miles. The employ- ment of this current is not less varied than at Niagara, ranging from the operation of street cars in Oakland to the running of a flour mill at Stockton, and from use in mines in various parts of the state to use in miscellaneous industries at Sacramento, Benicia, San Jose, and elsewhere. ILLUSIONS CONCERNING MACHINERY 103 involve for that nation ! The fogs of the North Sea would become her shroud. Men would then be obliged to build their industrial centres in the heart of the Sahara desert, where the sun shines most hotly and most steadily. VI. The Illusions to which Machinery has given Rise Ambitious hopes have been aroused by the marvellous effects of the use of machinery propelled by the forces of nature. It seems almost as though we may some day be liberated from the necessity of working to gain a living. Some persons have estimated that four hours of labor, or perhaps even two hours, or, according to a socialistic calcula- tion, one hour and twenty minutes per day, would suffice to produce more wealth than is necessary to satisfy all our wants. The manufactures of the United States were in 1900 car- ried on very extensively by means of steam, water, gas, and electric power ; according to the census of manufactures of that year over 11,300,000 horse-power was produced by ma- chinery thus propelled. As each horse-power is equivalent to the muscular energy of six men, it would have required 67,800,000 men to furnish this amount of power. The man- ufacturing industries of the nation were, however, really carried on by less than 6,000,000 persons. In 1902, more- over, there were nearly 40,000 locomotives in the country. To have done the work of these locomotives upon the com- mon roads of the country there would have been required, in round numbers, 76,000,000 horses and 19,000,000 men. 1 But all the railroads of the country were operated by only one million persons. To have done the work, then, accomplished by power and power machinery in our mechanical industries and upon our railroads there would have been required nearly 87,000,000 men. Now according to the ratio of the census 1 This calculation is made on the same basis as that given by Carroll D. Wright, United States Commissioner of Labor, in his "Outline of Practical Sociology," Fifth edition, 1902, p. 120. 104 PRINCIPLES OF POLITICAL ECONOMY of 1900, 87,000,000 men represent a population of over 400,000,000 persons, which, if the use of power in manufac- tories and on the railroads were discontinued, would have to be added to our present population of 76,000,000. If in addition to the above-mentioned uses of power ma- chinery, we consider its extension to many fields of applica- tion in which its use was previously unknown, we shall be ready to admit that the power machinery used in the various industries of the nation has multiplied each workman's pro- ductive power at least ten times ; or, to employ a more pic- turesque metaphor, we may say that each of them has ten slaves at his service, giving him a position almost equivalent to that of a Roman patrician and permitting him to add the pleasures of wealth to those of idleness. As a consequence of this new slavery that takes the place of the old, why will not the men of the future be able to lead the noble life of the ancient Greeks in the Agora or of the Romans in the Forum; why will they not then be able to consecrate to politi- cal life, to artistic amusements, to gymnastic exercises, or to elevated mental speculations, the hours that were previously devoted to manual labor, with the sole difference that what was formerly the privilege of the few will become the lot of all? This is indeed an alluring prospect, and the socialists exult in it. It is perhaps unfortunate that a closer analysis dissipates the illusion. Such a social state as this may, in- deed, not even be desirable. Antique slavery was no less harmful to the masters than to the slaves, since it led the former to lose all habit of effort and all taste for work. It is to be feared, therefore, that the slavery of natural forces would have similarly disastrous effects on the men of the twentieth century. They, too, might in the course of time have no ideal but that of the degenerate Romans: panem et cir censes. Furthermore, an analysis of the above fantastic prophecies will show that these hopes are greatly exaggerated. The ILLUSIONS CONCERNING MACHINERY 105 larger part of the mechanical energy used in modern indus- trial life is applied exclusively to transportation, by means of steamboats and locomotives. Machinery does, to be sure, multiply our productive energy ; but a large number of work- men are employed both in producing it and in attending to it while in use. 1 Steam has, of course, effected a revolution by almost removing the difficulties of transporting passengers, exchanging goods, communicating ideas, and by developing the solidarity of mankind. From this point of view it has performed an ethical service the importance of which can- not be exaggerated. But it would hardly be true to say that steam, when applied to transportation, has multiplied products. 2 The goods an increase of which could cause a notable im- provement in the condition of mankind are agricultural prod- ucts ; the first requisite of welfare is food, and, if possible, good food in abundance. Yet this is precisely the province in which machinery has thus far made but little advance. Of the machines employed in farming, there are few that really increase production. Irrigating appliances doubtless do 1 Professor Leroy-Beaulieu points out in his "Treatise on Political Econ- omy " that economic progress is less great in reality than in appearance, inas- much as a gross increase of productive power is mistaken for a net increase. Not only is a great part of mechanical energy applied exclusively to transpor- tation, but many machines are used only to manufacture other machines or objects that are not directly consumable. Machines, moreover, require a large number of workmen for their production, their repair, and their man- agement. Few machines are utilized to the full extent of their productive capacity, and a large number remain idle a great part of the time. Again, all the labor and machinery that is used for purposes of advertising, making samples, etc., cannot be regarded as really productive. Besides, the rapid suc- cession of new inventions, discoveries, and improvements leads to the aban- donment of machinery that has been used but a short time. Finally, machines consume large amounts of coal, oil, and other materials whose pro- duction and transportation require the labor of many persons. 2 Steam transportation multiplies products for the time being by bringing them from distant places ; but this is clearly only a temporary state of affairs due to the fact that these localities are still very sparsely populated and need not keep for their own consumption all that they produce. 106 PRINCIPLES OF POLITICAL ECONOMY increase crops, but threshers and most of the other machines simply economize human labor but do not bring forth a single additional blade of wheat. In fact, many machines involve a partial waste of the crop that would have been saved by careful manual labor. Is this slow development of machinery 1 in the food -supply ing pursuits due only to the routine spirit of the farming classes, as many think, or is it due rather to the nature of agriculture itself? The latter explanation seems to us the true one. The soil is the labo- ratory of Life, arid Life has forces that are mysterious and recalcitrant. There is still another business that is of capital importance from the viewpoint of human prosperity ; namely, the con- struction of houses. To this branch of production machinery is scarcely applicable, save under exceptional circumstances. 2 The use of natural forces to propel machinery has resulted in great cheapness and abundance only in one field of pro- J The census of 1900 indicates that implements and machinery used on farms in the United States represent only 3.7 per cent of the value of all farm property. This is equivalent to an average of 90 cents per acre devoted to farming in 1900, whereas in 1890 the value was 79 cents per acre ; the census adds, however, that "apart of this increase is unquestionably more apparent than real." An account of the exceptionally extensive use of machinery in agriculture on the "bonanza farms" of the West is given by William Allen White in Scribner^s Magazine for November, 1897, under the title, "The Business of a W.heat Farm." 2 There are houses in sheet- iron that may be taken apart and transported. If this method of construction were to become general, it would cause a great revolution. Houses would again become mere furniture, as in the patriarchal period. But at present machinery is employed only in the larger cities in constructing buildings. The result is that comfortable homes (with which health, family life, and morality are so closely connected) do not increase as rapidly as our need for them ; the rent of buildings increases more quickly than the price of food. It must, however, be admitted that machinery is used quite extensively in the construction of high buildings in our large cities. Not only is the entire framework of these structures frequently made of steel, but power tools are used for such diverse purposes as drilling, blasting rocks to construct founda- tions, cutting stones, etc., all of which are elements in the cost of buildings. MACHINERY AND THE LABORER 107 ductive activity ; namely in manufacturing. In this branch it has gone even beyond our hopes, since it causes a super- abundance and obliges great industrial producers to combine for the purpose of restricting the output. Finally, we must blame machinery for the crises produced by a superabundance an overproduction of goods ; we must blame it for the barrack system of factories that marks modern industry, and, above all, for the constant failure of many workers to find employment. The last of these effects is the most remarkable result of the use of machines ; it has aroused the bitter opposition of the working classes to the introduction of labor-saving (and consequently labor- supplanting) machinery. It scarcely seems necessary to multiply examples of the economy in labor effected in some branches of production by the introduction of machinery, so often has this fact been emphasized and discussed. 1 There is, moreover, no cause for 1 The following facts are taken from the First Annual Report of the United States Commissioner of Labor for 1886 : In the timber business 12 laborers with a Bucker machine will dress 12,000 staves. The same number of men by hand labor would have dressed in the same time only 2500. In the manufacture of paper a machine now used for drying and cutting, run by 4 men and 6 girls, will do the work formerly done by 100 persons, and do it much better. In the manufacture of wall paper the best evidence puts the displacement in the proportion of 100 to 1. In a phosphate mine in South Carolina 10 men accomplish with machinery what 100 men handle without it in the same time. There has been a displacement of 50 per cent in the manufacture of rubber boots and shoes. In South Carolina pottery the product is 10 times greater by machine processes than by muscular labor. In the manufacture of saws, experienced men consider that there has been a displacement of 3 men out of 5. In the weaving of silk the displacement has been 95 per cent, and in the winding of silk 90 per cent. A large soap-manufacturing concern carefully estimates the displacement of labor in its works at 50 per cent. In making wine in California a crushing machine has been introduced with which 1 man can crush and stem 80 tons of grapes in a day, representing an amount of work formerly requiring 8 men. In woollen goods modern machinery has reduced muscular labor 33 per cent in the carding department, 50 per cent in the spinning, and 25 per cent in the weaving. In some kinds of spinning 100 to 1 represents the displacement. Further data of the same nature may be found in Carroll D. Wright, 108 PRINCIPLES OF POLITICAL ECONOMY surprise in the frequent occurrence of labor agitation against the introduction of machinery ; the industrial history of the last few centuries is full of examples not only of popular animadversion but of actual violence toward those who are held responsible for its invention. In the sixteenth century the city of Dantzig prohibited the introduction of ribbon looms, and the inventor of them was drowned by the en- raged populace. Jacquart, the inventor of a weaving loom, three times came near being killed by the people of Lyons. Hargreaves was persecuted by the workers in England. In 1811 a party of English laborers called Luddites destroyed newly invented machinery in the northern and midland counties, and were only suppressed by military force. A former president of Mexico, Santa Anna, opposed the plan to build a railroad because it would deprive the muleteers of their employment. 1 The direct advantages of machinery which political econo- mists have generally pointed out are principally the follow- ing : (1) Machinery diminishes the strain on human muscles and relieves men of the grievous fatigue which not very long ago made them prematurely old. It does away with the dis- gust of many kinds of labor that were formerly exceedingly distasteful. (2) Machines permit the employment of workers of aver- age strength and ability for tasks that formerly required an exceptional degree of one or both. (3) Machines perform work much more rapidly than would otherwise be possible. "Industrial Evolution of the United States," Chapter 27; J. A. Hobson, " Evolution of Modern Capitalism " ; the article on Machinery in Bliss, " Encyclopaedia of Social Reform " ; and the Thirteenth Annual Report of the United States Commissioner of Labor, which is devoted entirely to the subject of Hand and Machine Labor. 1 Many incidents of the same nature may be found in Roscher's " Nationaloekonomik des Handels und Gewerbefleisses. " The Luddite riots are referred to by Green, " History of the English People," Vol. IV, p. 377. MACHINERY AND THE LABORER 109 (4) Machinery excels, both in the performance of exceed- ingly great tasks and in the accomplishment of exceptionally delicate ones. There are trip-hammers weighing several tons that strike three hundred blows a minute, as well as delicate devices that could crack an eggshell without crush- ing it. There are engines of ten thousand horse-power, on the one hand, and, on the other hand, dividing machines that can cut an inch into ten thousand equal parts. (5) Machinery performs the monotonous work and lessens the monotony of life. " Nothing could be more narrow or monotonous than the occupation of a weaver of plain stuffs in the old time. But now one woman will manage four or more looms, each of which does many times as much work in the course of the day as the old hand loom did; and her work is much less monotonous and calls for more judgment than his did." - MARSHALL, "Economics of Industry." (6) Machinery permits the production of a large number of exactly identical pieces or products, and thus gives rise to the modern system of "interchangeable parts," permitting the broken parts of machines to be replaced at once by exactly similar pieces. Were this not possible, the broken parts of a machine could be replaced only at great cost, by sending them back to the manufacturer or by bringing a highly skilled mechanic to the machine. (7) Machinery weakens the barriers between different trades, because many machines which are in use in one in- dustry are similar in general character to those used in many other industries. " Most of the operatives in a watch factory would find machines similar to those with which they are familiar if they strayed into a gun-making factory or sewing- machine factory, or a factory for making textile machinery " (Marshall, as above). But the problem of machinery, viewed in its widest and fullest significance, is so important and has given rise to so much controversy that we shall devote a separate section to its consideration. 110 PRINCIPLES OF POLITICAL ECONOMY VII. Whether Machinery is detrimental to the Working Classes The classical economists who sought to prove that in our economic organization there could be no conflict between the interests of society and those of the individual, endeavored to show that machinery does more good than harm to the working classes. The three classical arguments are the following : (1) Machinery lowers prices. Every mechanical inven- tion lowers the cost of producing an article, and consequently lowers its value. By the subsequent fall in prices, the work- man gains an advantage as consumer that is equivalent to his loss as producer. To this argument we must reply that the compensation in reduced prices will not exist if the product in question is not one consumed by the worker ; and this is certainly possi- ble. The manufacture of certain lace fabrics by means of machinery will lower the price of these goods ; but as the poor woman who made them originally by hand is not accus- tomed to wearing that kind of goods, the fall in price is no compensation to her. Even admitting that the product in question is ordinarily consumed by the worker, it may, nevertheless, form so small a part of his expenditures that the fall in prices is only an insignificant saving. The woman who knits stockings and who loses her employment because of the invention of knit- ting machines, will not readily find much consolation in the prospect of being able hereafter to buy her stockings cheaper at the hosier's. In order that the compensation supposed to exist be a real one, mechanical progress would have to take place simulta- neously in all branches of production, so that the consequent fall in prices would be general and simultaneous. In this case it might correctly be said that it matters little to the workman that he receives only half his former wages, since all his expenses are also reduced by half. But we have MACHINERY AND THE LABORER 111 already pointed out that mechanical inventions are not applied to an equal extent in all branches of production, but only in a small number of them, and that they affect but slightly the cost of the important necessities of a workman, viz., food and housing. (2) The increase of production. The optimists claim that every mechanical invention causes a fall in the price of goods ; lower prices must involve larger sales and increased produc- tion, and the final result is always to give new employment to the workmen that have been temporarily displaced. Instead of taking work from them, inventions make work for them. Many examples of this may be mentioned, among them the invention of printing ; owing to the increase of books since the invention of printing, how many more printers there are now than there were copyists in the Middle Ages ! l To this we may answer, first of all, that although an increased sale is frequently a consequence of lowering prices, this is by no means always the case. It is notably not the case under the following circumstances: (a) Whenever a commodity is used to satisfy a want that is limited. The ex- ample of coffins has become classical. No matter how cheap coffins have become, most of us have no use for more than one. There are many other products, such as wheat and salt, the consumption of which would scarcely be increased by a fall in prices. There are, moreover, articles of luxury which would be less in demand if their prices should fall considerably. (6) Whenever one industry is bound up with another a fall in prices has little effect on the amount sold. This is a very frequent case. The production of wine bottles and casks is limited by that of wine, and no matter how low the price of bottles and casks may fall, no more of them will be sold if there is no more wine to put in them. 1 In England the number of workers employed in manufacturing cotton textiles in 1835 was 220,000. To-day there are more than 600,000. Yet it is in this very line of work that machine-industry has made the most progress. 112 PRINCIPLES OF POLITICAL ECONOMY Similarly, the production of watch-springs is limited by that of watches ; the production of rivets by that of boilers, etc. ; and that of boilers by other causes than the price, such as the development of metallurgy, transportation, and mining. Moreover, even admitting an increase in consumption pro- portionate or more than proportionate to the fall in prices, it will require a long time perhaps generations before this increase is effected. It takes time for the old prices to fall, especially since the dealers and manufacturers are not eager to make the change, and the public is accustomed to the old prices. Competition among producers finally will cause them to fall, but rival industrial establishments are not built in a day. Still more time is necessary for the fall in prices to extend the market to those lower strata of society that do not change their habits or their wants in a short time. While all this is slowly being accomplished, what shall the workman do who has lost his employment ? Per- haps his grandchildren will profit by the change of condi- tions ; but for him there is little consolation. (3) Economy of labor. The use of machinery that econo- mizes manual labor necessarily involves, it is maintained, a gain for some one. This gain is realized either by the pro- ducer in the form of increased profits if he continues to sell his goods at the old price, or by the consumer, in the form of reduced expenses if, as is probably the case, the price of the article falls to the level of the new cost of production. The money that was previously paid to the workmen that are now without work is not lost ; it is either in the pocket of the em- ployer or in the pockets of the consumers. If this is the case, what will be done with it ? It will be invested or spent ; there is no other alternative. In either case the money will encourage industry ; it will develop production either by increasing the consumption of old products and inaugurat- ing that of new products, or by providing new capital for productive enterprises. Ultimately, then, the optimists contend, every mechanical MACHINERY AND THE LABORER 113 invention " sets free " not only a certain amount of labor, but also a certain Quantity of capital ; and as these two elements have a great affinity and cannot do without each other, they will end by combining. This is the argument that Bastiat advances. It is valid from an abstract of view, but we must ask: Where and when will this combination of labor and capital be effected ? Perhaps in ten years ; perhaps at the other end of the world. Possibly the consumer will use his savings to help dig a canal at Panama or build a railroad in China. Capital, when once set free, can easily find investment ; it is nowadays readily transportable and can be applied almost anywhere. Unfortunately the workman cannot so easily be moved. He is not fit for every kind of work, nor can he go to distant parts of the earth in quest of employment. In the long run he will of course change his place of work or his occupation, but the process may be a long and unpleasant one. And if the change becomes necessary with every new invention of machinery, workmen will be constantly out of employment. The natural effect of a permanent army of unemployed workers, often numbering from ten to twenty per cent of the laboring population, weighs on the market and lowers the wages of labor. 1 In a word, all economic progress, whether it consists of 1 The data regarding the number of unemployed laborers in this country are generally unsatisfactory. In 1890, at the Federal census, it was shown that out of the total number of persons ten years of age and over engaged in gainful occupations, the number unemployed during Dhe entire census year was 1,139,672, or 5.01 per cent of the total number engaged in gainful occupations. There is an article in the Quarterly Journal of Economics, Vol. VIII, taking a less favorable view of the situation. According to this article, the number of unemployed in 38 cities in 1893 is estimated at 523,080 ; upon this basis the number in the whole country would doubtless reach 1,600,000. Regarding the share of labor since the introduction of machinery, there are some significant statements made in the latest United States Census. In Vol. VII, pp. cxxiii-iv, it is declared that machinery lowers the total wages of the group of laborers in many industries, and also reduces the average rate of wages. 114 PRINCIPLES OF POLITICAL ECONOMY mechanical inventions, or methods of organizing labor, or sys- tems of exchange, can have no other effect than to render a certain amount of labor useless. As the organization of modern societies is founded on division of labor, which re- quires that each man perform a particular kind of work, this progress whatever may be its nature must make some one's labor useless, and thus rob him of his livelihood. Here lies the great difficulty. Must we, therefore, as Ruskin and his disciples maintain, preach to men the abandonment of steam-engines and ma- chinery, and return to manual labor and more humane natural forces, like those of wind and water ? It is doubtful whether such advice would be followed. There are, nevertheless, rea- sons for believing that the great economic and mechanical transformation witnessed by the nineteenth century is draw- ing to a close, and that our grandchildren will not be troubled by the same social upheavals as have recently occurred ; it is probable that they will be able to live a calmer life than we, a life more like that of our grandfathers. Indeed, history demonstrates that in the economic evolution of humanity, periods of rapid change have been followed by long periods of a more or less stationary nature. It is therefore probable that the great economic revolution of the present will be succeeded by a long period of rest, or at any rate of very gradual progress, like that of the thousand years that preceded it. The invention of the steam-engine has already produced most of the consequences that can be expected of it. Does any one object that new social trans- formations will be caused by new inventions? If so, how do we know ? And even if such a prediction were realized, it is not probable that the substitution of some undiscovered device for the steam-engine would produce a revolution comparable to that caused by the substitution of steam- engines for manual labor. - Within half a century the whole world will be girded and interlaced by a network of electric telegraphs and railroads. This is a transformation MACHINERY AND THE LABORER 115 that is nearly accomplished now, and that need not be repeated. Let us assume that balloons will be made capable of direc- tion. Is the transportation of goods and travellers by balloon likely to have the same economic consequences as replacing wagons by railroads ? Finally, in a few years hence, the human race will be settled on all the space that is available on the surface of the earth ; there will be no more vacant lands, and the economic perturbation caused by the competition of new countries in the markets of the Old World also will be terminated. The present social transformation, therefore, probably will soon be completed, and doubtless will be succeeded by a period of more gradual change. 1 1 John Stuart Mill, in a remarkable chapter of his " Political Economy " (Book IV, Chapter 6), refers to " the impossibility of ultimately avoiding the stationary state this irresistible necessity that the stream of human industry should finally spread itself out into an apparently stagnant sea." He de- clares himself inclined to believe that the stationary state of capital and wealth " would be, on the whole, a very considerable improvement on our present condition." CHAPTER III CAPITAL I. The Two Concepts of Capital No economic concept save that of value has given rise to so many theories as that of capital. All the theories of capital, however, may be brought under two heads, representing two great opposite tendencies. The first is that of the classical economists ; the second that of the socialists. The former we shall outline first. (A) Numerous authors have invented stories of the Robin- son Crusoe type, with a view to showing us how man origi- nally grappled unaided with the difficulties of existence. But not one of these authors has failed to provide his hero with a few tools or provisions, usually saved from a shipwreck. These writers knew perfectly well that unless they did this the story would have had to stop at the second page, for the life of their hero could not have lasted longer. Yet what would Robinson need ? Had he not the ability to work, and all the resources of the fruitful virgin soil upon which novel- ists wisely stranded him ? Yes ; but there was still some- thing lacking, and as the romantic hero could not do with- out it, writers were obliged to devise some scheme by which he might obtain it. This requisite thing was capital. But it is unnecessary to imagine the romantic situation of a Robinson Crusoe in order to be convinced of the utility of capital. The same state of things prevails in actual every- day society. There is no problem more difficult to solve than how to acquire something when one possesses nothing. Take a common laborer, a man without means. How can he earn his bread ? He cannot engage in any productive enterprise, not even that of a poacher, for a poacher needs a gun. He 116 CAPITAL 117 cannot even become a burglar, without implements. He might render slight services, such as running errands or opening the doors of carriages in front of the theatres ; but this is more like begging than like productive work. He would be as wretched, as helpless, and as sure to die of star- vation, as a Crusoe who had saved nothing from the wreck, were it not for the wage-system that enables him to enter the service of some one provided with capital who is willing under certain conditions to furnish him with the food and the tools that are requisite for production. ^Animals doubtless depend on their " labor " and on nature to obtain food and to satisfy their other wants. Primitive man was necessarily in the same situation. The very first capital that man possessed must have been made without the aid of other capital. At some time or other, man, worse off than Robinson on his island, must have solved the difficult problem of producing the first wealth without the help of any preexisting wealth. He was originally reduced to the need of starting the whole onward movement of human industry by the aid of his hands alone. Once started, however, the most difficult step was taken, and human industry has ever since then progressed with increasing rapidity. The first pointed stone that was picked up, the flintstone of the an- thropopithecus, served to help make other new implements under conditions more favorable to production ; and these in turn helped to prepare the way for still more discoveries. The ease of production increases like a geometrical progres- sion, and is proportionate to the amount of wealth already produced. It is well known that although, after a certain point, a geometric progression increases very rapidly, the increase is very slow at the beginning. Similarly, our mod- ern societies, living on the wealth stored up by a thousand generations, find it easy to increase all kinds of wealth ; yet they should not forget how slow and perilous at the outset this process of accumulation must have been. How many centuries must have been required for man to traverse the 118 PRINCIPLES OF POLITICAL ECONOMY epochs of hewn stone and of polished stone, and to lay up the first supply of capital ! There is no doubt that millions must have perished of misery during this critical period. Only a few races have been able to traverse it and rise to the rank of truly capitalistic societies. Ad augusta per angusta. (B) The second explanation of capital, given by the socialists, especially by Karl Marx and Ferdinand Lassalle, may be summarized as follows : The definition and origin of capital are entirely different from the classical explanation. Capital is not simply any in- strument of production, but all wealth which serves to provide its possessor with an income independent of his labor. We must acknowledge that this definition harmonizes better with the general idea of capital, i.e. that which furnishes an income. But it evidently presupposes a specific economic and social organization, especially the fact that wealth may be loaned at interest or may be employed to give work to people who are glad to hire themselves out for wages. Now this par- ticular social organization does not exist everywhere ; it is of quite recent origin, and in Europe dates from the six- teenth century. A proof of this lies in the fact that the very word " capital " was not used previously. The ruin of small industry and .small farming, the expropriation of the masses, and the creation of a permanent class of wage-workers, all these things had to be accomplished before capital acquired the power to command the labor of others and ,to provide its owner with an income not due to any work of his own, unless we regard as work the task of watching over one's possessions and collecting profits. This is why socialists find the comparison of capital to the bow and arrow of the primitive savage, or to any tool in the possession of Robinson Crusoe, simply ridiculous. Neither the savage nor Robinson could have obtained an income with these implements. Hence they were not capital, according to the socialists, who ridicule what might be called the naturalistic concept of capital, and substitute for it the his- CAPITAL 119 torical concept, which regards capital not as a permanent or necessary institution but as the result of history. They re- gard capital as a " historical category " as Rodbertus would say which made its appearance at a definite period of his- tory, and whi&h will disappear in due time. The violent opposition between these two theories is largely due to the fact that efforts have been made to use them as weapons of social warfare, the first being employed to justify the role of capital and the second to discredit it. The first school exclaims : How useful capital is, since even Robinson Crusoe could not have lived without it ! And the second replies : What a tyrant capital is, since it lives only on the labor of others ! Such arguments as these are ethical in nature, and need not be considered until we reach Book III, on the Distribution of Wealth. The only point which concerns us now is the true function of capital in the pro- duction of wealth. Now there is no necessary contradiction between these two theories, since the one regards capital in its natural, permanent, sociological characteristics, while the other con- siders its acquired, relative, historical nature. Both may be true, and, in fact, each of them contains part of the truth. It is certain that the part played by capital has been modified by economic evolution. First it was the simple tool of the manual laborer ; later it gradually passed out of his possession and came into that of the wealthy members of society. Whereas it was at first simply an instrument of production, it is now often made an instrument of money- making and the means of obtaining an income without work- ing. This new state of society is what the socialists call u capitalism." 1 But although it may be admitted that 1 It has been said that each of the three factors of production has in turn exerted a preponderant influence. In primitive societies of hunter, fisher, and shepherd peoples, nature is the all-important factor. In Antiquity and the Middle Ages labor was the most important factor ; in modern industrial societies it is capital. 120 PRINCIPLES OF POLITICAL ECONOMY " capitalism " will some day disappear, capital will still remain. The definition given by the classical economists is there- fore better, precisely because it emphasizes those features of capital that are essential and necessary, while the other defi- nition points out only its accidental and ephemeral character- istics. The fact that no wealth can be produced without the help of preexisting wealth is an economic law whose importance cannot be exaggerated. Just as fire cannot be started with- out the use of some ignited substance, just as an explosive mixture will not explode unless a lighted fuse or similar contrivance be brought near it, just as a living being can- not be produced without the presence of some preexisting living substance (germ, cell, or protoplasm), similarly wealth cannot be produced, under ordinary economic conditions, without the help of a certain amount of preexisting wealth which plays the same part as the fuse does in starting explo- sions. Now it is necessary to give a name to this preexist- ing wealth, the function of which is so important and so well-defined. We shall call it "capital." If socialists dis- like the name, they have the right to propose another ; but as they have not done so, we may for the present retain this one. II. The Distinction between Wealth which is Capital and Wealth which is not Capital All wealth must be applied in one of two ways : either to serve for consumption, or to serve for production. Wealth serves for consumption when it is used directly to satisfy some of our wants, to afford us some gratification. It is unnecessary to enumerate the wants and enjoyments for which wealth is used, as an enumeration would have to in- clude all that is placed on our table, or used in our house, or that contributes in any way to our immediate pleasure. But this category of wealth is not the largest ; there are other CAPITAL 121 kinds of wealth, incapable of being used directly to provide gratification. Such wealth is employed in the production of consumable wealth, that is, wealth of the first-named kind. This intermediate, non-consumable wealth consists partly of instruments and goods altogether unfit for consumption, partly of raw material which can be consumed (i.e. made to provide gratification) only after having undergone certain transformations. This kind of wealth fills our factories, farms, storehouses, and docks. To this whole second group, consisting of wealth not fit or not intended for consumption, we apply the name capital. But the above classification, however simple it may appear at first sight, requires some explanation. Above all, we must not believe that it is possible to clas- sify all commodities under one or the other of these divisions, by reason of specific qualities inherent in each commodity. Any object having value may become capital, provided cer- tain conditions are fulfilled. The idea of capital does not connote a certain class or kind of goods, but a certain condi- tion or purpose of goods. All wealth may at some time or other become capital, just as every physical element may, at a certain degree of temperature, become a gas. The feature, condition, or purpose that makes wealth capital is its produc- tive use in conjunction with labor. A diamond in the hands of a jeweller or a glazier, flowers in the possession of a florist, a clown's costume owned by a theatrical director, all become capital, because they are instruments of production. Perhaps it may be objected that they do not produce any new wealth, and are therefore not useful to society. To this we must re- ply that they are no more and no less useful than the occu- pations in which they serve as accessories or as raw material. It may be urged, from a moral and social point of view, that the work of jewellers, florists, and actors is useless ; in which case we must refer to the discussion regarding the dis- tinction between productive and unproductive labor. These services (of actors, etc.) satisfy a desire and have a value; 122 PRINCIPLES OF POLITICAL ECONOMY hence they are productive in the economic sense of the term, and, consequently, the implements employed in these occupa- tions are also productive in the same sense. 1 Nor is this all. It should also be noted that some kinds of wealth, even when used not productively but for con- sumption, may, nevertheless, bring an income to their owner by means of hire or rent ; for example, a rented villa, hired furniture, or money loaned to a spendthrift, or even to a government (which generally offers a still more striking instance of unproductive consumption). Must not wealth, in this case, also be called capital ? We do not hesitate to call it capital in everyday language, arid we are justified in doing so, provided we are careful to indicate the difference between this kind of capital and the preceding kind by means of some qualification which enables us to keep them apart. As a matter of fact, these kinds of capital are very dissimilar. As the last-mentioned capital is not in the service of labor, it produces nothing of itself, neither new wealth nor new value. Hence we naturally ask : Whence comes the income which this capital provides for its owner ? It comes from the pockets of the borrower or the tenant, who is obliged to procure it by his own labor or by employing some other capital productively. Such capital as this we shall call lucrative capital?' To sum up, then, there are three kinds of wealth : (1) That which serves only for consumption and which 1 Besides, if it were necessary to introduce such non-economic considera- tions as morality or social usefulness in the narrower sense, it is evident that machines which serve in the production of cannon or armor for cruisers must be declared absolutely unproductive, and it would also be necessary to remove three-fourths of our metallurgical plants from the list of capital. 2 Boehm-Bawerk, in his remarkable book on " Capital and Interest," approves this classification and terminology ; but he also calls productive capital "social capital," and lucrative capital "individual capital." He means that only the former kind is capital for society, the latter being capital solely for the individual. But this terminology is likely to cause error, because lucrative capital cannot be conceived as existing save in society, while productive capital might exist even for a Robinson Crusoe. CAPITAL 123 is not capital, although it may at any time become capital. 1 (2) That which, like the preceding, serves only for con- sumption, but which, nevertheless, gives its owner an income 1 In making an inventory of the riches of a country, this wealth is counted as virtual capital. Some categories of wealth have given rise to many controversies. In ordinary language we designate as " capital " (as opposed to immovable property) all movable or personal values represented by shares of stock, bonds, etc. But these values are only representative capital; i.e. they represent real capital invested in mines, railroads, industrial plants, etc. We must, therefore, take care not to count them twice in the inventory of a nation's wealth, once as valuable documents, and again as the really existent wealth which they represent. Often they are really only lucrative capital, in the sense which we have given to this term ; that is to say, they do not correspond to any real capital at all ; such, for instance, are govern- ment bonds. On the other hand, in ordinary language the name "capital" is never given to immovable property, like land and buildings. As for land, it should certainly not be called capital when we mean unused land as provided by nature, for this would be to confound nature and capital ; but whenever land is modified by cultivation, we may well ask whether it does not then fall under the head of productive capital, since it is then a product of nature and labor and undoubtedly serves to produce new wealth. Buildings are, on the contrary, essentially only objects of consumption, since, like food and clothes, they are products in their final form, having no other purpose than to satisfy human wants. But they may become lucrative capital for their owners if they do not occupy, but rent them ; they may even become productive capital if they are not used for habitation but for production, i.e. as workshops, stores, etc. It must be admitted that the above statement has been vigorously denied. Many economists contend that a house, even when used for residence, is always capital, because it always produces an income in the shape of shelter, comfort, and the advantages it gives. But, from this point of view, the arm- chair in which I sit, the glass of wine which I drink, should also be called capital productive of income, because they render me a service or an advantage. Indeed, some economists have gone as far as this (Walras and Irving Fisher) . What is to be said of money, of coin ? For a nation it is always capital. For an individual, it is or is not capital, according to the use made of it. There are, however, authors who maintain that, even for individuals, money is always capital, because it can never be consumed directly, but only after being exchanged for objects of consumption. 124 PRINCIPLES OF POLITICAL ECONOMY derived from the income of others. This we call lucrative capital. (3) That which is actually employed in production, and which we shall therefore call productive capital. In this chapter on production we really have to do only with the last kind of wealth. The other kinds will be dis- cussed in the sections on Distribution. III. What is meant by the "Productivity " of Capital? The part played by capital in production has given rise to unfortunate misconceptions. It is customary to say that capital yields an income. This seems to be an essential part of its nature, just as trees naturally bear fruit or as hens naturally lay eggs. Hence the income provided by capital is regarded as a product due exclusively to capital. The spread of this false notion is partly due to the fact that a vast amount of capital is in the form of securities, bonds, or shares, to which coupons are attached representing the inter- est that falls due every year or every six months. The coupons " grow " in value as time advances, and when the day of pay- ment comes they are detached and collected. Just as a fruit or seed can be sown again to produce new fruit or seed, and just as a newly laid egg can be made to produce another hen for laying more eggs, so these coupons may be used as new capital and invested in such a way as to provide new interest- coupons. Thus it may seem that capital grows and in- creases according to the same laws as those that govern the multiplication of plants and animals. But the law of com- pound interest (this is the name given to the above-mentioned multiplying process of capital) is even more marvellous than the multiplication of animal organisms. It has been calcu- lated that a single cent, invested at compound interest on the first day of the Christian era, would by now have yielded a value equal to that of some thousand million globes of solid gold as large as the earth. ' CAPITAL 125 We must nevertheless abandon the idea of the natural pro- ductivity of capital, an idea which has aroused the more or less justifiable ire of the socialists. This mysterious produc- tive and generative power, attributed to capital as part of its nature, is a pure chimera. Notwithstanding the popular belief to the contrary, money does not produce money, capital does not produce capital. Not only has a bag of money never produced a single cent, as Aristotle remarked long ago, but a bale of cotton or a ton of iron never has produced any cotton or iron. Capital is inert matter, and by itself is absolutely, sterile. But when it is put in the service of labor, as we have seen in the preceding chapter, it gives labor a degree of pro- ductivity that may be very great. With a horse and plough, a farmer can produce much more wheat than with his manual labor alone. It is this increased or supplementary crop that constitutes the income from capital. It does not arise from the plough ; it is due to the man aided by the plough. What leads us astray is the fact that we see many persons living on their income, and even growing richer, without working. Hence it appears that their income arises from capital, and is spontaneously produced by it. In reality,' this income is the product of labor, labor which we do not see but which is not difficult to find, viz., the labor of those who borrowed the capital of its owner and who employ it produc- tively. There can be no doubt about this. The coupons rep- resenting the interest on the bonds of a coal-mining company represent the value of coal extracted by the labor of miners ; the coupons of railway bonds represent the result of the labor of mechanics, conductors, brakemen, station-masters, switchmen, etc., who perform the work of transportation. 1 1 It is for this reason that socialists draw the conclusion that the profit given to the capitalist constitutes a social injustice. This may indeed be the case ; but it is not necessarily so, for we have shown that without the aid of wealth, labor is doomed to remain sterile. Consequently, every laborer who has not the good fortune to possess wealth is obliged to borrow it in some way or other ; and it seems natural and legitimate that he should pay for its use. 126 PRINCIPLES OF POLITICAL ECONOMY It is, however, possible that the capital in the hands of the borrower has been dissipated or consumed unproductively. In this case the interest received by the lender does not represent the product of the borrower's labor, but the labor of some other person whose identity is still to be sought, but who nevertheless exists somewhere. The coupons of govern- ment bonds, for example, do not represent wealth produced by the labor or industry of the state, since the state produces but little and is even in the habit of expending unproductively the greater part of the capital lent to it ; but these coupons do represent the labor of all the citizens who each year pay into the public coffers taxes which, in the form of interest, pass into the possession of the creditors of the government. So also, when a young man borrows money to spend foolishly, the interest which he pays to the money-lender certainly does not represent the product of his own labor, but perhaps that of the workmen in his employ, or of the farmers on his estate. 1 (See what we have said regarding lucrative capital, on page 122.) 1 Boehm-Bawerk, in his explanation of the nature and function of capital, points out that the ultimate purpose of production is to furnish goods tor consumption, and that this may be done in two ways : directly and indirectly. The direct way is immediately to unite the forces of nature with our own efforts, and thus produce what we want. The indirect or roundabout way is first to produce means of production, i.e. such tools or devices as will ulti- mately augment our productive powers. Take, for example, the case of a thirsty farmer ; he may go to the neighboring spring and drink out of the palm of his hand whenever he is thirsty. This method, however, is incon- venient ; he must go several times each day, and he cannot hold much water in the palm of his hand. He may stop to make a bucket, and thus take away enough water to satisfy his thirst for a whole day. But, in order to do this, he must first get the wood and devote several hours to cutting it into shape. There is, however, even a more roundabout but more perfect process. The farmer may cut down a number of trees in the forest, make wooden pipes of them, have them carry the water to his house, and in this way procure a constant stream of water at his very door or within his house. The last process is of course the longest and most roundabout method, but it is ultimately the best ; it is production by means of capital, capital being the name of the intermediary products by means of which we ultimately obtain, under more favorable conditions, the things we want. CAPITAL 127 IV. The Durability of Fixed and of Circulating Capital Capital may last for a long or a short time. According to its duration it will serve for a larger or smaller number of productive acts. Capital which can be used only once, because it is consumed in the act of production, is called, circulating capital; examples of this kind of capital are : the wheat 'that is sown, manure that is mixed with the soil, coal that is burned, cotton that is spun. Capital that can be used to serve for several productive acts is called fixed capital; it may include the most fragile implements, such as needles, and the most durable kinds of wealth, such as canals or tunnels, which last as long as the world. 1 Whenever it can be done, there is great advantage in employing capital of long durability. However considerable may be the labor required by its production, and however slight may be the labor saved each year by the assistance of this capital, there must necessarily come a time, sooner or later, when the labor saved will equal the labor originally expended. When this point is reached, and when to use the customary expression capital is " redeemed," the labor subsequently economized will be a net gain for society ; from that time onward, and for the whole period of its duration, the service rendered by capital will be gratuitous. The 1 It should be pointed out that Adam Smith, who first used these terms, " fixed " and "circulating " capital, used them in a somewhat different sense. He understood by circulating capital that which provides an income only by circulating, i.e. by changing hands, by being exchanged {e.g. merchandise and money). By fixed capital he means that which returns an income with- out being exchanged, and which stays in the same hands (e.g. a factory). This definition seems scarcely satisfactory, since it would lead us to declare that coal burnt by a manufacturer in his furnaces is fixed capital (since it is not intended for sale) whereas houses owned by a building society that buys them to sell would have to be regarded as circulating capital. In other words, for Adam Smith the essence of circulating capital lay in the change of owner- ship ; in the definition we have adopted, it is to be found in the change of nature. 128 PRINCIPLES OF POLITICAL ECONOMY progress of civilization tends always to replace capital of less durability by capital of greater durability. Three points, however, should not be overlooked : (1) The formation of very durable capital generally requires an amount of labor proportionate to the increased durability. A certain equilibrium must therefore be sought between the labor-cost of the capital and its durability. We may say in general that the increased cost in labor usually is not so great as the gain in durability ; it is this circumstance that makes the use of such capital profitable. (2) The formation of fixed capital demands the present and immediate sacrifice of a large amount of labor and other commodities, while the remuneration anticipated in econo- mized labor or economized expense is more or less distant in the future. The return for capital, moreover, is all the more distant when it is of great durability. Take a con- crete example. If the construction of a canal, such as the Panama Canal, is to cost 140,000,000, and the time for the repayment of this sum is fifty years, we must compare these two items : on the one hand an immediate expenditure of so large a sum, and on the other hand a remuneration for which we must wait half a century. Now to make any such comparison as this, considerable foresight and not a little boldness are necessary. It requires, moreover, firm faith in the future. These are qualities that are found only in highly civilized communities. Peoples whose social state is not advanced and whose political organization affords, but little security, rarely employ large amounts of fixed capital ; all their wealth takes the form of articles for consumption, or of circulating capital. Even under the most favorable circumstances, the faculty of foresight is limited. An individual, a company, or even a government, w*ould not consent to advance capital which will not be paid back for two centuries, although it may be certain that this capital could last for a thousand years and con- sequently render gratuitous services for eight hundred years. CAPITAL 129 Why ? Because results that are not entirely attained for so long a period as this, do not fall within the scope of human predictions. As a general statement of fact we may lay down the rule that capital which is not repaid in the course of a generation is regarded as poorly invested. (3) It must finally be pointed out to the disadvantage of fixed capital that, if its durability is too great, it runs the risk of becoming useless. Therefore great prudence should be exercised in our estimate of future results. The mere mate- rial durability of capital is not nearly so important as the period of its utility. We can generally tell how long a tun- nel will last, but we do not know how long traffic may be expected to continue taking the route that leads through the tunnel. Utility is very unstable ; what at one time is re- garded as the most useful of goods or institutions may at a subsequent time no longer be so regarded. Suppose we have built a canal, and before the capital sunk in it has been re- deemed, traffic may have taken another route ; in this case a certain quantity of labor will have been uselessly expended. Aware, then, of our ignorance of the future, it is prudent not to build for all eternity. The creation of too durable capital must be regarded as ill-advised. V. How Capital is Formed Capital, being always a product, or, as Boehm-Bawerk says, an " intermediary product," can only arise, like every other product, from the two original factors of all production : labor and nature. All the kinds of capital that we can think of tools, machinery, works of art, and materials of all classes can have no other origin but this. 1 There would be no need to stop and discuss so clear a mat- ter as the formation of capital, if the attempt had not been 1 Karl Marx called capital "crystallized labor." His phrase would be accurate had he not, in adhering to his principle that all value springs from labor, purposely omitted the part played by nature in the formation' of capital. 130 PKINCIPLES OF POLITICAL ECONOMY made to base the formation of capital on a new agent, of a special nature, called saving. It is a popular bit of wisdom that we can grow rich only by means of labor and saving. We already know what labor is. But what is saving, this new element that is now introduced? Is it a third original factor of production, that we have neglected to mention ? Certainly not, as labor and the forces of nature are the only conceivable creators of wealth. 1 Is it, then, a form of labor ? Some have maintained that it is. But what is there in com- mon between labor and saving? To labor is to act; to save is to abstain. 2 It is hard to conceive how a purely negative act, simple abstention from using, could produce anything. And when Montaigne declares that he knows "no action so potent and effective as this inaction," this may be true from the moral point of view, but it does not explain how inaction can create even the least valuable commodity. When wealth is said to have been created by saving, do we mean that if this wealth had been consumed as soon as it was produced, it would not now be in existence ? If so, it is a self-evident fact familiar to everybody. If a child asks where chickens come from, and we answer that in order to produce chickens we must refrain from eating eggs, this reply may be excellent advice, but it is an absurd explanation. The reasoning which regards saving as the original cause of the formation of capi- tal seems hardly more satisfactory : it amounts to saying that non-destruction is one of the causes of production, an extraordinary sort of logic. This strange idea must have been occasioned by the use of money. To save, in modern societies, means to put aside a certain amount of money. Now the man who puts a hand- ful of coins in a safe certainly does not create either wealth 1 Senior and some other economists expressly state, however, that tn"e three agents of production are labor, natural agents, and abstinence. 2 The opinion that saving is a form of labor is held by Courcelle-Seneuil ; but as he admits that the only object of the theory is to justify the social function of capitalists and the services they render, we need not stop to discuss it. CAPITAL 131 or capital (he really withdraws some wealth from circula- tion), but since each coin represents a claim to a certain amount of existing wealth, it is evident that whoever accumu- lates these coins is putting aside for future use a certain amount of wealth quite as real as though he produced it by his labor. But this is a purely individual point of view from which to consider saving. It is impossible to name a single kind of wealth in society that has been created by saving. The stone axe cut by qua- ternary man was not the result of saving ; probably he was just as little able to reduce his consumption as the working- man of to-day who earns just enough to keep from starving. Not by reducing his consumption, but because of a particularly successful hunt, providing an unusually large food-supply, was he enabled to create his first capital. Is it reasonable to suppose that in order to pass from the state of hunters to that of farmers it was necessary for a nation first to save enough food to last a whole year ? Nothing is less probable. Hunting peoples simply domesticated their cattle, and with cattle as capital they first obtained the leisure necessary for undertaking agricultural labors that extend over long periods of time. But, as Bagehot pertinently inquires, how does a herd or flock represent abstinence ? Has its possession entailed privations on the part of the owner ? Certainly not, since the milk and the meat have fed him, and the wool and the hide have clothed him, better than he was fed or clothed before. It must not be supposed that we mean to question the merit or the virtue of saving. But although saving plays a part, and an important one, in cpjosumption, we do not per- :' ceive what it has to do with production. It should be studied in its proper place. Probably no one would ever have thought of regarding saving or abstinence as one of the factors of production, had it not been felt, mistakenly, that this theory was necessary to justify the payment of interest for capital. PART II. THE METHODS OF PRODUCTION CHAPTER I THE ORGANIZATION OF PRODUCTION I. The Stages of Industrial Evolution BESIDES its other merits, the historical school may claim the credit of having discovered and outlined the successive types of industrial evolution. 1 It is customary to distinguish five types or periods : (1) The home economy or family economy. This system prevails not only in primitive societies but even in those of antiquity, and extends as far as the first period of the Middle Ages. Under this system the people are divided into small groups, each one of which is independent of the others from the economic point of view. Each group suffices unto itself, consuming hardly anything but what it has itself produced, and producing almost nothing beyond what it will consume. Exchange and the division of labor exist only in an embry- onic form. (See the pages on the History of Exchange and of Labor.) Each group consists of a family. The term "family," however, must be taken in a wider sense than it now pos- sesses. Not only was the patriarchal family itself much larger, but it was made to include many other persons, slaves OP- serfs, who were regarded as belonging to it. In Rome slaves were legally designated a,sfamilia. The residence of the wealthy Roman landowner, having an army of slaves 1 More detailed outlines of the economic evolution of society may be found in these books: Thurston, " Economics and Industrial History" ; Buecher, " Industrial Evolution " ; Henry Dyer, " The Evolution of Industry." ORGANIZATION OF PRODUCTION 133 engaged in all kinds of labor, as well as the manor of the medioeval baron with his serfs, both belong to this economic period. (2) Corporative economy, or the guild system.^ This system makes its appearance in the Middle Ages and is characterized by a very important feature, viz., the separation of trades. The worker, at least in the towns, is autonomous ; generally, he owns the raw material, and produces with the aid of tools that are his own property. He has become what is called an artisan. Ordinarily, he works only " to order," producing such goods as are requested in advance by his customers ; or, at least, he produces only for the small local market of the town in which he lives, a market which he jealously guards. He is associated with other workmen of the same trade, in a kind of league for mutual assistance and defence, and together with these associates he helps form those cor- porations or guilds which played so important a part in the economic, and even in the political, history of the Middle Ages. (3) Domestic economy (which must not be confounded with the home or family economy). The workmen in the guilds little by little lose their independence. Instead of producing directly for their customers or for the public, they now pro- duce for a wholesale dealer. They work at home, and some- times not always still own their tools and the raw material. But they no longer own the finished product ; that 1 Between these first two systems, the German school of economists, espe- cially Schmoller and Buecher, introduce another which they call the system or period of hired labor, in which the laborer, who was only partly indepen- dent, usually worked in the house of the consumer with raw material that was provided by the latter. This state of affairs was similar to the present habit of some small artisans who wander about from house to house, or the present custom among dressmakers in countries where they work in the homes of the persons who employ them. Although this system seems to have continued several centuries in Germany, before the establishment of the guild system, and is very interesting as a transitional step, it does not appear ever to have been sufficiently predominant to be regarded as a distinct stage of economic evolution. 134 PRINCIPLES OF POLITICAL ECONOMY belongs to the dealer. Why is this intermediary, the dealer, interposed between the worker and the public ? Because the little town market has been destroyed and has perforce given way to the national market ; and because the workers of the guilds were too poor, too unenterprising, and produced at too great a cost to obtain control of this enlarged market. (4) Organized manufacture, or the workshop economy. The intermediary or industrial organizer now brings his dis- persed workmen together in one place. Thus he gains sev- eral advantages, principally that of an extensive division of labor, which increases productive capacity and at the same time reduces the cost of production. (Seethe section on the Division of Labor.) Henceforth, the worker owns neither the raw material nor the implements of production ; he no longer works at home, but has become a wage-worker, an employee, while the intermediary who possesses all these things has be- come an employer. But productive power has thus been increased to a remarkable degree. This transformation began to take place about the sixteenth century. It was not, however, without a struggle that the more perfect organization of manufacturing industry elimi- nated the guilds and conquered the markets which were closed to it by the guild regulations. In France the intervention of the government was necessary to accomplish this change. During the ministries of Sully and of Colbert the government founded manufactories possessing special privileges, and some of these establishments have remained state concerns ever since then (e.g. the Gobelin manufactory of tapestries). In England the destruction of the guild system was brough^ about chiefly by the exportation of goods on a rapidly in- creasing scale to foreign countries and British colonies. (5) Machine industry or the factory system. 1 This is the system which marks our own epoch. It began with the 1 M. Vandervelde, a Belgian economist, suggests the name " machinofac- ture " as opposed to the preceding type of " manufacture." Etymologically, "manufacture" means "to make by hand." Now it has come to mean ECONOMIC EVOLUTION 135 application of steam to industry and transportation. 1 It has carried productive power to its maximum, but has for the most part only emphasized the features of the preceding period, among which are : the grouping of large numbers of laborers, night work, the quasi-military organization of labor, the employment of women and children. 2 As this system requires constantly increasing amounts of capital for its successful continuance, it perpetuates what the socialists precisely the opposite. The word "factory" originally was merely an abbreviation of " manufactory. " Four bases of distinction between manufac- turing and the hand trades have been suggested by various writers ; namely, the use of power, the use of machinery, production for the general market, and production under a system of division of labor. All of these are un- doubtedly characteristics which are usually associated with manufacturing, but no one of them alone sufficiently defines the word. The twelfth census of the United States regards standardization as the true criterion for manu- factures, as opposed to hand trades. This term, "standardization," applies to all operations which produce "standard" products; that is, similar products which conform to a general demand. Tailoring and custom shoe- making, for example, are not standardized, for dissimilar articles are pro- duced, each being suited to the taste and need of the individual consumer. But the manufacture of ready-made clothing and shoes is standardized, for here the products all conform to a single standard, even the variations for sizes being standard variations. 1 The remarkable improvement in methods of transportation, which we shall refer to later in this book, and the invention of a multitude of mechani- cal devices for increasing productive power, have together effected so com- plete a change in the economic life of mankind during the past century and a half that historians have designated it as the "Industrial Revolution." 2 In 1870 the number of persons engaged in gainful occupations in the United States was 12,505,923; of these the females were 1,836,288, i.e. one- seventh of the total number of females ten years of age and over. In 1900 the whole number of persons engaged in gainful occupations was 29,074,117, and of this number 5,319,912 were females, being one-sixth of the females ten years of age and over. In the mechanical and manufacturing industries 2.53 per cent of the workers in 1870 were women, whereas in 1900, 4.65 per cent were women. Despite various forces tending to restrict the employment of young chil- dren, and frequent misrepresentation regarding the age of employees, the census figures indicate that in 1870, 13.19 per cent of the total number of children ten to fifteen years of age, inclusive, were at work ; in 1880, 16.82 per cent, and in 1900, 18.23. 136 PRINCIPLES OF POLITICAL ECONOMY call the regime of capitalism. This system has many grave defects, which form the subject of complaints that are too often justified. Among its objectionable features are : the frequency of accidents; the chronic unemployment and invol- untary idleness of large numbers of laborers ; overproduction and the crises it involves ; the creation, at one end of the social scale, of colossal fortunes, and, at the other end, of a famished laboring class often forced to sell its labor for a crust of bread, while between these two classes there is a special category of property owners called stock-holders, which at first sight it is difficult to distinguish from simple parasites. All these objectionable features of capitalism will be discussed hereafter in greater detail. It is a mistake to suppose that each of the economic sys- tems outlined above did away entirely with its predecessors. We can only say that each of them in turn predominated. Even to-day, although the factory is the characteristic method of industrial production, we can still find traces of the home economy, where, for example, the peasant's wife spins the flax that serves to make the household linen ; and although guilds have now disappeared from the European cities in which they once held sway, there are still many artisans, occupied in various trades, who work principally for custom- ers that order goods in advance, just as in the Middle Ages. It also goes without saying that we still find considerable production outside of the factories and other large industrial establishments, but it is especially " domestic economy " that has survived and that now, curiously enough, tends again to gain ground. In the large cities some important indus- tries especially tailoring are carried on almost entirely in this way. This strange revival of a former industrial sys- tem is due probably to the recent intervention of the legis- lative authorities, which have laid down certain rules for the conduct of labor in larger industrial establishments. As these labor laws apply especially to, factories, many industries THE REGULATION OF PRODUCTION 137 find that, by having the work done in the homes of the laborers, they can easily escape legal surveillance. We might be disposed to believe that this change is a for- tunate one, and that the workman is happier and more free when he works at home, at times that best please him, and in the midst of his family, rather than in the industrial barracks known as " factories." Experience, however, proves that this is not the case ; that, quite to the contrary, the worst kind of exploitation takes place by the method of domestic production, to which nowadays ' the characteristic name of " sweating system " has aptly been applied. In this form of industrial organization the workman is not only robbed of the protec- tion of the laws concerning hours of labor, the work of women and children, necessary hygienic precautions, etc., but he is also entirely in the control of intermediaries or contractors, who are interposed between him and the large manufacturer, and who deprive him of part of the gain which his toil should bring him. He is, moreover, constantly ex- posed to the imminent danger of losing employment, and to the risk of irregular work ; for whereas the proprietor of a factory, unable to close it without great loss, prefers to work at a small loss rather than allow his enormous capital to lie idle, the contractor under the sweating system has no care of this nature. II. How Production is Regulated Economic equilibrium exists when wealth and services are produced in just the quantity necessary to meet the demand. Not to produce enough is an evil, since a certain number of wants will be unsatisfied. To produce too much is another evil, perhaps not so great as the former, but none the less real. Every excess in production necessarily involves not only a waste of wealth, but also a useless expenditure of energy, and consequently unnecessary toil and trouble. A state of health in the social body, as in the 138 PRINCIPLES OF POLITICAL ECONOMY human body, consists in the perfect equilibrium of production and consumption. When each man produces what he consumes, as in the first stage of economic evolution, described above, the equilib- rium is maintained easily enough. To a certain degree, each individual, and each small family group, is able to foretell the wants of the immediate future, and although this prevision may not always be strictly correct, production can be regu- lated accordingly. But when division of labor and exchange have been introduced, the problem is more difficult, for then it is necessary to foretell the wants of others, a more com- plex matter than to foretell our own wants. Yet the problem is not very difficult when laborers work " to order," for then each consumer declares what he wants. Nor is the problem very difficult in small industries; the baker can estimate pretty accurately the number of loaves that will be sold in a day. But the problem really becomes complicated in an eco- nomic society like our own, in which the market is immense, and in which a great number of industries produce their goods in advance without awaiting orders, and where com- merce especially speculative commerce anticipates the wants of society. Political economy, especially classical political economy, teaches that production is regulated surely, rapidly, and automatically, by the law of supply and demand, operating by virtue of this principle: "Things are worth more or lesi-T according to the insufficiency of their quantity for the satis- faction of our wants." If it should happen that any branch of industry is not sufficiently provided with labor and capi- tal, the want which it is designed to satisfy is not fully met, and the goods which it produces acquire a higher value. The producer, particularly the industrial manager who is the principal guide of production and the first person to profit by a rise in prices, realizes greater gains. Attracted by the prospect of gains higher than the average, other producers THE REGULATION OF PRODUCTION 139 capitalists and laborers engage in this favored industry. In this wise the production of goods is increased until the quantity reaches the amount desired by the public. When, on the other hand, any commodity has been pro- duced in quantities exceeding the need, its value must fall. This fall in value reduces the income of the producer, and particularly the profits of the industrial manager, who must directly bear the consequences. He will not continue an industrial policy that means loss or failure, and the produc- tion of this particular commodity is slackened until the output has fallen to the level of the amount consumed. In these oscillations the value of all goods tends con- stantly towards a fixed point, just as a pendulum in motion tends to a vertical position, or as water seeks a perfect level. This fixed point is determined by the cost of production, a term which designates the sum of values, in goods or in services, consumed in the production of a commodity, and which includes : the wages of labor, interest, insurance, the renewal of capital, the cost of transportation, taxes, and the price of the raw material (which is in turn made up of the elements just enumerated). When the value of an object is equal to its cost of produc- tion, it is in the position of equilibrium ; we say that its value is normal. The conception of the mechanism of production outlined in the above paragraphs is one of the celebrated " economic harmonies " of Bastiat and the liberal school, according to which all productive activity regulates itself automatically. But for the economic mechanism to operate thus admirably in actual practice, many conditions are necessary that are but rarely fulfilled. The supply must respond immediately to the demand, and the demand must immediately take advantage of the supply ; the factors of production must be absolutely mobile ; they must change their position with electrical rapidity, abandoning the employments in which they are superabundant, and taking up those in which 140 PRINCIPLES OF POLITICAL ECONOMY they are insufficient. This theory of automatic equilibrium, moreover, presupposes a single market embracing the world, or at least markets that are closely united, like communicating jars of water, so that whenever the equilibrium is disturbed it is almost instantaneously reestablished. The economic world is evidently tending toward just this state of affairs ; but it is yet far from having realized it. Now farming and even manufacturing in fact all pro- duction presupposes that capital is engaged in it for a greater or less time, 1 and that, being fixed, it is no longer transferable at will from one productive branch to another. Suppose, for instance, that a wine-raiser produces too much wine, and feels that he should turn his attention to the pro- duction of something else. We are told by the liberal econ- omists that the law of supply and demand (which in his opinion may hardly be regarded as either " harmonious " or "beneficial") will oblige him to do this. But what is he going to do with the thousands of dollars of capital invested in wine-raising, and consisting of vineyards, wine cellars, etc.? Much of this capital lies irretrievably buried in the soil, and he cannot afford to abandon it. Supply and demand, even where they operate most freely, do not always bring about a distribution of products and services that is for the best interest of society. This is strik- ingly true of trades and professions. The most useful voca- tions for example, farming tend to become abandoned, while others that are least productive, like store-keeping and saloon-keeping (not to mention the government service), are sought with great persistency, and the number of persons engaged in them increases at an amazing rate. Is this, then, an exception to the law of supply and de- mand ? Certainly not. The law applies here, as elsewhere, but absolutely without regard for social usefulness. Indeed, we have already explained that value is entirely independent of social utility, and that it depends on human desire, which 1 See the section on Fixed and Circulating Capital, page 127. THE REGULATION OF PRODUCTION 141 is an entirely different matter. Between the scale or order of real wants, such as a moralist, a statesman, or a hygienist would draw up, and the scale of economic values, there is no uniformity, no parallelism whatever. For this reason it was thought formerly that the distribu- tion of trades, professions, and occupations should not be left to the law of supply and demand. The old industrial systems, based on slavery or castes or guilds, all possessed the common feature of regulating, by right of laws or of heredity, the number, duties, and rank of those engaged in various occupa- tions, and of subjecting them to certain restrictions. The predominant principle was that no one could enter any trade or profession without the authorization of the government or of the guild. It is well known that the French Revolution put an end, by law, to trade corporations or guilds, and proclaimed the prin- ciple of the liberty of labor, by which no one should be pre- vented from engaging in any trade whatever. This reform was welcomed, throughout Europe and soon imitated by almost all western nations. The principle of free labor must be maintained because it is an essential part of human liberty ; it should be made to penetrate even those fields of activity in which it does not yet prevail. But it is perfectly natural that unregulated production should overthrow the perfect adjustment of pro- duction to consumption 1 and cause those disturbances of the economic equilibrium which are called crises. 1 It has, nevertheless, been objected that there were more famines in those days than now, although the production of wheat, and trade in it, were hedged about by a multitude of regulations. (In some places it was even forbidden to substitute wine-raising for wheat-growing.) We must acknowl- edge that free competition has indeed rendered great services in the produc- tion of wheat, because this is one of the few cases in which the theoretical state of free competition has in fact been nearly realized ; the wheat market is almost the ideal of a world market, and would even more closely approach this ideal if protective duties did not place obstacles in the way of free com- petition. 142 PRINCIPLES OF POLITICAL ECONOMY III. Crises The automatic regulation of production just explained, which is founded solely on free competition, is very uncertain. It is subject to disturbance, even frequent disturbance. Whenever the proper equilibrium is disturbed, we say that there is a crisis. Crises have often been called the diseases of the economic organism ; their nature is as varied as that of the innumer- able ailments that afflict mankind. Some are periodic, and others are wholly irregular. Some are short and violent, like attacks of fever ; others are slow, "like anaemia " to use M. de Laveleye's phrase. Some are confined to a particular country, others are epidemic and travel round the world. Some economists have attempted to construct a general theory of crises, and to describe the laws that determine them. 1 Such attempts must be regarded as premature. We may of course discover common characteristics in crises, and find them related to a single fundamental cause such as that which we have already mentioned, viz., a sudden disturbance of the economic equilibrium, either in the production of many commodities or in the production of a single very important commodity, such as wheat, capital, metallic money, or credit instruments. In each of these cases, which we now pur- pose to investigate, the disturbance of equilibrium is due to 1 Stanley Jevons undertook to do this. After carefully describing crises, he concluded that they took place periodically, once every ten years. Since the beginning of the nineteenth century he found that there had been nine crises, in the years 1815, 1827, 1836, 1839, 1847, 1857, 1866, 1873, and 1878. This recurrence is due, according to Jevons, to an analogous repetition of bad crops, which is in turn caused by the recurrence, every ten years, of spots on the sun ! In this manner the problem of crises and their periodicity is reduced to a problem of astronomy. An excellent history of the theories regarding crises is given by von Berg- mann, " Geschichte der nationaloekonomischen Krisentheorien," Stuttgart, 1895. Consult also: Jones, "Economic Crises" (Macmillan, 1900); de Laveleye, "Le marche monetaire et ses crises "; Juglar, "Des crises com- inerciales et de leur retour p6riodique." ECONOMIC CRISES 143 a glut or a dearth of goods. It would seem that a dearth of goods is much more dangerous than a superabundance, and yet, as we shall see presently, the latter is more dreaded, except in the case of a superabundance of money. (1) A general glut or scarcity of products. A general glut is one of the most frequent forms of economic crises, and may even be regarded as a kind of chronic ailment, a sort of constitutional infirmity, of modern industry. 1 The development of large-scale production, modern inventions, and means of transportation have enabled industry to throw such enormous masses of products on the market that con- sumption cannot always keep pace with production. This is not because men's wants are small or limited in number, for we know that they are great and that they are even capable of unlimited increase, but because the sale of an article does not depend solely on the number of people that desire it but on the number of those that have the means of buying it. Now the increase in 'income of the bulk of the population usually has not been so great as the growth of manufactures. Moreover, nearly all countries now seek to close their markets to foreign products, and at the same time try to introduce their own products into other lands. Thus products are by various devices kept out of certain markets and confined to others, as though accumulated in closed reservoirs. Producers, therefore, in order to find an open- ing for their goods, and to have them gradually absorbed by consumption, are obliged to lower prices and to decrease their output for a while ; this general fall of prices means, for the employers, lower profits or failures, while for the laborers it means lower wages or loss of work. Crises caused by the inverse difficulty (scarcity of goods) may in certain cases be quite as formidable. We need only 1 The collectivists attach great importance to this kind of crisis, which in their opinion constitutes, properly speaking, not a crisis but a necessary con- sequence of the present capitalistic regime, and which, being a cause as well as an effect, must inevitably involve the complete overthrow of our modern industrial organization. 144 PRINCIPLES OF POLITICAL ECONOMY refer, as an example, to the so-called " cotton famine " which resulted from the American Civil War, and which, because of the lack of the necessary raw material in many European cotton mills, led to the discharge of large numbers of work- men and the ruin of many manufacturers of cotton goods. A bad harvest of cereals may cause terrible famines in poor countries like India or Algeria; even in wealthy countries, such as those of western Europe, a slight deficiency in the supply of wheat always provokes some sort of a crisis. It may even happen although the event appears para- doxical that the crisis due to a dearth of some one com- modity will produce the same results as a crisis due to an ex- cess in production, namely a general glut of the market and a depreciation of commodities. A shortage in the wheat crop, for instance, causes a rise in the price of wheat ; hence all consumers of wheat whose means are limited, that is to say the great majority of people, are compelled to lower their ex- penditures for all the other articles which they purchase. In this way there is a mass of goods that no longer finds pur- chasers, and that can be disposed of only at a loss, or must be kept unsold. This curious state of affairs is illustrated by famines in India, which generally cause a crisis for Eng- lish manufacturers. (2) A glut or a dearth in some factors of production. A disturbance of the proper relative quantities of the factors of production is still more frequent and even more grave than a disturbance of the equilibrium among products them- selves. In no productive enterprise can the factors of production be brought together .in a haphazard, reckless fashion, i.e. without due regard for their proportion to each other. The chemical law of so-called " definite propor- tions" reigns in this field quite as fully as in chemistry; M. Walras and M. Pareto call it the "law of the co- efficients of production." Successful production always requires a certain amount of land, a proportionate amount of labor, and a proportionate quantity of fixed and of ECONOMIC CRISES 145 circulating capital. These productive elements, it is true, may to some extent be substituted for each other ; but not ad libitum. Often there is too much or too little of one of these elements, not enough labor or capital for the land at our disposal, or, inversely, not enough land to keep busy all the laborers or to use all the capital, or, perhaps, more capital than is required by the number of laborers employed, or vice versa. The amount of land in a country is limited by nature ; to increase it is beyond the power of man. The number of laborers depends on the laws (only imperfectly understood) of population, and hence may also be said to have certain limits. But the quantity of capital does not seem to have any limit at all. In advanced countries where incessant saving accumulates increasing quantities of wealth, where all normal chances of profit have been seized, and the opportu- nities for further investments tend to decrease, capital must ultimately be accumulated in huge quantities. Naturally this abundance causes a fall in the rate of interest, 1 and men try to devise more profitable investments ; new enterprises are begun, either abroad or at home, some of them of an ex- traordinary nature, and some altogether absurd, until finally 1 There is, however, a difference between commodities and capital ; al- though the glut of commodities lowers prices and ruins producers, a glut in capital, on the other hand, raises the value of capital and momentarily enriches the capitalists. This result, which at first seems singular, is not difficult to explain. The fall in the rate of interest changes the basis of capi- talization for the future, but the capital already invested profits necessarily by this circumstance. An example will make this clearer. Suppose that to-day the rate of inter- est is 5 per cent. Stock which yields an annual income of $10 is therefore worth $200. Suppose that to-morrow, by reason of a glut in capital, the rate of interest for new investments falls to 3 per cent. Then the stock which brought an annual income of $10, and which continues to bring that amount, is worth $333, since 3 per cent of $333 is $10. The result of this strange circumstance is that although merchants com- plain of a glut in commodities, capitalists rejoice in a glut of capital. The fortunate position of capitalists who have already invested at the old rate cannot, however, continue forever ; either some crisis will lower the value 146 PRINCIPLES OF POLITICAL ECONOMY there comes what in stock-exchange language is called a " crash." Many of these industrial collapses are sadly prom- inent in the economic history of recent years, especially those of 1819, 1837, 1857, and 1873 in this country, and those of Vienna in 1873 and Paris in 1882. The opposite state of affairs is also possible, namely in- sufficiency of capital, which may follow such crashes as those we have just mentioned, or which may be due to the use of vast amounts of capital in a costly war. When capi- tal is insufficient, there may also be a crisis, but one marked by conditions opposite to those set forth above, namely by a rise in the rate of interest and of discount, and diffi- culty in obtaining money. Finally, there may be a disturbance of the normal pro- portion between fixed and circulating capital, the amount of circulating capital being relatively insufficient. This has happened in countries which, having imprudently devoted all their savings to the construction of railroads, have nothing to spend in developing their industries and consequently no traffic for the very railways they have constructed. (3) Excess or scarcity of money. Although money is really only a commodity, yet it plays so important and char- acteristic a part in economic life, that every departure from the normal amount of it will affect the whole economic mechanism. Can an excess of money, like an excess of other commodi- ties, cause a crisis ? The general public would regard the fear that there might be too much money as absurd, and refuse to admit that it may involve a crisis. But it cannot be denied that there is a certain proportion between the amount of money that ought to be in circulation in a coun- of their investment, or the changed rate of interest will be sooner or later applied to their investments also when the time comes for returning the borrowed capital. Ultimately, the abundance of capital must necessarily reduce the power of capitalists. OVERPRODUCTION 147 try, and the needs of that country ; if the amount is sud- denly increased, a crisis results. The crisis takes the form of a general rise of prices, and has very serious consequences for all consumers, particularly for creditors and persons living on fixed incomes. It may be said, of course, that when we have to do with metallic money, especially with gold, it is easy for a country to dispose of its excess, and that it is in the very nature of things for the excess to vanish. But this is not true when the money is paper money or even bank notes. (See, below, the section on Paper Money.) A diminution in the quantity of money is regarded by every one as a danger, ancl always occasions great alarm. This alarm is, no doubt, partly due to certain preconceived false notions regarding the part played by money ; yet it is not entirely unfounded. 1 When the balance of trade has long been unfavorable to a country, and its reserve of coin is not large, a time comes when it no longer has enough money. Then the cash reserves in the banks diminish, exchange becomes unfavorable, the rate of discount is raised, and many merchants, unable to meet their engagements, be- come bankrupt. Such conditions as this are called monetary crises. They are the most dangerous of all, for they seem to possess a thoroughly epidemic character ; but they have also been most carefully studied, and their arrival can be most readily foreseen and therefore most successfully fore- stalled. (See the section on Rises in the Rate of Discount.) IV. Overproduction and the Law of Markets The fear of an excess in production, of a general glut, is a nightmare that haunts the minds of all business men. The feeling is not hard to understand. Every producer, observ- 1 M. de Laveleye regards this as the sole fundamental cause of crises. Many economists thought that the last European crisis, i.e. the depression of prices during fifteen years, was due to the scarcity of gold. This question is discussed by Hector Denis, "La depression des prix." 148 PRINCIPLES OF POLITICAL ECONOMY ing that his goods sell the better the scarcer they are in the market, naturally concludes that scarcity is a good and abundance an evil. The economists of the classical or optimistic school do not like to admit the possibility of any discord in the economic harmony which they never tire of explaining and glori- fying. They are unwilling to acknowledge that crises are consequences of economic liberty. They have long tried to prove that the steady increase of products is advantageous not only for the consumers for that goes without saying but also for the producers themselves. Of course they do not undertake to prove that there cannot be an excess of production in a particular industry, nor that such an excess is anything but a misfortune. But they maintain that, when there is a glut in any branch of production, the best remedy consists in a proportionate increase in the production of other goods. The crisis resulting from abundance can, they claim, only be cured by abundance itself, according to tjie celebrated motto of the homeopaths similia similibus. Hence all producers are interested in making production as abundant and as varied as possible. This theory, known as the law of markets (la loi des debouches), was first promul- gated by Jean Baptiste Say, who was very proud of it and who asserted that it would change the policy of all nations. It may be summarized as follows : Every commodity will find a sale more readily with every increase in the variety and abundance of other commodities. To understand this theory, let us leave money out of consideration, and suppose that products are exchanged directly for products, as under the system of barter. Take a trader arriving at one of the great markets of Central Africa. Is it not advantageous for him to find the market fully supplied with numerous commodities ? Of course he does not care to find the market fully supplied with the particular commodity that he has to offer, say muskets, but he does want to find the greatest possible quantity of all OVERPRODUCTION 149 other goods, ivory, gum, gold-dust, etc. Every new com- modity that is put on the market means a greater possibility of disposing of his own commodity, or, as this theory puts it, an additional market for his goods. The more other goods there are for which he can exchange his goods, the better are his chances of disposing of them. And if our trader has unfortunately brought too many muskets, he hopes that others have also brought too much of their goods to the market ; in this case muskets are no longer in excess, as compared with other goods ; and as J. B. Say remarks, " What best favors the sale of one commodity is the produc- tion of another." The same thing, we are told, takes place under the system of exchange by means of money. The greater the resources of all other persons, the better is the opportunity that each of us has of disposing of his goods or his services ; and the quantity of my resources depends on the amount I have produced. The best we can wish for a person who has pro- duced a commodity in excess, is that all other producers have done the same ; the abundance of one commodity is counter- balanced by that of other commodities. If, for example, Eng- land has produced too much cotton goods, and India has simultaneously produced too much wheat, there is no danger that England will be unable to dispose of her cottons. Again, let us suppose (a supposition which coincides with present conditions) that industry, thanks to the marvellous increase of productive power, throws an enormous quan- tity of manufactured goods on the market. The result is a general glut. Why ? Because agricultural production has not kept pace with manufacturing ; it has increased only slightly, and consequently the value of agricultural goods has, compared with the value of manufactured goods, in- creased. In this case the consumers, who are obliged to spend more for their food-stuffs, are unable to purchase many manufactured goods. But if agricultural production progresses as rapidly as manufacturing, the equilibrium is 150 PRINCIPLES OF POLITICAL ECONOMY again established ; the consumer, spending less for his food, will readily purchase the excess of manufactured goods. Notwithstanding these circumstances, and even supposing that all products without exception increase in quantity, there may still be a fall in prices and consequently a general glut. For our hypothesis, as above stated, did not include an increase in the amount of money. Therefore the value- relation between money and commodities in general has changed. Since money is scarce, prices fall. But if we could increase money in the same proportion as other com- modities, the evil would be removed, for then the relation of values called price would not have changed, and the crisis would not take place. We may, therefore, declare that even this hypothesis confirms the economic law of markets. To sum up, then, we may say that the theory of markets simply shows that there is no danger in an excess of production whenever the increase takes place simultaneously and proportionately in all branches of production. It is perfectly evident that in this case the relations between the quantities exchanged are exactly the same as before, although the total quantities have increased. Unfortunately, the increase of production never takes place under the conditions required by the theory of mar- kets. There is not one chance in a million that an equal increase will ever occur simultaneously in all branches of pro- duction. Production increases by sudden leaps and by local, intermittent changes. Besides, before we can make any practical use of the law of markets, nations must tear down the walls of protective duties which prevent an excess of commodities in one country from pouring out into other coun- tries and thus establishing a level in the universal market. This is why these disturbances of equilibrium in exchange, these crises which we have analyzed, remain an inherent evil of our economic organization. 1 This is also why producers 1 The collectivist school of socialists regards overproduction as an inevita- ble consequence of the exploitation of laborers. The working-classes, they FREE COMPETITION 151 nowadays seek to regulate production by means of commer- cial agreements known as trusts and pools, perhaps the most interesting economic phenomena of to-day. Some- times, it is true, these combinations undertake to limit the quantity of a commodity on the market in order simply to raise its price quickly. In this event they are speculative schemes, very much like that which, under the guild system, was called "engrossing"; to "engross" meant to buy up the entire supply, or so much of it as not to allow other persons to get what they needed. Generally, the members of these modern combinations agree not to produce beyond a certain limit ; in this case their influence may be benefi- cial. (See the section on Large-scale Production.) V. Competition The law of supply and demand, to be true in practice, requires freedom of labor ; and freedom of labor in its active form is called free competition. Competition, then, appears to be the great regulator of the whole economic mechanism of modern society. It was formerly customary in most treatises on political economy to enumerate the advantages of free competition and the disadvantages of monopoly. It was generally agreed to attribute to competition the follow- ing good results : (1) It adapts production to consumption, and thus main- tains the economic equilibrium. (2) It gives a great impetus to production, stimulating progress by means of rivalry, and effecting in the economic declare, are robbed by the capitalists of about half the product of their toil, and, therefore, with the wages they receive, are unable to buy back the product of their labor. Hence the glut. If the workers received what is due them, and their powers of consumption were thus made equal to their powers of production, there could be no more crises. This explanation does not seem quite satisfactory. Even granting the fact of spoliation, such spoliation would mean that the power to consume has simply been transferred from one class to another ; and it is difficult to see why the spoliators should not consume as much as the despoiled. 152 PRINCIPLES OF POLITICAL ECONOMY domain a kind of natural selection like that prevailing in the organic world. (3) It causes a gradual lowering of prices and tends to cheapen goods in the interest of all persons, particularly that of the poorer classes. (4) It effects a progressive equalization of economic conditions by reducing profits and wages to nearly the same level in all industries. Economists of the optimistic school, such as Bastiat, delight in singing the praises of the "harmonies" evolved by free competition, which they regard as no less marvellous than the harmony Pythagoras believed he heard descending from the skies. They regard the economic order based on free competition as "spontaneous" or "natural," and con- clude that it is both perfect and permanent in character. This enthusiasm has been considerably dampened in re- cent years. A more attentive observation of facts and of the actual effects of free competition has not justified the blind faith in it. We have learned that the present eco- nomic organization is no more and no less natural and spon- taneous than any preceding economic system, such as the family economy, the caste system, or the guild system ; for these forms too were the natural result of historical evolu- tion. And as for the beneficent effects of competition, it must be confessed that they too are somewhat questionable, in view of certain facts that stare us in the face : (1) Free competition does not regularly assure the equi- librium between production and consumption ; there are even times when it threatens to disturb this equilibrium. (Consult the preceding section on Overproduction.) (2) Although free competition generally stimulates pro- duction by keeping up a rivalry among producers, it is in other respects (for example, with regard to the quality of goods) harmful to production. Each competitor, in order to triumph over his rivals, endeavors to substitute cheap materials for better and more costly ones, so that as far as FREE COMPETITION 153 progress in production is concerned the most striking result of keen competition is, perhaps, the adulteration of goods. Adulteration has now become a veritable art that takes full and immediate advantage of all scientific discoveries. 1 The monopolist, on the other hand, generally finds it to his advantage to sustain the superior quality of his products; he even takes pride in keeping his goods up to a high stand- ard, in order to increase the reputation of his firm. (3) Free competition does not always guarantee cheapness, and in many cases may even cause high prices. It is true that competition, wherever it operates thoroughly, tends to bring the value of all goods down to the cost of production. But there are many instances in which it raises the cost of produc- tion, and consequently the price of the product. This para- doxical result is attained whenever there is too large a number of producers in any branch of industry. The case of bakeries offers a striking example. The number of baker-shops is ridiculously excessive. As each of them sells less and less, because of the competition amon'g a large and increasing number of shops, each is obliged, in order to cover expenses, to charge more for each article sold. A newly arriving competitor cannot lower prices, as they are just high enough to permit the old producers to gain a livelihood ; his entrance, on the contrary, will raise prices, since still another producer must be supported by the same quantity of sales. 2 1 Instances of this state of affairs are innumerable. Wine can now be made without grapes, jam and preserves without fruit and without sugar, butter without milk, and eggs without hens. At Lyons, France, silk goods are made that contain only 5 per cent of silk and 95 per cent of mineral substances. If competition, or, in general, the struggle for life, guaranteed the triumph of the most moral, the most devoted, and the most unselfish persons, then it would truly be a means of progress and real selection. But in reality it only assures the victory of the strongest and most cunning, and thus may entail a veritable moral retrogression, for men are obliged, as the proverb says, to "howl with the wolves." 2 Formerly, the number of bakers was regulated in each city according to 154 PRINCIPLES OF POLITICAL ECONOMY On the other hand, the system of monopoly does not mean the arbitrary rule of the monopolist. Prices are, under this system, no more arbitrary than under that of free competi- tion ; for in both cases prices are subject to the general law of values, the price of an object always being limited by the desire of consumers for that object and the sacrifices they are ready to make to procure it. Without entering into the difficult question of the determination of prices under a system of monopoly, we may remark that every monopolist finds it to his interest to keep prices reasonably low, on the principle of "small profits and large sales." 1 (4) Free competition does not necessarily cause an equali- zation of profits and of wealth ; for competition is essentially a kind of warfare which means the triumph of the strong and the ruin of the weak. Can it be said that political wars have resulted in equalizing the political power of nations, or that vital competition known as the " struggle for life " among plants and animals has developed all of them to the same degree ? Similarly, those countries in which industrial competition is most free and most vigorous, e.g. the United States, are those in which the most colossal fortunes are found. population, and bread was relatively less dear than to-day. In Paris thirty years ago there was one baker to every 1800 inhabitants ; to-day there is one for every 1300, and if we count the branch stores, one for every 800. In order to earn a living they must make a profit of one cent per pound of bread ; this is the amount indicated by the official price lists. The great cooperative bakeries can cover their expenses with one-fourth this gain. No one has denounced the evil effects of free competition, or the paradoxi- cal result that it has in raising prices, with more animation than Fourier. But even John Stuart Mill, whose energetic statement in favor of free com- petition we have quoted, also recognized (in a declaration made before a commission of the House of Commons, June 6, 1850) that the middlemen obtain an extravagant part of the total produce of social labor, and that " competition has no other effect than to share the sum total among a larger number and thus diminish the portion of each, rather than to lower the relative part obtained by this class in general." 1 The formation of trusts in this country has in some cases raised prices ; but in the best-managed monopolies, prices are probably no higher than they would be under competition. See Jenks, "The Trust Problem," pp. 130-170. FREE COMPETITION 155 (5) Lastly, the most unexpected result of free competition is that it is not a permanent state, as experience shows that it tends to destroy itself by giving rise to monopolies ! Be- cause of the gradual elimination of smaller enterprises and the triumph of the large ones, competition tends to cause the formation of giant enterprises that seek to suppress, and that actually succeed in suppressing, all competition. The great capitalistic leaders in each branch of production endeavor to form gigantic combinations, of national or even international importance, called "trusts" in this country and "Kartellen" in Germany. These combinations despotically control an entire branch of production, at least for a time, and become, so to speak, states within the state. They arouse the distrust of governments, which consequently intervene by means of regulatory laws or taxes, and which, in some cases, take charge of these enterprises themselves and thus transform private monopolies into public ones. The economic evolution which is taking place at the present time appears to involve these three successive stages : (a) competition among small producers ; (b) the monopoly control of large producers ; (0fo/-metallism would be more desirable than fo'-metallisrn ! If in the fifties there had been but one monetary metal gold the discovery of gold mines in California and Australia would have caused the utmost dis- turbance through an enormous rise in prices. Indeed, such may some day be the effect of gold production in the Klon- dike and the Transvaal. The exhaustion of gold mines would cause an even more formidable perturbation. Whether prices are high or low does not matter much ; but it is of the highest importance that prices shall not rise or fall abruptly. It is also desirable that the value of money shall tend in gen- eral to fall rather than to rise, because a continual, gradual reduction of the power of money acts as a social equalizer; it stimulates the activity of those that live on indepen- dent incomes, it relieves debtors, and it tends to diminish the advantage of persons having money over those that possess none. But when there is only one metal, it is probable that the value of money will, on the contrary, tend to rise. Bimetallists are not only unwilling to abandon the double 254 PRINCIPLES OF POLITICAL ECONOMY standard, but they also endeavor to convert the gold-standard nations, and maintain that none of the difficulties that are feared would arise if bimetallism were adopted by interna- tional agreement among the great powers, on the basis of 16 to 1 or on the basis of any other fixed ratio. This assertion seems preposterous to the economists of the clas- sical school. They declare that the relative values of gold and silver do not and can not depend ne varietur on the will of any government, or even on the will of all governments com- bined, any more than the respective values of oxen and sheep, or of wheat and oats. The value of things is regulated solely by the law of demand and supply, and is wholly beyond the scope of legislative control. The precious metals, they assert, are no exception to the rule. In our opinion, this line of argument adopted by the clas- sical school requires some qualification. Gold and silver, being used principally for money, are not commodities that may be likened to oxen or sheep or any other merchandise. When, therefore, we speak of the demand for precious metals, we mean almost exclusively the demand made by a dozen or more government Mints. Hence there is nothing absurd in the supposition that if these dozen buyers should agree among themselves to fix the price of gold and of silver, they could succeed in so doing. If they declare that they will all buy gold at the rate of $240 per pound Troy, and silver at 115 per pound Troy, it is highly probable that they will impose this price on the market. The classical school says that it would be absurd to decree that an ox shall always be worth ten sheep, or that a bushel of wheat shall be worth the same as two bushels of oats ! Certainly it would ; the market for these commodities is immense, and each one of us, by his tastes and desires, helps to regulate the current prices of these goods. But if in the whole world there were only a dozen people who consumed beef or mutton, it is highly probable that by concerted action they could fix prices at the ratio of 1 to 10, or at any other ratio that pleased them. INTERNATIONAL BIMETALLISM 255 Such a result as this is in fact accomplished, in spite of far less favorable conditions, by commercial speculators and large dealers, who combine with one another in trusts and similar organizations, and who sometimes arbitrarily deter- mine prices. 1 No doubt this line of argument must not be carried to absurd extremes. It is manifestly not in the power of gov- ernments, even were they unanimous, to decree that the ratio between gold and silver henceforth shall be equality, or that it shall be reversed and that a pound of silver shall be worth more than a pound of gold. Such a decree would be a dead letter, because the industrial use of the precious metals, though less important than their use as money, never- theless must not be neglected; this circumstance would be sufficient to prevent the choice of an extraordinary ratio. All the governments in the world could not make silver worth as much as gold ; men and women would never con- sent to pay as much for a silver ring as for a gold one. 2 But within reasonable limits we do not hesitate to believe that an international agreement would be efficacious in determining the relative values of the two metals, and con- sequently in eliminating the principal disadvantage of bimet- allism ; namely, the disappearance of one of the two metals. 1 We could give numerous proofs of the influence exerted by law on the prices of precious metals ; for instance, the stability of the ratio between the two metals during nearly three-quarters of a century in France ; or, contrari- wise, the fall of silver caused by its demonetization in Germany, later aggra- vated by the agreement that suppressed its coinage in the Latin Union, and, recently, its' continued depreciation because of the discontinuance of silver coinage in British India. 2 Let us add that if, upon this hypothesis, the values of gold and of silver were successfully maintained at the same level, the gold mines would soon be abandoned because the cost of production of gold is much greater than that of silver. Hence such a measure would cause the production of silver to increase very rapidly, whereas the gold mines would soon be abandoned be- cause they would bring no profits. Thus, sooner or later, the production of gold would cease. Similarly, if the law should declare that an ox shall be worth no more than a sheep, and this basis of values were successfully en- forced, we may be sure that no one would continue to raise oxen. 256 PRINCIPLES OF POLITICAL ECONOMY For whither could it disappear, when in all countries it is subject to the same law ? Is such an international agreement as this practically pos- sible ? That is another question. It does not appear so, in view of the fact that all nations seem to regard it as a mat- ter of national honor to adopt and maintain the gold stand- ard. Moreover, the nations that have adopted a legal ratio for the two metals did not establish the same ratio, in Austria-Hungary it was fixed at 1 to 18.22, in Russia 1 to 23.25, and in Japan 1 to 33 J. Besides, the English govern- ment, whose cooperation is regarded as indispensable, has always rejected the idea of international bimetallism. The best plan for the bimetallist countries appears to be the one they have adopted ; namely, the maintenance of the statu quo. About ten years ago, when the production of gold was decreasing rapidly, this policy involved some dan- ger. The question then arose whether there would be enough gold for all the nations desiring to employ it as their monetary standard, and whether those who delayed in adopt- ing it might not discover that they had entered the field too late; but in the last part of the nineteenth century the output of gold increased very considerably, and there is every reason to believe that its increase will continue with a rapidity proportionate, or more than proportionate, to that of silver. 1 For this reason the difference in the value of the 1 In ten years the annual production of gold has been tripled, princi- pally by the South African mines. The world's annual production, which in 1883 fell below $100,000,000, rose in 1899 to over $300,000,000. It is true that the South African War considerably reduced the output of the last few years ; but the construction of the great trans-Siberian railroad will proba- bly increase the output of the Siberian gold mines. The access to very rich but hitherto almost inaccessible gold deposits in Alaska is being facili- tated, and many auriferous districts are being discovered in various parts of Africa. The placer-gold yield of the Klondike (Yukon) increased from $2,500,000 in 1897 to $16,000,000 in 1899. The production of silver has of course also increased enormously, so that it is difficult to tell which of the two metals will fall more rapidly in value. (See page 228.) INTERNATIONAL BIMETALLISM 257 two metals will probably decrease, and a change will take place opposite to that of 1870-1895. Hence the problem of bimetallism has lost much of its acuteness. There is no immediate peril for the bimetallist nations in remaining bimetallist, and if they should decide later to adopt gold monometallism, this step will be less difficult then than now. The solution of the monetary problem is every day becoming easier and less urgent. Yet as gold has become practically the sole international money, the bimetallist nations must see to it that they possess a sufficient stock. 1 If they fail to do this, they will be obliged to resort to the expensive process of purchasing gold with which to make payments abroad. (See the section on Foreign Exchange.) 1 To attain this object, several countries (Russia a few years ago, and now Spain) require that customs duties be paid in gold coin. CHAPTER III PAPER MONEY I. Whether Metallic Money can be replaced by Paper Money DID we not already know that paper money could be sub- stituted for metallic money, we might have some difficulty in believing it possible, and the title of this section would cause some surprise. It is manifestly impossible to substitute for wheat or coal or wealth of any other kind mere pieces of paper on which are inscribed such words as " One Hundred Bushels of Wheat" or "One Hundred Tons of Coal." Such pieces of paper could not provide either food or warmth. If, more- over, we used coins merely to hang around our necks, as Oriental women wear their gold or silver sequins, even then our scraps of paper would be useless as substitutes for me- tallic money. But we know that money is unlike any other wealth, and that in our civilized societies its utility is not of a material nature. A piece of money is nothing but an " order " giving its possessor the right to claim, under cer- tain conditions, a share of existing wealth. (See page 220.) The part played by an "order" can be taken by a piece of paper quite as well as by a piece of metal. To the financier Law, whose premature experiments led France into bank- ruptcy, is due the credit of having perfectly understood and demonstrated this possibility. The subject will be clearer if we distinguish three kinds of paper money : (1) Representative paper money is that which merely rep- resents an amount of coin that has been deposited some- where, say in the safes of a bank. This kind of paper KINDS OP PAPER MONEY 259 money is thus secured by the coins for which the paper is simply a substitute. 1 Our American gold and silver certifi- cates, guaranteed by gold and silver deposits in the Treasury of the United States, are good examples of this kind of paper money. Gold coin, especially in large amounts, is cumber- some and difficult to handle; hence the Secretary of the Treasury has been authorized to receive deposits of gold coin in sums of not less than $20 and to issue certificates therefor. These certificates are essentially receipts which show that so many dollars in gold coin have been deposited with the Treas- urer of the United States, and that the holder of the certifi- cate is entitled to receive them on demand. Gold certificates, however, are not legal tender, but are receivable for customs, taxes, and all public dues. On October 1, 1902, about $300,- 000,000 worth of these certificates were in circulation. Silver is even more cumbersome than gold, and a plan for substitut- ing certificates was authorized by the laws of 1878, 1886, and 1900. On October 1, 1902, about $460,000,000 worth of these certificates were in circulation. Like gold certificates, they are receivable for all public dues, but are not legal tender. This form of paper money seems to present no difficulties. (2) Fiduciary paper money is that which takes the form of credit instruments. It is, properly speaking, a promise to pay a certain sum of money. It is evident that the value of the paper depends on the solvency of the debtor. If perfect trust can be placed in his ability to pay ; if, in other words, the signature and promise is reliable, there is no reason why this paper should not circulate as easily as money. We shall see that bank notes usually fall in this category, except in certain cases which we shall mention hereafter. The 1 "One of the earliest mediums of exchange," says Jevons, " consisted of the skins of animals. The earliest form of representative money consisted of small pieces of leather, usually marked with an official seal. It is a very rea- sonable suggestion that when skins and furs began to be found an inconven- iently bulky kind of money, small pieces were clipped off, and handed over as tokens of possession. By fitting into the place from which they were cut, they would prove ownership. 1 ' 260 PRINCIPLES OF POLITICAL ECONOMY "national banks" of the United States issue money of this sort, guaranteed by government bonds deposited with the Treasurer of the United States. There were, on October 1, 1902, national notes in circulation to the amount of over $350,000,000. Fiduciary money (or, as it is sometimes called, redeemable or convertible money), when issued by the government, is secured only by the general solvency of the treasury depart- ment, and not by a specific deposit, dollar for dollar. Presi- dent Hadley says : " Experience proves that this is not nearly so safe a reliance as that on which the coin certificate is based. ... At the very best, there is danger that the assets on which the government relies for the payment of such notes will fail in an emergency. . . . The assets of the government are, for the most part, permanent investments of a kind which it is not easy to sell at short notice. When a fiscal emer- gency arises, the dangerous power, possessed by the legis- lature, of declaring such notes a legal tender even if they are not redeemed, is a constant menace to financial stability." 1 (3) Conventional paper money represents nothing and con- fers a claim to nothing. The name " paper money," in its strict sense, is generally confined to this category. It con- sists of strips of paper issued by a government having insufi> cient metallic money. These strips of paper, to be sure, bear such inscriptions as " Ten Dollars " or " Twenty Dollars," and thus, like the preceding kinds of paper money, have the appearance of promises to pay certain sums of money. But every one knows that this is pure fiction, and that the gov- ernment will never redeem these promises, because it has no money for that purpose. Conventional paper money (also called irredeemable or inconvertible paper money because there is no provision on the part of the government to redeem it or exchange it for coin) may be regarded as money on which the government has charged approximately a hundred per cent seigniorage. 1 A. T. Hadley, "Economics," page 191. (Putnam, 1898.) INCONVERTIBLE PAPER MONEY 261 This kind of money either is issued as such directly by the State, or is the result of the degeneration of money that was originally convertible. Convertible money sometimes loses the quality of convertibility, or possesses it only to a limited extent, and thus becomes inconvertible. "The paper may be declared to be redeemable in coin ; that promise may even be borne upon the surface of the paper ; but if provision be not made so that, in fact, every holder of a note can obtain coined money therefor at will, the paper is inconvertible. No paper money is convertible, the full, immediate and unconditional redemption of which is not, at all times, within the choice of the holder." 1 It is especially in this third form that the substitution of paper money for metallic money seems hard to understand ; certainly it is not a very simple matter. It has, however, frequently been accomplished in many countries ; experience has amply proved that the substitution is possible, and that the public will readily submit to the process. Russia and the South American Republics have applied this system for many generations. Why should they not? If, by the decree of the lawgiver and the consent of the public (which to a certain extent is always necessary for the acceptance of legislative decrees), these strips of green, white, or blue paper have the power to pay for goods, to liquidate debts, and to pay taxes, why should they not circulate just as well as white or yellow coins ? Do they not serve the very same purposes as coins ? Yet we must admit that between the value of paper money 1 Francis A. Walker, "Political Economy," page 153. The "greenbacks" and "confederate notes" issued during the Civil War are examples of this kind of paper money. For seventeen years, i.e.' from 1862 to 1879 the greenbacks were not worth their face value; in 1864 it took two dollars and eighty-five cents of paper to buy one dollar of gold. The government did not begin to redeem them until 1879. The step from putting out promises to pay that are not redeemable, to issuing paper that the government does not even pretend to redeem, is an easy one, and many are the governments which have taken it. Money of the latter sort is called fiat money. In the colony of Rhode Island, for instance, the issues read as follows : " This bill shall be equal to money." 262 PRINCIPLES OF POLITICAL ECONOMY and that of metallic money there will always be several im- portant differences. The value of the former is always more precarious, more restricted, and more changeable. We shall briefly explain each of these three defects. (A) The value of paper money is precarious because it is dependent on the will of the legislator and can be annihilated as well as created by law. Should the law demonetize paper money, the holder will have in his possession nothing but bits of paper, for when paper money has lost its legal value it has lost all. The same thing is not altogether true of metallic money ; for besides its legal value it has also a natu- ral value due to the physical and chemical properties of the metal it contains. Doubtless if gold and silver were de- monetized in all countries, 1 metallic money would lose the greater part of its value. Let us not be deceived in this respect. The fall in the value of silver money, caused by its demonetization in several countries, is more than sufficient proof of our assertion. 2 Nevertheless, even though the pre- cious metals were demonetized everywhere, they would still possess utility and value, because they could be employed for industrial purposes ; and as this employment of them would 1 We say "in all countries " because if it were demonetized in only one, there would be no perceptible decrease in its value. This is the circumstance that offers the holder of metallic money the greatest security. 2 Many economists, however, harbor an illusion in this respect, or, at least, do not put their readers on their guard against it. Most of them imply that the government seal impressed on gold and silver coins merely indicates their value in much the same way that store-keepers put a mark on goods. But the declaration that the 232.20 grains of fine gold and 25.80 grains of alloy constituting our "eagle" are worth ten dollars, not only is declaratory of value but also determinative of value. These metals have acquired the larger part of their value because the will of the legislator, ratified (as it were) by the will of society, has chosen gold and silver as money ; they would lose half, and probably more, of their value, as soon as this sanction or this ratification should cease to exist. Aristotle very clearly perceived this, when he said, in the " Nicomachean Ethics," Book V : "It was by virtue of a volun- tary agreement that money became the instrument of exchange. ... It is called v6fju6/*os, signifying law, which indicates that it is founded, not on nature, but on convention ; and that human laws, which DEFECTS OF PAPER MONEY 263 increase with the fall in their value, it is possible that the decline in value would be smaller than we anticipate. Sup- pose that the metals fell to a third or a fourth of their present value. The holder of metallic money then would still possess a certain amount of value of which no law could deprive him, and this amount would probably be higher than it could have been, had any other commodity been chosen as legal money. (B) The value of paper money is more restricted, that is to say, its circulation is limited to a narrower area than metallic money. As its value is conferred upon it by the laws of a particular nation, it cannot be expected to circulate beyond the boundaries of that nation. 1 It cannot, therefore, be employed in international exchange. The value of metallic money, on the other hand, being determined by that of the metal it contains, is approximately the same in all civilized nations. Therefore it can circulate everywhere, if not as have thought fit to employ it as a measure of value, may, at pleasure, set this use of it aside, and employ some other measure in its stead." But we must not therefore conclude, as some economists (notably Cernu- schi) have done, that the value of the precious metals is purely conventional. In order that any object shall have a recognized utility and value, it is of course necessary that the will and choice of men be directed toward this ob- ject ; but human will and choice are in this case determined by natural causes, and therefore the resulting value is also natural and by no means purely conventional. The choice of men in singling out the precious metals for this purpose was not arbitrary, but due to definite qualities which the precious metals possessed, and which we have already pointed out. Even wheat owes its value to the fact that most civilized men have chosen this cereal among all others as their staple food ; and if ever they substituted another, we may say that the value of wheat would decline. But no one would therefore maintain that the value of wheat is purely conventional. It is the same with the precious metals. The only difference is that it is easier to use something else as money, than to find a food to substitute for wheat. 1 It is of course true that American paper money will be accepted by bankers abroad, or by foreigners who are familiar with our currency. Bat in this case it is received not as money properly speaking, but as an instrument of credit, i.e. with the intention of having it cashed, just as a note signed by Rothschild would be accepted in any country. 264 PRINCIPLES OF POLITICAL ECONOMY coined money, at least as bullion. This is the reason why metallic money is essentially a universal and international money, while paper money is essentially national. (C) Finally, the value of paper money is more changeable than that of metallic money, for the excellent reason that the quantity of paper money depends solely on the will of the government, while the quantity of metallic money depends on natural resources, principally on the discovery of new mines. The former, therefore, is issued by man, the latter by nature. An imprudent, careless government can depre- ciate paper money by issuing more than is needed, and too often this is exactly what occurs. But no government on earth can depreciate metallic money in this manner. Supposing that the government is prudent enough to issue only a limited quantity of paper money, this cannot remove the disadvantage to which we refer, inasmuch as the need for money varies from time to time and according to circum- stances. It frequently happens, for example, that a period of great business activity requiring an increase in the in- struments of exchange is followed by a period of depression. There may have been no change in the amount of money ; yet in the first period there will probably be a dearth, while in the second period there is liable to be an excess of paper money. It is true that the discovery of exceptionally rich gold and silver mines may at any time throw a large amount of precious metals on the world's market, and thus cause a fall in the value of metallic money. It is also true that when a period of depression follows a period of great activity, even the metallic money which has been drawn into a country may prove to be excessive in amount. This has occurred more than once. But these variations are never so great as those due to changes in the quantity of paper money. The pre- cious metals are sought and accepted everywhere, and if they are in excess in one country they naturally flow into others. Sudden increases in the amount of paper money, however, IS PAPER MONEY WEALTH? 265 being always confined within the limits of one nation (which may be regarded as a reservoir from which there is no out- let), always have disastrous consequences. The above three disadvantages, which render paper money so imperfect an instrument when compared with metallic money, would vanish almost entirely if all civilized countries should bind themselves : (1) To confer the legal tender quality on only one kind of money, paper money which shall be accepted everywhere. (2) Not to augment its quantity, or, to augment it only in a measure fixed in advance and calculated for each nation, perhaps according to the increase of its population. In this case the value of paper money, though still con- ventional or artificial, would rest on almost as broad a basis as the value of metallic money itself, because it would be founded on the unanimous consent of all nations. As its quantity would be regulated according to scientific forecasts, and not by mere chance, its value would probably be subject to little variation. Indeed, it is likely that the money of the future will be of this kind. The fact that paper money is artificial money is by no means a sign of inferiority. Quite the contrary ! A watch is an artificial instrument for measuring time, while the sun is a natural instrument; this circumstance does not prevent the former from being, for this purpose, superior to the latter. It is even a characteristic feature of progress that natural instruments are replaced by artificial ones : the rude club by the rifle, the horse by the locomotive, sunlight by electric light, the warmth of the sun by artificial heat. II. Whether the Creation of Paper Money is equiva- lent to the Creation of Wealth The men who first conceived the idea of making paper money 1 flattered themselves that they were increasing the 1 We do not know who invented paper money. It was known in China from time immemorial. Marco Polo described it on his return from that 266 PRINCIPLES OF POLITICAL ECONOMY general wealth, just as if they had discovered a gold mine or accomplished the magnum opus of which the ancient alche- mists had dreamed, namely, the transmutation of the baser metals into gold. This idea was evidently absurd, for it assumed that wealth can be created out of nothing. Yet the idea has been ridi- culed too much, inasmuch as it is perfectly true that the emission of paper money can to some extent increase the wealth of a nation. How can it do this ? Adam Smith first offered an explanation. He observed that the metallic money circulating in a country is unproductive capital, and that the substitution of paper money, by removing this capital from commerce and making it available for other uses, permits its application to productive purposes. In a comparison that has since become celebrated, he declared that to do away with metallic money would be like doing away with roads; if we found the means of travelling in the air, we could restore to cultivation and production all the surface of the earth that is now devoted to transportation by land. Adam Smith's ingenious comparison, however, leaves some obscurity in our minds. We can see readily enough that when roads and railways are no longer required, the land they oc- cupy may be cleared and put under cultivation ; but it is not so easy to see what can be done with metallic money when it is dispensed with for currency purposes. Will it be melted down and made into gold and silver plate or jewelry ? That would be but little economic gain. What would really result is this : the money would be invested abroad, and thus bring considerable revenue. The United States, for example, now has a capital in the form of gold and silver coins amounting to over $1,500,000,000. Half of this is stored in the govern- fabled country in the fourteenth century. Antiquity has left us several specimens of money (if not of paper, at any rate of leather) having a purely conventional value ; this was called siege money because it had been issued usually in beleaguered cities to take the place of metallic money which was becoming scarce. THE ECONOMY OF PAPER MONEY 267 ment treasuries and is represented in circulation by the cer- tificates to which we have already referred. This enormous capital undoubtedly facilitates trade ; but it yields no profit. Suppose now that we find a means of substituting paper money for these coins ; then we should have all this metallic money to invest abroad, either by purchasing stock, railway shares, land, and ships, or by improving and extending foreign industry and agriculture. These investments would, in one way or another, produce 4 or 5 per cent interest, and thus result in an increased annual revenue of $60,000,000 to $75,000,000. Such a plan as this may be compared to that of a house- holder who, in possession of several thousand dollars' worth of silverware, decides that porcelain would serve him quite as well, and therefore sells his silver in order to increase his income by employing the proceeds productively. The same line of conduct is pursued by those industrious persons who, realizing that money does not yield any profit while lying idle in their pockets or in their safes, keep no more of it in their houses than is absolutely necessary, and invest all the rest. The wealthiest persons are often those who have the least money at home. While the thrifty peasant has a drawer full of gold and silver coins, the millionnaire has simply a check-book with which to pay for his purchases. The same thing is true of nations. While France employs $1,600,000,000 in metallic money, England, more accustomed to the use of credit devices than France, employs about $600,000,000 in coin. Yet England cannot be said to be poorer than France. When, therefore, the question is asked, " Does it lie within the power of a government or a bank to increase the wealth of a country by issuing paper money ? " it is not perfectly correct to answer with an unqualified negative. As a matter of fact, the thing is feasible. Paper money may increase the wealth of a nation ly the total amount of metallic money in circulation. The replacing of $1,500,000,000 of United States coin by an equal amount of paper money would 268 PRINCIPLES OF POLITICAL ECONOMY actually increase our wealth by that amount ; but it would not be increased a cent more. The limit here indicated, moreover, is a theoretical one ; in practice it would be daring to go quite so far as this. But it must be observed that the gain could not be made by all countries at the same time. One country could utilize its supply of metal productively by selling it abroad. But if every country wished to do this, it is evident that none would succeed ; gold and silver specie, offered by all coun- tries seeking to get rid of it, and demanded by none, would be a drug on the market and would lose their value. 1 Nevertheless, even accepting this very improbable hypoth- esis as true, there would still be some advantage to man- kind in abandoning the use of precious metals as money. For there would henceforth be a saving of all the labor that is devoted to the maintenance of the supply of metals, the labor of mining, of turning the bullion into coin, of filling up the voids caused each year by abrasion and accidental losses, and of keeping up the supply at a level that is required by an ever increasing population. This labor is no small item. The extraction of ore from the mines, smelting, transporta- tion, coinage, etc., are operations that demand the labor of many thousand workers. Do away with metallic money, and all these laborers will be available for production along other lines, and the total productive power of humanity will really be increased to this extent. In short, then, we see that the answer to the question at the head of this section is quite different from that formerly given. We must no longer say that paper money in- creases the wealth of a nation to the extent that it increases its supply of money, but, on the contrary, to the extent that it permits of reducing its supply of metallic money. 1 It is in this respect that Adam Smith's comparison is faulty. For if we discovered a means to dispense with roads, the result would be different : all countries could simultaneously benefit from the use of land that had pre- viously been devoted to transportation but which then could be used produc- tively. DANGERS OF PAPER MONEY 269 Such is the economic advantage that a nation may obtain by the emission of paper money. If now we ask what is the. fiscal advantage resulting from its emission by a government, the matter is more simple. When a government falls short of money, the creation of paper money is a very convenient way to pay its contractors, its employees, and its expenses, without being obliged to borrow, and consequently without being required to pay interest. When a government is in this pre- dicament, its credit is probably not of the best, and if it were obliged to borrow at interest the rate would be very high. Therefore paper money effects a saving that is not to be despised. 1 Many governments have resorted to this expe- dient, and have in general succeeded well enough, provided of course that in their issues they did not exceed the limit we have laid down, fixed by the amount of coin in circulation. Every issue which goes beyond this limit must cause a depre- ciation of the paper and a loss to the government and the nation compared with which the economy due to the use of paper money is a mere bagatelle. III. The Dangers resulting from the Use of Paper Money, and the Way to Prevent Them The advantages that paper money can procure for a coun- try or for a government are real enough, but they may be 1 During the Franco-Prussian War the French government had need of money, and issued notes to the value of $300,000,000. If it had borrowed this sum, it would have been obliged to pay about 6 per cent interest, or $18,000,000 a year, whereas the issue of paper money involved no expense but the cost of manufacture. But instead of issuing the paper directly, the French government chose, for valid reasons, to use the intermediary services of the Bank of France, for which it paid 1 per cent commission, amounting to only ."$3,000,000 a year. For the nation, this issue of paper money was very acceptable, because (on account of exportation and hiding) there was insufficient money in circulation. Thus the issue of these notes was a benefit both for the government and the public. But the amount issued was not enough, for when several private banks formed an association to issue frac- tional notes of a value less than five francs, the public was glad to accept them. 270 PRINCIPLES OF POLITICAL ECONOMY dearly paid for ; indeed, they may cost more than they are worth. Some economists have gone so far as to say that paper money is the greatest plague of nations, and that it is more injurious to society than a terrible disease is to an individ- ual. 1 It must be noted, however, that the evil effects are due rather to the imprudence of governments than to the nature of paper money itself. 2 Indeed, they are produced only when a government, overstepping the proper limit, issues more than is needed. The need may be measured fairly well by the amount of metallic money generally in circulation. Never- theless, impecunious governments are sorely tempted to go beyond this fatal limit ; many have done so, and have ended in bankruptcy. 3 It may safely be asserted that in the present state of economic science there is no excuse for a government over- stepping the limit. There are several signs, familiar to the economist and the financier, which should warn us of the 1 While the paper-money experiment was going on during the revolution- ary period of American history, Mr. Pelatiah Webster declared that "We have suffered more from this than from every other cause of calamity ; it has killed more men, pervaded and corrupted the choicest interests of our country more, and done more injustice, than even the arms and artifices of our enemies." 2 Experience has taught that when paper money is issued through the in- termediary of banks, and not directly by the government, it is usually done far more carefully and involves less danger. This is due to the fact that bankers are more vigilant in defending their own interests and those of their stock-holders, than the Government Treasury is in defending the interests of the public. Hence most governments have issued money through the banks. (See the section on Differences between Bank-notes and Paper Money.) 8 Every student of history knows the lamentable story of the French assignats issued by the Convention and the Directory to the enormous amount of 45,000,000,000 francs, which was probably twenty times the amount of coined money then in France. Even had these issues consisted of good gold and silver pieces, they would nevertheless have caused a great depreciation of metallic money, since the amount in circulation would have been twenty times what was required. We can imagine, then, what must have been the depreciation of this paper money ! In February, 1796, the hundred-franc ($20) assignat fell in value as low as seven cents, and a pair of boots sold for 4000 francs ($800). SIGNS OF DEPRECIATION 271 danger, even when it is far off, and which are surer indica- tions than the pilot obtains from sounding-lead and land- marks. (1) The first of these signs is the premium for gold. As soon as paper money has been issued in quantities too great for the needs of a community, it begins (by virtue of the uni- versal law of value) to be depreciated ; the first effect of this depreciation, the first sign that indicates what is coming, although the general public may not be aware of it, is that metallic money begins to command a premium. Metallic money is not affected by this incipient depreciation of the monetary system. Why should it be ? Gold and silver re- tain their former value. Bankers and money-changers begin to seek bullion to send abroad, and they will pay a small pre- mium to obtain it. This is the time for a nation's financiers to keep their eyes open ! (2) The second sign is a rise in the rate of exchange. Bills payable abroad, i.e. foreign bills of exchange, are sold in all the great commercial centres of the world. Like any other commodity, they have a market price that is quoted at the stock-exchange ; this is called the rate of exchange. These bills, or claims on foreign countries, are always payable in gold or silver, generally in gold, because gold is the inter- national money. If, for example, the United States is under a paper-money system and its paper begins to be depreciated, bills on London or on Paris will rise in price just like gold itself, since they are in fact equivalent to gold. When, there- fore, our ten-dollar gold piece commands a premium of 2 per cent and is sold for $10.20, a hundred-dollar bill of exchange on London will rise to an equal premium and will sell for 1102. (See the section on the Rate of Exchange.) (3) The third sign is the flight of metallic money. How- ever slight the depreciation of paper money may be (and un- less this defect is immediately remedied by the withdrawal of the excessive paper), all the metallic money will speedily dis- appear from a country. This phenomenon is invariable and 272 PRINCIPLES OF POLITICAL ECONOMY therefore characteristic ; it occurs in all countries where paper money has been issued in excess. This is what hap- pened in Russia, and in all the states of South America, which are, nevertheless, gold and silver mining countries. The reasons for this, which we explained when dealing with Gresham's law, need not be repeated here. (4) The fourth sign is a rise in prices. This appears later on, and shows that the evil has already become a grave one, and that the permissible limit has been greatly exceeded. While the depreciation of paper money is still slight, say 2 or 3 per cent, prices (except those of the precious metals) are not affected. Retail dealers, and even wholesale deal- ers, will not alter prices for so trifling a difference as this; and even if they do so, the public will not worry about it. But whenever the depreciation of paper money reaches 10, 15, or 20 per cent, then all tradesmen and all producers raise their prices correspondingly. 1 The evil, which until then had been latent, suddenly bursts forth and is revealed to all. (5) Finally, we must note that the old prices continue the same for those persons who can pay in metallic money, if 1 Business men and producers are not opposed to this rise in prices ; they become accustomed to it so readily that they approve of the paper-money system and oppose its abolition, because that would result in a return to the old prices. When the United States was under a paper-money system, there was an important political party, significantly called inflationists, which did everything in its power to maintain that system. At the present time there is a similar party in the Argentine Republic. (For the explanation of these facts, see page 229.) As paper money, especially that which is for any reason inconvertible, rises or falls in value almost constantly, prices will be constantly changing. If a manufacturer or merchant does not know what the price of his goods will be a week ahead, he is cut off from any legitimate estimate of his coming receipts or expenses, and is obliged to guess at the course of the market. Speculators who think that the rise in prices will continue, purchase large stocks of goods in order to sell out when the rise comes. This may create an excessive demand, tending to advance prices still further. Although all prices have risen, there are many people who believe that when prices rise they are richer than before; they are worth more in "dollars," but they overlook the fact that dollars will now buy much less than before. (See J. L. LAUGHLIN, "Elements of Political Economy," page 167.) AMERICAN PAPER MONEY 273 there is any of it left. For metallic money has lost none of its former value ; on the contrary, compared with paper money it has gained. Hence we observe the curious phe- nomenon of two different sets of prices for commodities. Every article now has two prices, one payable in metallic money, the other in paper money. The difference between the two prices exactly measures the depreciation of the paper money. Thus, for example, in Russia an article that sold for eight roubles in paper would bring only five or six roubles in silver, because of the depreciation of Russian paper money. As soon, therefore, as a government perceives the premoni- tory signs, namely, a premium for gold and a rise in the rate of exchange, 1 its first duty is absolutely to forbid the emis- sion of any more paper money, since the extreme limit has already been reached. If this limit has unfortunately been overstepped, and we discover the ominous symptom of double prices, it must endeavor to retrace its steps and destroy the paper money that returns to the public treasury, until there is the right amount in circulation. Such an heroic remedy as this, however, involving the partial suppression of the national revenue, is not within the power of all governments. They cannot resort to it unless they can afford to sacrifice a part of their revenue ; in other words, the public revenue must be in excess of public expenditures. IV. American Paper Money The experience of our own country with paper money of all kinds has been sufficient to serve very appropriately as an illustration of the principles underlying this department of economic science. 1 When at the close of the war of 1870 France was under the paper- money system, and all its gold went into Germany to pay the war indemnity, gold immediately rose to a premium of 2 per cent (fifty, centimes on a twenty-franc piece). That was not a great rise, but it was enough to put the government on its guard, and the danger was averted. 274 PBINCIPLES OF POLITICAL ECONOMY The first government paper to circulate as money in this country appears to have been the " bills of credit " issued by the colony of Massachusetts in 1690 to the amount of 40,- 000, in order to pay the colonial troops for a disastrous mili- tary expedition against Canada. As the public treasury was empty and the soldiers refused to wait, these bills were issued in anticipation of the tax collections ; they were not payable at any particular time, they did not bear interest, and were not legal tender. As they did not pass for more than twelve or fourteen shillings in the pound, the soldiers lost two-fifths of their dues. In 1692 the bills were made legal tender in all payments, receivable for taxes .at 5 per cent better than silver, and redeemable in silver at the end of twelve months. These provisions made them as good as silver. The idea of issuing paper money, once introduced, spread to all the other colonies like an epidemic. In many instances the opposition of the royal governors to the introduction of "bills of credit" contributed to the irritation against the mother country which culminated in the Revolutionary War. Down to the founding of the union, the paper-money party in each of the colonies, largely made up of debtors and spec- ulators, endeavored to secure an abundance of cheap money. The lower houses of the colonial legislatures were controlled by a body of insolvent debtors. 1 One of the commonest ways of increasing the issues of paper was the alleged re- placement of old and worn bills, which often meant an issue so large as to leave a margin for general expenses, and some- times a very large margin. Reports which were made from 1 Their methods are thus characterized by Thomas Paine, writing in 1786 : "There are a set of men who go about making purchases upon credit and buying estates that they have not wherewithal to pay for ; and having done this their next step is to fill the newspapers with paragraphs of the scarcity of money and the necessity of a paper emission, then to have legal tender under the pretence of supporting its credit, and when out, to depreciate it as fast as they can, get a deal of it for a little price and cheat their creditors ; and this is the concise history of paper-money schemes." " Writings," Vol. II, p. 178. COLONIAL PAPER MONEY 275 time to time to the home government in response to inquiries regarding the amount of bills outstanding, were ingeniously prepared so as to convey false impressions, whenever, indeed, they answered these inquiries at all. Horace White has summed up the usual course of events where these bills of credit were issued, as follows : (1) Emissions ; (2) disap- pearance of specie ; (3) counterfeiting ; (4) wearing out of bills ; (5) calling in and replacing worn and counterfeited issues with new ones ; (6) extending the time for old ones to run, especially those which had been placed on loan ; (7) depreciation ; (8) repudiation of early issues in part and the emission of others, called "new tenor." When popular governments have once started the conven- ient process of issuing paper money, there seems to be no hope of arresting it. Bad as the colonial bills of credit were, those of the revolutionary period were worse. The Conti- nental Congress had need of money but no means of raising it. Therefore it had recourse to the expedient of issuing paper money, to be redeemed by the states, which never did redeem it. Pelatiah Webster was almost the only man of prominence to insist upon taxation as the only legitimate means of raising money for the war. But the popular sentiment was entirely opposed to this, and one delegate to the Congress voiced the general feeling when he asked with unspeakable scorn why he should vote to tax the people, when a Philadelphia printing press could turn out money by the bushel. In the summer of 1775 " due bills " for 13,000,000 were issued, which, at the suggestion of Congress, were declared by the colonies to be legal tender. From this time forward, the issues of " continental " paper currency so called to distinguish it from the money issued by the separate colonies followed in rapid succession, until 1241,000,000 had been issued by 1779. To prevent depreciation it was deemed necessary to fix the prices of merchandise by law and to prohibit selling merchandise at higher prices for paper than for silver. Severe punishments were inflicted for this 276 PRINCIPLES OF POLITICAL ECONOMY offence, but by 1777 the depreciation was too great to be ignored, and a little later the Continental paper became so valueless as to give rise to the characteristic expression " not worth a continental." l In May, 1781, Congress recommended that the states should repeal their legal-tender laws. All of them subse- quently adopted " scales of depreciation " for the settlement of debts. These were tables showing how much the money was worth in specie at various times, and how disputed accounts should be settled. The tables were notoriously incorrect. The one recommended by Congress placed the currency at par in September, 1777, whereas it was worth at that time only 33 cents on the dollar. August 4, 1790, Congress granted authority for funding the bills in 6 per cent bonds " at the rate of one hundred dollars in the said bills for one dollar in specie." Only $7,000,000 turned up to take advantage of this provision. After the establishment of the union a number of states plunged afresh into debauchery of paper money. 2 Despite the common sense displayed by a few men, such as Thomas Paine, who emphatically asserted that " money is money and paper is paper," the advocates of paper money triumphed in many of the states and succeeded in passing laws imposing severe penalties on persons that refused to accept the paper. Meanwhile the paper declined steadily in value, and landowners who had covered their farms with mortgages made haste to lift 1 " Washington said it took a wagon-load of money to buy a wagon-load of provisions. At the end of the year 1778 the paper dollar was worth sixteen cents in the northern states and twelve cents in the south. Early in 1780 its value had fallen to two cents, and before the end of the year it took ten paper dollars to make one cent. In October, Indian corn sold wholesale in Boston for $150 a bushel, butter was $12 a pound, tea $90, sugar $10, beef $8, coffee $12, and a barrel of flour cost $1575. Samuel Adams paid 2000 for a hat and a suit of clothes." FISKE, "The American Revolution, "Vol. II. In Philadelphia a barber papered his shop with bills, and a dog was led up and down the streets covered with a coat of continental paper money. 2 McMaster, in Vol. I of his "History of the People of the United States," describes the paper-money agitation in the states at this time. GREENBACKS 277 them by paying the depreciated but lawful money. As the sums were sometimes large and the money bulky, it was fre- quently carried in handkerchiefs, and occasionally in pillow- cases. For a time the financial problems facing the national gov- ernment apparently did not call for renewed experiments with paper money, and at the beginning of the Civil War, in 1861, the currency of the United States consisted of gold coins, subsidiary silver, minor coin, and state bank-notes. In 1862, after unwise action by the Treasury Department had forced the banks of the country to suspend specie payments, i.e. to refuse to meet their obligations in coin, Congress passed a law authorizing the issue of $150,000,000 of United States notes, not bearing interest, payable to bearer, of denomina- tions not less than $5 each. They were to be legal tender in. payment of all debts, public and private, except duties on imports and interest on the government debt. A few months later another act authorized the issue of $150,000,000 more of these notes, so crying were the needs of the Treas- ury for funds to carry on the war. The total amount finally reached $450,000,000. But these notes or "greenbacks," as they were called, immediately depreciated. In 1864 each note was worth only 49 per cent of its face value, and ultimately fell to 35 cents per dollar. As the government was obliged to pay higher prices for everything, the cost of the Civil War was nearly $1,000,000,000 more than it would have been otherwise. The notes were originally made convertible, at the option of the holder, into bonds bearing interest in coin at 6 per cent. But this connecting link between the notes and gold was unwisely repealed in 1863. If it had remained in force, the notes would have been exchanged for bonds whenever the price of the latter was above par, and specie payments would probably have been resumed soon after the close of the war. As a matter of fact these notes were not really redeemable in coin until 1879. 278 PRINCIPLES OF POLITICAL ECONOMY Two other kinds of legal-tender notes were issued during the war. They were called " Treasury notes " in contradis- tinction to the United States notes or "greenbacks." On March 3, 1863, Congress authorized the issue of 8400,000,000 of Treasury notes of denominations not -less than $10, to run not more than three years, to bear interest not exceeding 6 per cent payable in " lawful money," i.e. in either gold or United States notes. They were to be legal tender for their face value, excluding interest. The object of this law was to obtain loans from small investors without increasing the cur- rency. Anybody having $10 for which he had no immedi- ate use could buy a Treasury note for that sum. He would be impelled to hoard it for the sake of the interest, but if necessary he could use it as money for its face value, in which case the recipient would be impelled to hoard it. Under this act $44,520,000 of one-year notes, and $166,480,000 of two-year notes, bearing interest at 5 per cent, were issued. A portion of these notes had inter- est coupons attached to them, which could be cut off and collected as the interest matured. These were found to be troublesome, since they caused alternate contraction and expansion of the currency. When the accumulated interest was sufficient to make it worth while for the owner to keep them they would be hoarded, and when the coupon was cut off they would be put in circulation. They were paid off by the government and cancelled as soon as possible. Under this act also there were issued $266,595,440 of compound-interest notes to run three years. The rate of interest was six per cent, compounded semi-annually, and the interest was payable with the principal at maturity and not otherwise. On the back of the note was printed a state- ment showing its value at the end of each six months. This was the most scientific form of legal-tender notes issued dur- ing the war, since it offered a continuing inducement to the owner to hold them as an investment instead of putting them in circulation. POSTAGE CURRENCY 279 In the summer of 1862, when the silver subsidiary coins grew scarce because of the depreciated greenbacks, people began to use postage stamps as a substitute. The demand for stamps became greater than the Post Office Department could supply; the stamps, moreover, were inconvenient to use. Accordingly, Congress issued small notes to take the place of the stamps, consisting of strips of paper bearing the facsimile of postage stamps. This was called " postage cur- rency." By a later act, fractional currency was issued in the form of promissory notes of the United States for sums less than one dollar. These notes were small and easily worn out and lost ; the largest amount in circulation at any time was 127,000,000. Of particular interest to the economist, however, is the endeavor, made in 1864, to keep down the price of gold (for which the greenbacks had steadily been increasing the pre- mium) by legislative enactment. Secretary Chase induced Congress to pass a bill " to prohibit certain sales of gold and foreign exchange." The law, based on the belief that brokers had caused the price of gold to advance, imposed heavy fines and penalties upon all those who should violate it. But the measure remained on the statute book only two weeks. On the day it passed, gold was quoted at 198. The next day it was 208, the next 230, and in a few more days, 250. Whereupon Congress repealed the act without debate. Another matter of essential interest and importance is the effect of this depreciated legal-tender paper on wages. Pro- fessor Taussig maintains that " money wages responded with unmistakable slowness to the inflating influences of the Civil War. In 1865, when prices stood at 217 as compared with 100 in 1860, wages had only touched 143. The course of events at this time shows the truth of the common statement that in times of inflation, wages rise less quickly than prices, and that the period of transition is one of hardship to the wage-receiving class." l 1 Paper read before the International Statistical Institute at Chicago, 1893. 280 PRINCIPLES OF POLITICAL ECONOMY Congress voted in December, 1865, in favor of the early resumption of specie payments. In pursuance of this design, in April, 1866, it passed a law for retiring and cancelling the legal-tender notes at the rate of $4,000,000 a month. But in February, 1868, this act was repealed, after 1-14,000,000 had been retired. In 1873 the Treasury Department reissued $26,000,- 000 of the retired notes. Later Congress voted to resume specie payments on January 1, 1879. Since then the notes have always been redeemed in gold coin, whenever presented to the subtreasury in New York. Subsequently it was pro- vided that the notes should not be retired when redeemed, but should be paid out and kept in circulation. At that time the amount outstanding was $346,681,016, and it has remained at that figure ever since. A permanent gold fund for the redemption of these notes was indirectly established by the act of 1882, which provided that "the Secretary of the Treasury shall suspend the issue of gold certificates whenever the amount of gold coin and bullion in the Treas- ury reserved for the redemption of the United States notes falls below $100,000,000." l V. How even Paper Money may be Dispensed With Although paper money economizes metallic money, this advantage, as we have seen, is obtained only at the price of serious disadvantages and even of great dangers. If, there- fore, it were possible to find some way to economize metallic money without resorting to so dangerous an expedient as 1 For the information contained in this brief sketch of our paper money 1 am indebted principally to Horace White's " Money and Banking," second edition, 1902. Other literature of which use was made, and to which the student may be referred, is as follows : McMaster, " History of the People of the United States" ; Fiske, "The American Revolution" ; A. S. Bolles, "Financial History of the United States" ; Phillipps, " Historical Sketch of American Paper Currency " ; Felt, " Historical Account of Massachusetts Currency" ; A. M. Davis, "Currency and Banking in the Province of Mas- sachusetts Bay " ; J. H. Cuntz, " Our Money as It Is " (Vol. VII, No. 6, of "Sound Currency"). C. W. A. V. BILLS OF EXCHANGE 281 paper money, this would undoubtedly be a great benefit. Now there is such a way as this, and it is more effective as well as less dangerous than paper money. It consists not in replacing a costly instrument of exchange by another that costs nothing at all, but simply in doing away with every in- strument of exchange. We may explain the operation of such a scheme in the following way. In the first place: We replace cash sales, i.e. the exchange of commodities for money, by sales on credit, i.e. the ex- change of commodities for a promise to pay at some future date. Credit sales are in reality nothing more than this : I give you my commodity, and receive in exchange for it your promise to pay, represented by a note or by a bill of exchange. 1 In the second place : Once these promises to pay have been made, we seek to have them fulfilled in some other way than by actual payment in metallic money. Jurisprudence suggests various methods of accomplishing this ; for example, what the jurists call compensatio (by means of which two exactly opposite and equivalent claims or obligations coun- terbalance each other), or confusio (when one party is at the same time both creditor and debtor), or novatio (when one promise to pay is extinguished by making a new promise). The extreme complexity of social relations and the fact that each of us or at any rate each producer is in turn both buyer and seller make it a very easy matter to apply such devices as these to facilitate payments. It was first of all in international commerce, in exchange between countries, that men learned to employ credit and to dispense with the direct use of money. The difficulty and danger of transporting large quantities of money over great distances led the Lombards, it is believed, to invent the bill of exchange. The foreign bill of exchange, indeed, is the first form of negotiable paper known to English law. When 1 For the understanding of this section the reader should refer to the chapter on Credit. 282 PRINCIPLES OF POLITICAL ECONOMY originally used in the thirteenth century, it was only in dealings between merchants of different countries; but in the seventeenth century inland bills of exchange came into use between merchants in different parts of England. A bill of exchange or draft (of which frequent mention will be made hereafter) is a written order by which the person drawing the bill orders some other person, upon whom he has a claim, to pay a specified sum of money to a third person. These bills are payable either at sight or at some specified time. It is not necessary that the person to whom they are given shall present them himself for payment. They may by indorsement be transferred from one person to another. In this manner one bill may serve to make many payments before the drawee is called upon to make final pay- ment. The utility of these bills is most manifest in foreign exchanges, and may perhaps best be made clear by an example. Suppose that American wheat dealers have sold to England $2,000,000 worth of wheat at six months' credit; that is to say, instead of receiving money from England they have drawn bills of exchange to the value of $2,000,000 upon their English debtors. Now suppose, furthermore, that English manufacturers of cutlery have sold $2,000,000 worth of knives and forks to American dealers on similar terms and have drawn an equal amount in bills of exchange payable in the United States. When the American purchasers of cut- lery wish to pay for the goods bought from England, will they send $2,000,000 in coin across the sea? Certainly not. They will simply purchase from the American wheat dealers the $2,000,000 worth of bills of exchange payable in Eng- land ; they will then send these bills to their English cred- itors in place of money, saying, "Collect these sums from your fellow-countrymen." It will not be difficult for them to procure these bills of exchange, for, as we shall see, there are persons called bankers who make it a business to buy and sell them, i.e. persons who buy paper payable abroad, in BILLS OF EXCHANGE 283 order to sell it to those that require it. The use of such bills avoids the manifest absurdity of sending two shipments of coin across the ocean, one to England and the other to America. 1 It is true that our example supposes that the two countries are indebted to each other for exactly the same amount, a supposition that is very unlikely to hold true. But although it is not directly true, the same result may nevertheless be reached in a roundabout way. Let us grant, for instance, that the United States has purchased $2,000,000 worth of tea from China, but sold nothing in return. The above kind of compensation then seems impossible. Shall we not in this case be obliged to send 2,000,000 in coin to China? Perhaps not. Although we may have sold nothing to China, there are probably other countries that have sold goods there, and that are consequently creditors of the Chinese. All we need to do is to buy their claims on China. When we shall thus have become creditors of the Chinese, nothing will be easier than to balance our accounts with them. It is possible, for instance, that England has sold China $2,000,000 worth of cotton cloth. In this event we should only have to buy England's claim upon China for this sum ; or, to put it tech- nically, we might purchase, at London, paper payable on Shanghai or Hong Kong. But it may be objected that in any case we shall be obliged to pay $2,000,000, and that it matters little whether we pay it to England or to China. This, however, is an error. It matters very much whether we owe to China or to England, for in the latter case it is only requisite that we shall ourselves have a claim of $2,000,000 against England (perhaps for wheat we have sold her) in order to balance accounts for all three nations, per- haps without the payment of a single dollar in money. Without such ingenious devices as this, international trade 1 Brief but clear explanations of the legal nature and significance of bills of exchange may be found in White's "Business Law" and Burdick's " Essentials of Business Law.' 1 284 PRINCIPLES OF POLITICAL ECONOMY would be impossible. If the United States, for instance, were obliged each year to pay in cash for the 1900,000,000 worth of goods which we import, whence could we obtain this enor- mous amount of money? There is not enough metallic money in the whole country to enable us to pay in cash for our imports during twenty months. In reality, the amount of money that is sent from one country to another is never more than a small fraction, 10 per cent at the most of the value of merchandise exchanged. In the transaction of business between individuals we are by no means so far advanced. Yet exchanges between indi- viduals could be effected by means of the same system as that used between nations, namely, selling on short credits, creat- ing bills of exchange, and passing them from person to person until they are counterbalanced by each other. Suppose, for instance, that I am a lawyer, and that one of my clients, who is a wine-merchant, owes me money. Instead of paying me, he gives me his note. When I want to pay my book-dealer, I can give him this note in payment. If it should happen that my book-dealer gets his wine from the same wine-mer- chant, it is a very simple matter for him to use this note in payment. 1 1 Here is a fuller illustration : In the same town let there be three persons, whom we will call A, B, and C. Let us suppose that A is a creditor of B's, B a creditor to the same amount of C's, and C in his turn a creditor of A's. This is shown by the accom- panying diagram. Is it not clear that, instead of having the sum of money owed by the three debtors respectively to their three creditors pass through a complete circuit, it would be far simpler to settle the whole transaction without paying a cent in cash ? We may be told that it is highly improbable that C should be a creditor of A's, and should, as it were, be purposely placed where he is, in order to close the circle. No doubt it is improbable. But if C is not a creditor of A's, he will stand in that relation to D, E, F, G, or H, etc., until we finally come to a man who in his turn is a creditor of A's, and then the problem is solved. The more persons there are in the operation, the better chance there will be of closing the circle. THE SYSTEM OF BOOK CREDITS 285 But we can conceive another method, infinitely more sim- ple in theory and easier to understand. Suppose that all our citizens have opened an account at the same bank, and that it is the business of the bank to register everybody's sales by giving him credit for the respective amounts, and everybody's purchases by marking them to his debit. Accounts then might be balanced by means of book credits and book debits. Such a system as this would dispense entirely with money. Every time I made a purchase, instead of paying the store- keeper I should authorize the bank to place the necessary sum to my debit and to the storekeeper's credit. The latter, in turn, would do likewise whenever he had occasion to make any purchases. If, instead of buying goods, I want to make an invest- ment, the process would be just the same: the bank would enter to my debit the sum representing the value of the stock, and an equal value to the credit of the company which issued it, or the former holder who transferred it to me. At the end of the year the bank would send a statement to each person, indicating his account for the year, and dis- closing a balance in favor either of the banker or the client. If the latter is the case, the surplus is credited to the client ; if the former, it is debited. It is evident that, theo- retically, under such a system as this all business transac- tions could be settled by means of book credits. 1 1 The term book credit is usually applied not to the accounts kept by bank- ing establishments, but to accounts kept by dealers themselves. Our use of the term is an extension of its application. "If two firms have frequent transactions with each other, alternately buying and selling, it would be an absurd waste of money to settle each debt immediately it arose, when, in a few days, a corresponding debt might arise in the opposite direction. Accord- ingly, it is the common practice for firms having reciprocal transactions to debit and credit each other in their books, with the debt arising out of each transaction, and only to make a cash payment when the balance happens to become inconveniently great." (Jevons, "Money," page 251.) The term book credit is generally confined to this sort of operation. 286 PRINCIPLES OF POLITICAL ECONOMY VI. How Improvements in Exchange tend to bring us Back to Barter The processes just described call our attention to a curious tendency in modern economic life. Clearly, the present ten- dency, as Stanley Jevons remarked, is to do away with the instrument of exchange and bring us back to the direct exchange of commodity for commodity, i.e. to barter. There is, indeed, in the ingenious and complicated processes which are the latest result of economic evolution, a curious resemblance to the primitive methods of uncivilized societies. This is not the only respect in which the historical develop- ment of nations displays the strange phenomenon that human thought, having reached the end of a certain line of progress, returns, as it were, to its starting-point, and thus describes one of those great circles which so vividly impressed the imagination of Vico. Progress moves in a circle, or it at least appears to suggest a rising spiral. 1 Is not international trade now really carried on by barter? Each country pays for most of its imports by means of its exports; in other words, it exchanges its own products for foreign products. (See the following section, page 301, note 1.) 1 An analogous phenomenon attracted our attention when discussing the r61e of merchants (page 207). We observed that social evolution gave rise first to a class of merchants whose function it was to facilitate relations between consumers and producers ; then we remarked that the same evolu- tion tended to-day to eliminate this class of merchants and to bring us back, by means of simple and more effective methods, to direct contact between consumer and producer. Again, cooperative association was one of the first forms of production; yet many regard it as the industrial form of the future. The other social sciences offer quite as striking examples of the same prin- ciple: e.g. direct government by the people in antique cities reappears in the guise of the referendum in our modern constitutions ; obligatory military service for all citizens is bringing European nations back to the state of things which preceded the institution of permanent mercenary armies. Yet the contrary thesis is upheld by Massart, de Moor, and Vandervelde in their book on U L' Evolution regressive." CHECKS 287 The introduction of such an arrangement as that outlined above, by which all citizens have accounts at the same bank, would be tantamount to a system of barter, since under it everybody would be paying for the products or services of others with his own products or services. It is virtually a kind of barter that makes the check system and the great institution of the clearing house possible. Their nature and working is comparatively simple. There was a time when merchants kept their money in their own strong-boxes and paid it out as occasion happened to require. But in the course of time, goldsmiths obtained the privilege of keeping this money in their vaults, subject to the demands of the owner ; and instead of paying money from their own safes whenever they made purchases, mer- chants would simply give their creditors an order on the goldsmith, calling upon the latter to pay the requisite amount to the bearer of the order. These orders or checks, the im- portance of which has steadily increased with the develop- ment of trade, now serve very extensively as a substitute for money. A check may be defined as an order on a bank to pay some one a specified sum of money. It can be drawn only against a deposit of money in the bank, or against a credit previously agreed to by the banker. By means of the check the depositor transfers a part of his deposit or his credit to the person to whom the check is payable. Suppose that A purchases fifty dollars' worth of goods from B, and pays with a check for that sum ; B, in turn, buys fifty dollars' worth of goods from C, and uses a check in payment ; C buys fifty dollars' worth of goods from D and pays in the same manner as A and B. If all these checks are drawn on the same bank, the matter is perfectly simple. Each pierson in possession of a check will deposit it at the bank, and although total business to the amount of $ 150 has been transacted, it will only be necessary for fifty dollars ultimately to change owners. D will be fifty dollars richer than before, whereas A will be fifty dollars poorer. 288 PRINCIPLES OF POLITICAL ECONOMY B and C may be regarded as having merely exchanged goods for goods, as under a system of barter. Now suppose that each of these persons has an account at a different bank. The recipient of the check in each case need not hurry off to the bank upon which it is drawn; he simply deposits it at his own bank, a.nd is credited for the amount of the check. In the course of a day's busi- ness each bank in this manner receives a great variety of checks drawn upon all the banks of the neighborhood, and, sometimes, checks that are drawn upon distant banks. Then the representatives of the various banks meet at the clearing house and balance their claims against each other. It will be found, in the example mentioned above, that B's bank has a claim of fifty dollars against A's bank, that C's bank has a claim of fifty dollars against B's bank, and that D's bank has a claim of fifty dollars against C's bank ; but all that is necessary is for A's bank to pay fifty dollars to D's bank. In reality the matter is likely to be even simpler than this, for each bank has a multitude of claims against the other banks, and when all these claims are compared little money need be paid to balance them. If a bank sends to the clearing house checks to the amount of $20,000 and finds there checks drawn against itself to the amount of $22,000, the bank will be indebted to the clearing house for $2000, which balance it will have to pay in money. If, on the other hand, the checks drawn upon this bank had amounted to $18,000, the bank would have received the balance of $2000 from the clearing house. In this manner different banks very conveniently settle all their mutual obligations by merely paying the balances against them, or receiving balances due them, at the clearing house. Banks situated in different places settle their accounts with almost equal ease. Banks in country districts have agents, or corre- sponding banks, in the nearest clearing-house city, so that every clearing house performs this work of settling accounts for banks of the adjacent territory. Then the New York CLEARING HOUSES 289 clearing house acts as a central clearing bouse for the banks of the entire country, since every important city bank corre- sponds with some New York bank that is a member of the clearing house. In 1902 the total transactions of the clear- ing houses of the country amounted to $116,021,618,003. The New York clearing house effected $78,130,693,507.97 of these transactions, the daily average being $265,793,423.21, while the amount of money actually used to effect this vol- ume of business was but four and one-half per cent of that sum. Thus the clearing house really reverts to a sort of barter. These huge bundles of checks, bills of exchange and negoti- able paper, which day by day are exchanged for each other, simply represent innumerable boxes, bales, barrels, and car- loads of all kinds of merchandise which have been exchanged for each other. For those who look behind the mere appear- ance of things, the clearing house is a colossal bazaar, like those which exist among African tribes or which existed in the cities of antiquity. The only difference is that here not the goods themselves are exchanged, but the certificates that represent them. The precious metals, to be sure, although they are losing their position as instruments of exchange, still retain their function as the measures of value, for it is plain that the value of all these papers, checks, bank-notes, etc., is ulti- mately based on metallic money. Only, this basis is from day to day becoming more narrow, when compared to the enormous edifice of credit that has been built upon it. The present system has been likened to a pyramid, resting upon its apex and constantly growing larger. It has also been, compared to a top turning with enormous rapidity on a metallic point, so that its equilibrium is fearfully unstable ; as soon as the top ceases to turn, it falls. 1 1 Mr. Vanderlip, former Assistant Secretary of the United States Treasury, has recently given what he called a conservative note of warning with refer- ence to the inflation of credit liabilities in this country. These liabilities, he 290 PRINCIPLES OF POLITICAL ECONOMY Nor can we be certain that, even as a measure of value, the precious metals will not some day lose their privileged rank. We can readily conceive a social state in which the unit of value serving as the basis for sales and purchases will be purely nominal, and will correspond to no particular piece of money in circulation. Money of account of this kind has fre- quently been employed: the mark banco of the mediaeval bankers, the livre tournois under the "ancien regime" in France, and the modern English guinea are not represented by any coin. Only when money has become a pure abstraction shall we fully attain the social state described in the preceding section of this book, namely, the system under which all receipts and payments are effected by a thorough system of book- keeping embracing the exchanges of all members of the community. declared, have in the last five years increased $4,000,000,000. There has been an increase of $1,300,000,000 in the deposits of the national banks alone during the last two years, while the basis of gold and legal tender has slightly decreased. This increase of bank liabilities and bank credits has been caused in a great measure by the conversion of the ownership of industrial establish- ments into shares and bonds, that is, into bank collateral. CHAPTER IV INTERNATIONAL TRADE I. The Balance of Trade THE term balance of trade designates the relation between imports and exports. Statistics show that the imports and exports of a country are rarely equal. The balance of trade is either in favor of exports or of imports ; that is to say, a nation exports more than it imports, or imports more than it exports. The latter case is the more frequent. The United States, however, since 1893 has always imported less than it exported ; we have, in other words, had what is called a "favorable balance of trade." During the last five fiscal years of our foreign commerce the value of merchandise exported and imported was, in round figures, as follows : TEAK 1898 1899 1900 1901 1902 Totals EXPORTS IMPORTS $1,231,000,000 1616,000,000 1,227,000,000 697,000,000 1,394,000,000 850,000,000 1,488,000,000 823,000,000 1,382,000,000 903,000,000 $6,722,000,000 $3,889,000,000 These figures indicate that during a period of only five years the United States has sold to foreign countries 12,833,000,000 worth of goods more than it has bought from them ; this is equivalent to an average annual excess of ex- ports over imports amounting to more than $566,000,000. Must we therefore conclude that foreign nations are every year obliged to pay us, on an average, more than half a bill- ion dollars in money? This is scarcely probable, for the amount of money circulating in this country has not in- creased perceptibly. A good test of the validity of the as- sumption that foreign nations pay us this enormous amount 291 EXPORTS IMPORTS $71,000,000 $151,000,000 84,000,000 120,000,000 105,000,000 80,000,000 117,000,000 102,000,000 98,000,000 80,000,000 292 PRINCIPLES OF POLITICAL ECONOMY annually is furnished by the statistics of gold and silver imports and exports. (We have already learned that in international trade paper money is of no avail, and that international engagements must be met in gold and silver.) The official statistics for gold and silver exports and imports during the last five fiscal years show, in round numbers, the following totals : YEAR 1898 .... 1899 1900 .... 1901 .... 1902 .... Totals .... $75,000,000 $533,000,000 The excess of imports over exports during this period was 158,000,000, or an annual average of little more than $11,000,000. Thus it would appear that we are annually selling an excess of $566,000,000 worth of merchandise to foreign nations, and receiving $11,000,000 in gold and silver in payment for this excess. Such a conclusion is manifestly absurd. Evidently, drawing conclusions with regard to the prosperity of a nation after a mere glance at its "balance ' of trade " is not quite so simple a matter as is sometimes supposed. Let us now consider France as an example of the opposite state of affairs. Here are the figures for her special com- merce 1 during the five years from 1897 to 1901, in round millions : YEAR 1897 .... 1898 .... 1899 .... 1900 .... 1901 EXPORTS IMPORTS $720,000,000 $791,000,000 702,000,000 895,000,000 831,000,000 904,000,000 822,000,000 940,000,000 833,000,000 943,000,000 Totals .... $3,908,000,000 $4,473,000,000 1 General commerce means all imports and exports without exception, while special commerce includes only those commodities that have been pro- THE BALANCE OF TRADE 293 Thus in a period of only five years France purchased abroad 565,000,000 worth of goods more than she sold, which amounts to an annual excess of imports over exports of $113,000,000. Must we conclude from these figures that France is annually obliged to pay this amount of money to foreign countries ? The most superficial observation demon- strates that the amount of money in circulation there has not diminished. It has even increased. The statistics re- garding the exports and imports of gold and silver for the same period as that considered above are as follows : YEAR 1897 .' . 1898 .... 1899 .... 1900 .... 1901 EXPORTS IMPORTS $65,000,000 $94,000,000 100,000,000 78,000,000 76,000,000 101,000,000 67,000,000 121,000,000 57,000,000 105,000,000 Totals .... $365,000,000 $499,000,000 The supply of gold and silver money in France, therefore, has increased during this period by 1134,000,000, i.e. nearly $27,000,000 annually. If we consider the case of England, the statistics are still more surprising. 1 The annual excess of imports over ex- ports averages $1,200,000,000. In other words, one year of foreign commerce at this rate would suffice to drain the duced within the country, or will be consumed there ; thus special commerce does not include goods that simply pass through the country or that remain there temporarily. Special commerce is necessarily less extensive than gen- eral commerce. In France the difference between the two is more than $400,000,000. In some countries (such as Switzerland) it is proportionally even greater than this because of their geographical position. The extent of special commerce indicates the forwarding trade in which a nation engages. The Netherlands and Belgium each derive large profits from the forwarding trade. 1 For the year 1901 the imports of the United Kingdom amounted to $2,540,265,299, whereas the exports were valued at $1,362,728,893, a dif- ference between the two of $1,177,536,406. Doubtless the official figures are not exactly correct ; the money that travellers carry with them, for instance, is not included. But as the errors 294 PRINCIPLES OF POLITICAL ECONOMY country twice of all its metallic money ; for the United Kingdom has but 1600,000,000 in coin of all kinds. Yet this money is by no means drained from the country by foreign trade. On the contrary, here, as in France, the im- ports of precious metals surpass the exports. What, then, is the key to the enigma ? Simply this : In order to ascertain whether the foreign trade of a country is in equilibrium, we must consider not only the balance of its imports and its exports, as the public is accustomed to doing, but the balance of its credits and its debits. Now the balance of credits and debits (or the balance of accounts) is not the same as the balance of trade. To be sure, expor- tation is one way, and the chief way, of making foreign countries our debtors. Yet there are other ways of doing this. Similarly, though imports constitute our principal debt to foreign nations they are not the sole source of our indebtedness to them. What, then, are these international claims or debts, distinct and different from exports and im- ports, which have aptly been termed invisible exports and imports ? They are numerous, but three of them stand out prominently in importance : (1) The cost of transportation of exported goods, i.e. freight and insurance. If the exporting country has charge of the transportation of its goods, it has a claim on other countries that certainly will not be counted among its ex- ports, inasmuch as the claim arises only after commodities have left the home port and are on the way to their destina- tion. On this account, England has large claims against other nations, estimated at more than $440,000,000 per an- num ; for England not only carries all her own exports, but also transports a large share of the goods of other countries ; or omissions are probably about the same on the side of imports as on that of exports, they do not much modify the general result. Additional proof that the amount of money in France has not decreased may be found in the amount of cash reserves held by the banks. The Bank of France, for example, which thirty years ago had about $200,000,000 in cash on hand, now has three times that amount. THE BALANCE OF ACCOUNTS 295 and she certainly does not perform this service gratuitously. 1 The United States, on the other hand, pays foreign nations for transportation and insurance, more than $200,000,000 annually. France pays annually to foreign nations about 70,000,000 for the same service, since she transports in her own vessels only half her exports and one-third of her imports. 2 (2) The interest on capital invested abroad. Rich coun- tries, and, as a rule, old countries, invest abroad a large part of their savings, and for this reason receive each year large amounts of money or of commodities from foreign nations. These receipts usually take the form of stock coupons, shares, debentures, farm rents, and profits in industrial and commer- cial enterprises. The tribute that England in this manner 1 The increased value of merchandise due to the cost of transportation explains the following fact, which at first sight appears inexplicable : When we add the imports and exports of the whole world, and compare the total imports with the total exports, we find that imports are much greater than exports. In the year 1901, for example, the value of the world's imports was about $10,300,000,000, while the total value of exports during the same period was about $8,800,000,000. Now if, instead of comparing the values of imports and exports, we compare the quantities, it is evident that the two totals must be equal, inasmuch as there cannot be (for the world as a whole) more goods arriving than have been sent away, unless, forsooth, their quan- tity has increased while on the way to their destination ! As a matter of fact some goods are lost under way because of shipwrecks, waste, etc., and it is therefore very probable that the amount of goods arriving is less than that which was sent. But as the above estimates consider values instead of quantities, and as values increase under way precisely because of the cost of transportation, it is not surprising that the goods imported (i.e. which reach their destination) possess a greater value than those exported (i.e. which are taken from their starting-point). 2 The report of the United States Commissioner of Navigation gives the following information regarding the tonnage of the merchant navies of the principal maritime nations in 1902 : Great Britain, 15,546,897 ; United States, 5,797,902 ; Germany, 3,138,568 ; Norway, 1,632,757 ; France, 1,519,922 ; Italy, 1,159,082; Russia, 800,334; Spain, 784,573. It must be pointed out, however, that of the total tonnage for the United States, less than 8 per cent was engaged in foreign trade. Before the Civil War, in the days of wooden ships propelled by sails, American vessels carried two-thirds of our imports and exports that travelled by sea. 296 PRINCIPLES OF POLITICAL ECONOMY receives each year from foreign countries and from her own colonies is estimated at $400,000,000. India and the Austra- lian colonies, for instance, have negotiated in England almost the sum total of their loans. How numerous, moreover, are the enterprises throughout the world that are in the hands of English financiers or promoters ! Englishmen are said to have acquired land in the United States having a total area equal to that of Ireland. France, too, has numerous claims on foreign nations, chiefly in Europe ; they are estimated at more than 14,000,000,000, and represent an annual revenue of 1230,000,000. Probably 13,000,000,000 of foreign capital is invested in the United States, and this amount is increased in prosperous years. Thus the United States owes about $120,000,000 annually for interest on foreign capital. In this respect, Spain, Turkey, Egypt, India, and the South American republics appear as debtors. But it should be observed that whenever these countries issue a loan, and so long as this loan is not fully subscribed, they become for the time creditors of the countries which take up the loan and which therefore send them funds. (3) The expenses incurred by foreigners living in the country. As the money spent by these foreign visitors or residents generally is not the product of their labor within the country but is drawn from their estates or from capital invested at home, all countries which are resorted to by wealthy foreigners are constantly receiving large sums of money from abroad. When brought into the country in the pockets of visitors or sent them through the mails, this money does not figure in the statistics of imports. From this point of view France, Italy, and Switzerland are credit- ors of England, the United States, and Russia for consid- erable amounts. The latest French census, for example, indicates that there are in France 66,000 foreigners living mostly on independent incomes ; the number of those that stay but a short time is certainly much larger than this. Now suppose that each of these foreign residents spends THE BALANCE OF ACCOUNTS 297 12000 a year (certainly a low estimate for people who are there for amusement); this would mean an annual tribute of 1132,000,000 paid by those who are staying for longer periods. This sum comes from the respective home countries of these foreigners and pays, so to speak, the bill for their boarding expenses in France. It is estimated that Americans spend about $50,000,000 in foreign travel each year, and that tourists spend $40,000,000 annually in Switzerland. These are the principal items to be considered in this con- nection. 1 They are more than sufficient to restore the equilib- rium of international trade and solve the enigma referred to above. If, for example, in the case of France, we find her debit account to consist of $900,000,000 for goods imported, $72,000,000 for the transportation of goods carried under foreign flags, and $100,000,000 (let us say) for French citizens travelling abroad, or for French property held by foreigners, the sum total of debits would be about $1,070,- 000,000. If, on the other hand, we credit her with exports to the value of $800,000,000, plus $220,000,000 as interest on French capital invested abroad, and $132,000,000 spent by 1 There are other kinds of credits and debits besides those indicated ; for example : () Bankers' commissions, whenever bankers extend their business to foreign countries. Stock-exchange cities like London, Paris, and Berlin receive orders and transact business for all countries. As this is not done gratuitously, these countries become to some extent creditors of other countries. (5) The sale of ships. Purchased ships do not figure on the custom-house books either as imports or exports. England builds ships for many other countries and on this score too is a creditor for large amounts. In some years more than 1,000,000 tons of ships, mostly steam vessels, are launched from the great shipyards at Belfast and on the rivers Clyde, Wear, Tees, and Tyne. We must be careful, however, not to reckon the profits of exporters under this head, though many treatises on political economy do this. These prof- its are already included in the value of exports, and to count them again would be a mistake. The value of exports is determined by the customs officials according to the current prices of commodities, and this price of course covers the profits of manufacturers and dealers. 298 PRINCIPLES OF POLITICAL ECONOMY foreigners living in France, the sum total of credits is about 11,150,000,000. Thus France has a good .balance in her favor. A similar calculation would show a similar state of affairs in England, and, in fact, for most of the older European creditor nations which appear to have an " unfavor- able balance of trade." We must therefore conclude that the foreign trade of a country is in equilibrium not when exports and imports are equal in value (which never happens), but when its credits and its debits are equal. II. How the Balance of Accounts is Maintained "We must abandon the old and s^psurd idea, often expressed by well-known newspapers, that a country which imports more than it exports is rapidly approaching ruin. The problem, however, is merely somewhat altered by substi- tuting the more important "balance of accounts" for the "balance of trade." With this change the problem reads: Is there risk of ruin when a country is obliged, all things considered, to pay foreign nations more than it receives from them? We must certainly reply affirmatively to this question. If a nation buys more abroad than it sells, and has no other claims on foreign nations to restore the balance of accounts ; or if its rich citizens spend their incomes abroad (a practice called absenteeism*), such a nation will be compelled to ex- port its metallic money. To remedy the growing scarcity of metallic money it will probably resort to the issue of paper money. But as this paper money, although it will take the place of coin in interior commerce, cannot be employed to pay foreign nations, the country will be obliged to borrow abroad the sums that it must pay. Such a course as this must inevitably lead nations, as it does lead individuals, to bankruptcy. Indeed, it would not be difficult to find in South America, and even in COUNTERACTING TENDENCIES 299 Europe, many examples of this. Yet we must recognize certain counteracting forces which operate very effectively and which tend to obviate this evil. Persons who have payments to make abroad endeavor to settle them by some other means than the exportation of money, because sending money is inconvenient, and because the money sent is not generally legal tender in the country where the debt must be paid. Therefore debtors try to buy bills of exchange payable in these foreign countries, in order to obviate- the danger, inconvenience, and expense of trans- porting gold and silver. Bills of exchange, as we have seen, form the ordinary means. of paying international debts. But if a country owes more abroad than foreign nations owe her, it is clear that forAgn bills of exchange, i.e. claims on foreign debtors, will be relatively scarce. These bills will therefore be in great demand, and by virtue of the law of demand and supply they will sell at a higher price than their normal value. In other words, they will be at a premium. Now it is plain that this premium, bringing profit to all those dealers who have claims on foreign nations and who therefore have bills of exchange to sell (and this class consists evidently of all exporters), will stimulate the exportation of goods to foreign countries; inversely, the necessity to pay this pre- mium, and the consequently disadvantageous situation of all those who must make payments abroad (that is to say, all importers), will discourage imports. 1 The result will be an increase of exports and a decrease of imports, precisely the remedy best suited to the situation. Nor is this all. Let us admit that the inequality of debits and credits involves a continual drain of money from a coun- try. The flight and consequent scarcity of money causes a fall in prices ; and although a fall in prices has some disad- vantages, yet in this particular case it has the advantage of stimulating purchases by foreigners, since trade always seeks 1 For the understanding of this and the succeeding pages it would be well to read the section on the Rate of Exchange. 300 PRINCIPLES OF POLITICAL ECONOMY the markets in which one can buy cheapest. At the same time the amount of purchases made abroad by the debtor nation will of course decrease, because commodities can now be bought quite as cheaply at home. It is a well-known fact that goods are not taken away from dear markets to cheap markets, any more than water runs up hill. In short, the situation just described tends to encourage exportation and discourage importation securing the same beneficent result as that discussed in the preceding paragraph. If paper money has been issued to take the place of metal- lic money, the result is the same. Metallic money will then be at a premium ; the greater the amount of paper money, the higher the premium. The producers of a country find it profitable to sell abroad, because then they are paid in metallic money, which brings a premium, and thus involves additional profit. Hence this condition of affairs encourages increased exportation. Importation, on the other hand, is slackened, because foreign producers do not like to sell in a country having a depreciated paper money ; or if they do sell, they raise their prices, and this, again, restricts sales. To sum up, then: There is a sort of automatism in the balance of accounts that tends to restore the equilibrium whenever it is disturbed in much the same manner that regulators on steam engines tend always to maintain a uni- form speed. The current of trade cannot forever continue in one direction any more than the tide of the sea ; sooner or later it must change, and after metallic money has been taken out of a country there are natural forces which tend to bring it back again. Statistics, as well as simple observation, show that money plays only a small part usually less than 10 per cent of the total amount in international trade. (See page 284.) We must therefore admit that the balance of accounts regulates itself, and that credits and debits tend of their own accord to reach an equilibrium. This, in fact, is ADVANTAGES OF FOREIGN TRADE 301 what the school of Bastiat would call an "economic harmony." 1 Experience, moreover, demonstrates that whenever the ratification of a commercial treaty or any other circum- stance gives rise to a great increase of imports, this is invariably accompanied by a corresponding increase of exports. Whenever, on the other hand, a protective tariff causes a decrease in the volume of a nation's imports, it is a natural consequence that its exports will likewise diminish. III. The Advantages of International Trade We have seen that exchange among individuals is an indispensable complement of the division of labor, and that both together result in a prodigious increase of productivity. On a larger scale, the same thing is true of nations as well as individuals. Therefore, prima facie, international exchange offers economic benefits similar to those resulting from per- sonal and domestic exchange. In private and domestic trade, men exchange goods and services because of a relative superiority at different points. In international trade, this relative superiority may be due either to better natural facilities and resources or to the peculiar aptitudes of the population of a nation. But by means of foreign trade the advantages of this superiority are enjoyed to some extent by all nations that exchange with one another. It is strange that the advantages of international trade have been considered from two precisely opposite points of 1 The same idea as that explained above may be expressed more strikingly by saying that international trade, except for the superiority of methods employed, always tends to take the form of barter. . Indeed, we have shown that every debt to a foreign country gives rise to the exportation of goods to that country, and, vice versa, every claim against a foreign country leads to the importation of goods from that country. Of course, merchandise is not always exchanged for merchandise, inasmuch as services are often given in exchange for merchandise. Switzerland, in exchange for the money of tourists, gives the privilege of seeing her mountains and water-falls. 302 PRINCIPLES OF POLITICAL ECONOMY view. The classical economists consider only imports. They regard importation as the object and the raison d'etre of international trade. Exportation is but a means the only means by which a nation can procure the goods it imports. Exports, in other words, are the price paid for imports. The value of imports above and beyond that of exports exactly measures the advantage resulting from international trade. To acquire, for instance, an amount of imported merchandise worth $800,000,000 by exporting goods worth only $600,000,000, is an operation that brings $200,000,000 profit to a country. The less we give in exchange for what we want, so reason the classical economists, the more profitable is the transaction. According to the protectionists, and according to current public opinion, the advantages of international trade must be considered from the view-point of exports. Exports, it is held, constitute the real profit of international trade. Imports are thus regarded only as a necessary evil to which a nation must submit whenever it cannot produce all that it needs ; but a nation should strive to reduce its imports to the lowest possible amount. Exportation means increased wealth, the receipt of money in payment for goods sold abroad. Importation, on the other hand, means expense, the payment of money to foreign nations. Hence the ad- vantage of international commerce is measured by the sur- plus of exports over imports, of receipts over expenditures. As the United States in 1902 exported $480,000,000 worth more of goods than was imported, this sum indicates the nation's gain in international trade for that year. Both of these opposite points of view are false. Both are based on the mistaken assumption that a nation may be regarded in the same light as an individual. A great coun- try cannot be likened (as the classical economists are fond of doing) to a person carrying on trade solely as a means of procuring what he needs. A nation does not export goods merely in order to be able to import them, but be- ADVANTAGES OF IMPORTATION 303 cause exportation furnishes advantages that are peculiar to itself; exportation is an end, an object of itself, not simply the means to an end. It is true that by virtue of the principle stated in the previous section, exportation in- directly gives rise to a corresponding importation, but this result is due to economic forces quite independent of the will of exporters and importers. Inversely, the second point of view, which likens a great nation to a store-keeper who buys only in order to sell again, and whose profit consists in the excess of the selling-price over the purchase-price, is no less erroneous. What a singular idea it' is to measure the benefits of exchange and commerce among nations just as one would measure the profits of merchants ! This conception overlooks the fact that the profits which merchants draw from their transac- tions are a burden for both producers and consumers. Mer- chants certainly are entitled to receive some tribute for the social service which they render, but this tribute must, never- theless, be deducted from the advantages of exchange. If merchants or traders made no profits at all, exchange would be none the less beneficial ; nay, it would be even more beneficial. As Cairnes admirably has said, to measure the advantages of trade by the profits of traders would be just as reasonable as to measure the advantages of education by the salaries paid to teachers. In fact, the advantages of international trade are not susceptible of arithmetical calculation ; they cannot be measured in money. They are too complex for such simple methods, and are found on both sides, that of imports as well as that of exports. The following are the advantages of importation : (1) Additional well-being, whenever we have to do with imported goods which a country, because of its soil or its climate, could not have produced within its own borders. There are innumerable examples of this. Without inter- 304 PRINCIPLES OF POLITICAL ECONOMY national commerce, Holland would have no building stone, Switzerland would have no coal, most European countries would have no tropical fruit, England would have little lumber and no wine, Norway would have no salt, France would have no copper, and the United States would have no tea or coffee, the list would be long if wo attempted to make it at all complete. 1 (2) Economy of labor. This is true whenever wealth is imported that could be produced at home only at a higher cost than abroad. Erance, for example, could make her own machinery, and do it very well; yet it is generally more profitable for her to import it from England or the United States, because these countries are not only better provided by nature with iron and coal, but also possess better facili- ties for manufacturing goods of this sort. 2 This advantage of international trade ordinarily presup- poses the productive inferiority of the importing nation, as regards the product imported. Yet this is not an indispen- sable condition or one without which such importation would be disadvantageous. It may be to a nation's gain to obtain certain goods by importation even though it be capable of producing them within its own borders under more favorable conditions than the country which sends them. Suppose, for 1 Many European countries have too small a territory to provide food for their population. In order to feed her rapidly increasing population England is now obliged to import more than $1,000,000,000 worth of food stuffs, i.e. more than half of what she consumes in cereals, meats, drinks, etc. This is, moreover, a fact that is increasing in importance in all populous countries devoted largely to manufacturing. With the growth of population, European countries will be obliged to send abroad for an increasingly large part of their food-supply. 2 This advantage is the only one recognized by the classical school as resulting from international trade. Bastiat formulated it in this manner : "obtaining an equal satisfaction with less effort." John Stuart Mill, in a formula slightly different but in substance the same, put it in this way : "obtaining a more useful employment of the world's productive forces." Such is indeed the advantage of exchange between individuals, as we have already explained (page 199) ; it is like an extension of the division of labor. But this point of view is insufficient, and even incorrect, for international FOREIGN TRADE ECONOMIZES LABOR 305 instance, that Cuba could produce wheat under more favora- ble conditions, i.e. with less labor, than the United States : If, for example, a bushel of wheat costs one day's labor in Cuba and two days' labor in this country, would it be better for Cuba to produce her own -wheat rather than to import it from this country? Not necessarily. Perhaps Cuba can procure sugar even more advantageously than wheat, requir- ing only half a day's labor to produce an amount of sugar that can be exchanged for a bushel of wheat from the United States. In this event it will be more profitable for Cuba to raise sugar and to import wheat, inasmuch as she can thus purchase with half a day's labor what otherwise would have cost her a whole day's labor. It may thus happen that a country in all points superior to its neighbors will nevertheless find it profitable to import goods from them. For even in this case a country will gain by devoting itself to the production of those goods in which its superiority is greatest, and selling them for goods in the production of which its superiority, although real, is not so great. 1 In this case exportation would be only a means to an end. exchange. Each nation, as we shall see, far from tending to a more detailed division of the world's labor, seeks, and should seek, to develop its economic autonomy. Again, the cost of production cannot serve as a standard in international exchange, any more than it can so serve, ordinarily, in exchange between in- dividuals. Although competition is supposed to keep value at the level of the cost of production, it does so only on the assumption that labor and capital can immediately be transferred to wherever they are most in demand. Now this supposition, which is very imperfectly realized within the borders of a single nation, becomes absurd when applied to international commerce. It therefore still remains to be discovered how values are determined in inter- national trade. This difficult problem is discussed at some length by Ricardo, John Stuart Mill, Cairnes (" Some leading Principles of Political Economy ") and Cournot (" Principes mathematiques de la the'orie des richesses," Chapter 12). 1 The same thing is true of individuals. A physician may also be a very expert gardener ; yet it may be best for him to entrust his garden to a gardener less expert than himself in order to devote all his time to his patients. 306 PRINCIPLES OF POLITICAL ECONOMY Another advantage of international commerce closely allied with those indicated above, consists in the circumstance that whenever an accident of any sort unexpectedly reduces the productivity of one country, it may depend on others to remedy this accident, which, in the absence of international commerce, might have the most disastrous consequences. Thus interna- tional commerce provides a kind of assurance against famines, against the effects of the failure of crops, and against a mul- titude of economic misfortunes the effects of which are either attenuated or entirely prevented by trade between nations. This advantage of international trade cannot be measured in dollars and cents, and is sometimes entirely overlooked. Under the head of economy in labor, it should be noted that although a nation could perhaps produce a sufficient quantity of many commodities which it at present imports, the quantity produced at home could be increased only at a very great cost of labor and capital and a consequent in- crease in prices. The United States, for example, imports a large quantity of lead. It is probable that if it were neces- sary we could produce almost enough lead for the home market. If imports were cut off and we were required to do this, it would mean the exploitation of mines which now do not give sufficient returns to pay for the labor and capital necessary to work them. Cut off our foreign trade in lead, and it would be necessary to work these poorer mines, despite the greater cost ; and as this increased cost of mining must be borne by the consumers of lead, the price would immediately rise to a level sufficient to make lead-mining remunerative in. the case of the poorest mine that is worked, but whose output is necessary to satisfy the demand. The cessation of foreign trade would in this manner involve a great increase in the price of many commodities which are now in part imported from other nations. As for exportation, the following are its advantages: (1) It utilizes natural resources and productive forces which, if there were no outlet for them in foreign countries, ADVANTAGES OF EXPORTATION 307 would be superabundant and therefore partially useless. Were it not for exportation, Peru would not know what to do with her guano and her nitrates, nor Australia with her wool, nor Spain with her wines, nor California with her gold, nor Pennsylvania with her iron and steel, nor Minnesota with her flour, nor the southern states with their cotton. (2) It develops a nation's industry. We have already explained (page 176) that the extent of the division of labor and the progress of large-scale production are proportionate to the size of the market. The division of labor cannot be at all detailed when the market is small, whereas with every extension of the market a more elaborate division of labor and the introduction of more expensive but in the long run more productive processes and machinery becomes possible. International trade, by creating world- wide markets for goods, tends to develop the division of labor ; it leads to a fuller utilization of the possibilities of the soil and the popu- lation, to the completer development of acquired aptitudes, and hence to a great increase of the productive energy of humanity. England could never have become the great manufacturing nation that she now is, did she not export goods to all parts of the world. The possession of an ex- tensive market made it possible for her to make immediate and profitable use of the latest inventions and improvements in manufacturing. 1 IV. Why International Trade necessarily is Detrimental to Some Persons It must not be inferred from the above discussion that international trade is always beneficial to everybody. That would be to misunderstand its effects. In fact, it follows 1 Professor Leroy-Beaulieu maintains that international trade, especially international free trade, intensifies competition, makes coalitions and trusts among producers difficult, propagates the best industrial and agricultural methods, and stimulates all branches of human activity. (" Economic poli- tique," Vol. IV, pages 80, etc.) 308 PRINCIPLES OF POLITICAL ECONOMY from our explanation that one effect of international trade is to economize a certain amount of labor. Now as our modern societies are based on the division of labor, it is evident that labor cannot be economized without throwing a certain class of laborers out of employment. If the United States should increase its imports of cotton manufactures from Great Britain by $20,000,000 annually," this would be advantageous to American consumers and to the country in general if it made cotton goods obtainable at a smaller cost and for less labor than would otherwise be the case. But an increase in the importation of these goods means loss of employment for American workmen engaged in this branch of production. It is true enough (as we explained in a previous section of this book) that an increase of imports gives rise to a counter-current of exports, and that these English cotton manufactures would doubt- less be paid for with American cereals or American cattle, which would have to be raised for that purpose. But we must not forget that cotton goods imported from England represent a lower value than the American cottons which they supplant in the market ; else they would not success- fully compete with American goods. Perhaps our home manufacturers could not produce these $20,000,000 worth of cotton goods for less than $30,000,000. To balance this amount of English imports, however, there will be a counter- current of American exports amounting to only $20,000,000. In other words, the final result would be a diminution of home production to the extent of $10,000,000 and a corresponding reduction in the amount of American labor required. If there were no other effect but this displacement of labor, which is perfectly obvious, this in itself would be a grave injury to some classes of our population. The owners of our cotton mills, moreover, unable to change their build- ings into wheat farms or pasture lands, evidently would lose the capital that is invested in these factories. As the EFFECTS OF FOREIGN TRADE 309 laborers in their employ are not in a position to take up farming or cattle-raising for English consumers, it is by no means certain that they will find other employment. Thus, the consequence is likely to be ruin for the employers and idleness and poverty for the employees. There are, however, a few attenuating circumstances not to be overlooked. It may be said that international trade, like machinery, may ultimately cause an increase in the amount of work, which it began by diminishing. It may do this in two ways: (1) The fall in prices resulting from free trade will cause an increase in consumption and, consequently, an increase in production. A decline in the price of cotton goods will lead to increased purchases either of cotton goods or of other commodities. What the people save in the decreased price of cotton goods they will perhaps use to purchase goods of home production. And even if the savings are used to buy foreign goods, and not American products, it will neverthe- less be necessary to pay for this larger bulk of imports by exporting larger quantities of American goods. In the case discussed above, the exports of American wheat and cattle may be increased not merely by $20,000,000, but by $80,000,000. (2) The fall in prices diminishes the expenditures of those that consume the commodity in question. The consumers are therefore enabled to devote the amounts saved to produc- tive enterprises, old or new. Increased productive capital means the employment of additional labor. In this case, too, the work that has been taken from the laborers is restored to them by the growth of other branches of pro- duction ; and thus it is probable that the national labor will not be reduced at all. Not only importation, but also exportation, may have undesirable effects. Countries, for example, which regu- larly export cereals (like the United States and Russia) may ultimately impoverish their soil and rob it of all the 810 PRINCIPLES OF POLITICAL ECONOMY fertile properties that it possesses. These properties are removed in part with each crop that is taken from the land. 1 It may almost be said that such countries are gradu- ally exporting their soil itself. Peru, which has already exported all of her guano, is now rapidly exhausting her sup- ply of nitrates, consuming in the most improvident fashion the stores of wealth that nature has given her. V. The History of Protectionism During antiquity and the Middle Ages international trade was not so widespread as it is to-day. It was in the control of a few small countries, Tyre and Carthage in antiquity, the Italian and Hanseatic cities in the Middle Ages, and Holland at the beginning of the modern epoch. These, by reason of their maritime situation, acquired a mo- nopoly of commerce and transportation. The other peoples merely played a passive part ; they received foreign traders in very much the same way that tribes of African negroes now receive European or Arabian merchants, i.e. with some degree of friendliness because they are thus enabled to pro- cure commodities which would otherwise be unobtainable. Sometimes non-commercial peoples even sought to attract foreign merchants by granting them certain privileges. They always, however, required foreign merchants to pay special taxes or fees in exchange for the protection or privi- leges afforded ; these taxes were a kind of obligatory profit- sharing. Precisely the same thing is done nowadays by African chieftains who tax the caravans which pass through 1 Henry C. Carey has emphasized these considerations and made them part of his argument for protection. All the articles derived from the land are really separated parts of it, which must be restored on pain of its exhaus- tion. Hence, declares Carey, the producer and the consumer must be close to each other ; the products must not be exported to a foreign country in exchange for its manufactures, and thus go to enrich, as manure, a for- eign soil. In immediate exchange value the landowner may gain by such exportation, but the productive powers of the land will suffer. THE RISE OF MERCANTILISM 311 their dominions. Thus customs duties if we may apply this name to these early forms of compulsory tribute were originally mere fiscal taxes and in no wise protective. What, indeed, could they have protected? With the development of great nations during the six- teenth and seventeenth centuries, however, the problem of customs duties acquired a different character for the follow- ing three reasons : (1) Because the great nations of Europe endeavored to form national markets, closed to the outside world, produc- ing whatever they required and sufficing unto themselves. (2) Because the great importance attributed to the precious metals, gold and silver, after the discovery of America, led to the idea that a nation should buy as little as possible abroad in order not to be obliged to export metallic money. (3) Because the opening of the world's great maritime routes led to an unprecedented development of international commerce. Competition between nations, which could not exist when commerce was limited chiefly to the transporta- tion of articles of luxury (such as Tyrian purple, Venetian brocades, Toledo blades, etc.) became a factor of importance when commerce was sufficiently developed to transport articles of more general use (such as Flemish cloths). We have already referred, in our sketch of the history of economic doctrines, to mercantilism (page 7), which arose during the sixteenth century. The mercantilists exagger- ated the importance of money and of foreign trade as a means of procuring money. This undue emphasis, however, was not so absurd as some authors have maintained, for at a time when commerce had barely begun, when the great nations of Europe were being formed into powerful states, when taxation in money had just taken the place of taxation in products or in labor, a great increase in the amount of money in a country was indispensable. Soon afterward, another matter began to receive the attention of statesmen, 312 PRINCIPLES OF POLITICAL ECONOMY namely, the desire to place the nation in a position of eco- nomic self-sufficiency. This ambition may properly be regarded as the original germ of the protectionist idea. It must be observed, moreover, that in pursuing this aim men were simply carrying out the natural order of economic evolution, which has constantly been widening the economic group : first it was the family that formed an autonomous economic unit, then the village or town community, then the national market. To-morrow, perhaps, the economic unit will consist of the whole Western world. (See the section on the History of Exchange, page 184.) It was therefore natural that statesmen should conceive the idea of employing customs duties as a means of excluding foreign competition and developing the economic possibili- ties of a nation. Customs duties lost their fiscal character and became protective. 1 In England, Cromwell, and in France, Colbert, were the first statesmen to devise a genuine protective system. Colbert himself formulated the principal objects of the protective system under three heads : (1) To prevent the importation of manufactured goods by means of protective duties. (2) On the other hand, to favor the importation of raw 1 Customs duties may of course still have a fiscal character, making them what in this country is known as "tariff for revenue." Thus England, although asserting that she has absolute free trade, puts a duty on certain products (tea, coffee, sugar, tobacco, and wine), and in this way collects a revenue amounting to about $100,000,000. Yet these duties have a purely fiscal character, because England does not wish to produce, or could not pro- duce, any of these commodities on her own soil. Whenever a government is about to introduce customs duties, it is very important to know just what character these duties shall have. This is no mere question of names. For when duties are to be primarily fiscal, the government should lower them to a level that will encourage the importation of the products taxed ; experience has shown that when taxes of any kind have for their object the production of a maximum of revenue (postal charges, for example), the proceeds of the tax generally are highest when the tax is most moderate. If, on the other hand, it is intended that duties shall have a protective character, the government should raise them high enough to restrict the importation of the commodities that are taxed. OBJECTS OF COLBERTISM 313 materials, and all commodities used in manufacturing, by reducing duties and all other charges which might restrict such importation. (3) Above all, to encourage the exportation of national products by reducing taxes, or, if need be, by granting sub- sidies and bonuses. This system, which is sometimes designated as Collertism, reigned supreme until the " economists " made their appear- ance. We know that the latter (see page 23) took as their motto the rule, "laisser faire, laisser passer," and that they fought quite as energetically for free trade (as opposed to protectionism) as they did for freedom of labor (as dis- tinguished from the guild system). But the French Revo- lution, which led to the triumph of their doctrine with regard to the freedom of labor, did not by any means inaugurate free trade. Twenty years of European war were ill suited to the propagation of the idea that there should be free and unrestricted commerce among nations. In England, however, the ideas of Adam Smith spread rap- idly. In 1838, at Manchester, Cobden began the remarkable campaign that was destined to overthrow the system of pro- tection. He very adroitly chose the field of combat by direct- ing his attacks solely against the protective duty on " corn." * It was indeed a particularly odious spectacle to behold the rich lords of England, owners by right of conquest of nearly all the land of the kingdom, keep out foreign wheat in order to sell their own more dearly or to collect higher rents, and thus profit by the growing need of the population for food. The House of Lords found that it could with poor grace resist the popular indignation fostered by the "Anti-corn- law League " in 1846 ; and when Sir Robert Peel, the prime minister, was converted to the popular cause, the lords were obliged to yield. Once the duty on wheat was abolished, all the rest of the English protectionist system (including 1 In England the word "corn " means either wheat, barley, rye, and oats collectively, or, more specifically, wheat. 314 PRINCIPLES OF POLITICAL ECONOMY the famous Navigation Acts of Cromwell, to which the mari- time greatness of England has been attributed) fell to pieces. In France, a league founded by Bastiat in 1846, and mod- elled on the 1 English Anti-corn-law League, failed because the social conditions were entirely different from those which prevailed in England. But Emperor Napoleon III, whose policy was founded on an alliance with England, and whose tendencies were rather democratic, took advantage of the power conferred on him by the French Constitution, and without consulting the Chamber of Deputies, signed a com- mercial treaty with England. This celebrated treaty of 1860, for which the French people were very unenthusiastic, gave rise to considerable comment in Europe and was imme- diately followed by the signing of analogous treaties by most European powers. There seemed to be every indication that the era of free trade had fairly begun and that it would long continue. Yet its rule was of brief duration. The United States, as we shall see presently, after the Civil War, resolutely adopted a strong protectionist policy, and has since then persevered along the same line. In 1872, after the Franco- Prussian War, France, under the government of Thiers, tried to follow the example of the United States by levying upon foreign imports the taxes designed to pay for the un- successful war that had just been terminated. This effort failed because of the treaties still in force. In 1879 Ger- many, on the initiative of Bismarck, inaugurated the return of European nations to a decidedly protectionist policy, 1 and her example led almost immediately to the adoption of a similar policy by most nations of Europe, just as the ex- ample of France in 1860 had led to the general adoption of the free trade system. There are now few nations in Europe, except England, Holland, Norway, and Denmark, that have remained faithful to free trade ; everywhere 1 In point of date, Austria was the first, by adopting the tariff of June 27, 1878 ; but her example had much less influence than that of Germany. EARLY AMERICAN TARIFFS 315 else, even in Switzerland, tariff barriers have been raised and tariff wars have taken the place of commercial treaties. 1 From the very start the foreign commercial policy of the United States has been more or less protectionist. Hamil- ton's celebrated Report on Manufactures was a clear state- ment of the protectionist theory, and not the least remarkable of its author's state papers. Our constitution forbade the imposition of export duties, but lodged in the hands of Congress exclusive power to levy import duties. The first tariff measure brought before Congress was introduced by James Madison and passed on July 4, 1789. It provided for the "encouragement and protection of manufactures." The protection afforded by this measure, however, could not have been very great, inasmuch as the general level of duties was but 5 per cent ad valorem, and the highest rates on luxuries did not rise above 15 per cent. These rates were soon found insufficient to provide the necessary revenue, and were subsequently increased. Between 1789 and 1812, thirteen tariff laws were enacted by Congress ; the general purpose of these laws was to increase the duties and the number of dutiable articles, primarily in order to meet the expenses of the government, but also in order to protect American industries. The reports made by the committees of Congress and the *Even in England the government has decided to reestablish customs duties on cereals in order to pay the expenses of the South African War. Customs duties are established by law. They are either ad valorem, i.e. proportionate to the value of goods, or specific, i.e. determined by the weight or volume of goods. The first are more equitable, the second more simple. But it is no easy matter to apply the law justly in either case. In the first place, ad valorem duties give rise to false declarations of the value of goods. In order to prevent this the customs officials sometimes possess the right of preemption, by which they can purchase imported goods at their estimated value ; this rule, however, has little effect. When, on the other hand, duties are specific, i.e. determined by the number, weight, or volume of cer- tain kinds and classes of goods, it is necessary to prepare complicated and lengthy classifications of goods ; and even then there are apt to be instances of flagrant injustice. The present system in this country is a combination of both kinds of duties. 316 PRINCIPLES OF POLITICAL ECONOMY subsequent debates thereon indicate very clearly that the protection of American industries against foreign competi- tion was a principle very widely accepted. The restriction of our foreign commerce, due to the embargo policy of 1807 and the war of 1812, was equivalent to a rude but vigor- ous application of protection. During this period, Northern capitalists had been obliged to find new means of employ- ment for their idle funds, which could no longer be profitably invested in the shipping interest. They turned their atten- tion to manufacturing enterprises, and established the textile industries of the North. 1 But when peace was concluded, British manufacturers sent immense quantities of goods to American ports, and the Northern manufacturers saw the market for their cottons, woollens, and iron rapidly slipping from them. They therefore appealed to Congress for aid in the shape of a protective tariff which would preserve the home market to them. One result of this appeal was the tariff act of 1816, which imposed a duty of about 20 per cent on all cotton and woollen goods imported from abroad, and specific duties on salt and iron. Thus the tariff became distinctly protective. By 1824, eight years after the tariff act of 1816, of which Calhoun had been one of the chief supporters, the Southerners became the declared enemies of protective tariffs. The tariff, in their opinion, was of no benefit to them, whereas it favored the agriculturists of the West and the manufac- turers of the North. The national policy, however, continued to be protectionist, although from 1833 to 1842 and from 1846 to 1861 duties were reduced toward a revenue basis. In 1861 the Morrill tariff restored duties to about the level of 1845, but increased the duties on iron and wool. 1 In 1803 there were four cotton factories in the country. Five years later there were fifteen mills, with eight thousand spindles. By 1811 the number of spindles had increased tenfold, to eighty thousand, and in 1815 there were five hundred thousand spindles in operation. The home consumption of cotton illustrates the same development. In 1800 American manufacturers con- sumed five hundred bales of cotton ; in 1815 they used ninety thousand bales. THE "WAR TARIFFS" 317 When the Civil War broke out, the government was obliged to seize upon every possible source of revenue, and duties on imports were naturally made to furnish their share of the burden. It was necessary, moreover, to tax foreign goods heavily in order not to place at a disadvantage those domestic producers whose goods were now heavily taxed. Accordingly, the " war tariffs " of 1862 and 1864 imposed duties on all imports, arid effected a general increase of the rates. When peace was established, these war tariffs were permitted to remain practically unchanged for nearly twenty years, although the internal taxes had been removed. In 1883 some duties were lowered, but others were raised, and the general character of the tariff was not altered. In 1890 the McKinley tariff removed the revenue duties on raw sugar and some other articles, but increased the protective duties on articles that competed with domestic products. Again in 1894 a reverse movement took place, when the Wilson tariff reduced the duties on most protected commodities, reimposed a revenue duty on raw sugar, and placed wool, copper, and lumber on the free list. Filially, in 1897, the Dingley tariff was enacted. This act increased the duty on most goods, al- though it left copper on the free list and reduced the duty on steel rails. It imposed, on the average, a tax of about 50 per cent of the value of goods imported. 1 The prevailing tendency among Western nations thus ap- pears to be decidedly in favor of protection. In economic theory, however, there has been no such marked protection- ist reaction as in the commercial policy of many nations. Indeed, the majority of economists seem to have remained faithful to the classical doctrines on this subject. Neverthe- less, the German economist Friedrich List, in his " National System of Political Economy" (1841), and the American 1 The tariff history of the United States may be found in Taussig, " Tariff History of the United States"; Bolles, " Financial History of the United States"; Sumner, "History of Protectionism in the United States"; and W. M. Daniels, "The Elements of Public Finance." 318 PRINCIPLES OF POLITICAL ECONOMY economist Henry C. Carey, in his " Principles of Social Sci- ence " (1856), had already attacked the so-called Manchester doctrine at the very time that this doctrine was in the full tide of popularity. The violent reaction that has taken place in our own days against the classical school, although not directed especially against this point of its system, has con- tributed none the less to shake our faith in the absolute and rigid principles of classical political economy. To-day, economists of the realist or historical school insist that the commercial policy of a nation must be suited to its own par- ticular conditions. VI. The Doctrine of Protection No question in political economy has stirred up more controversy, caused more volumes to be written, or even occasioned more warfare, than that of international com- merce. Why should this be so ? Is not commerce between nations in all points similar to trade between individuals? Is it not, like private trade, simply an ordinary and normal form of exchange, and, if so, why do we need a special the- ory of international trade? If exchange is in itself a good thing, how can there be anything dangerous in the purely accidental circumstance that the two parties to the transac- tion are separated by a national boundary? We have already learned that in exchange between indi- viduals the division of labor, according to which, for example, one man produces only shoes while another produces only bread, secures for both participants a greater sum total of satisfaction and comfort than would be available if each were compelled to provide himself directly with bread and shoes. When left entirely to themselves, people exchange goods because it is profitable for them to do so. Free traders assert that the same is true of international trade, and that free exchange between nations permits us to obtain some goods at the cost of less labor and capital than when they are pro- duced at home. If, for example, the American farmer can THE POPULAR IDEA OF FOREIGN EXCHANGE 319 raise 100 bushels of wheat by 100 days' labor, and our silk manufacturers can produce 25 yards of silk in 120 days ; if, on the other hand, in France 25 yards of silk require only 90 days' work, while it takes 115 days to raise 100 bushels of wheat : here are conditions which make it eminently desirable for French silk producers and American wheat producers to exchange their goods. For if international exchange were cut off, 100 bushels of wheat and 25 yards of silk would cost 220 days' labor in this country and 205 days' labor in France ; but by producing silk for both countries, the Frenchman can buy more wheat; by producing wheat for the French as well as the home market the American can buy more silk for a given amount of labor. 1 This, at all events, is the standpoint of the classical econo- mists. They do not admit or conceive that international trade can be governed by other than the general principles which regulate all trade. The problem of foreign commercial policy is no problem at all. Exchange, they declare, is a form of the division of labor (the marvellous effects of which have already been explained). Its advantages are reciprocal, and its utility is absolutely independent of the question whether or not those who engage in it are citizens of the same or of different countries. But public opinion generally does not profess this superb indifference. It admits that free trade may be preferable theoretically, and might even conduce best to the welfare of humanity. Nor do protectionists pretend to be enemies of commerce between nations; and they prove this abundantly by their efforts to increase such trade and the sacrifices which they are willing to make in order to establish international routes and railways. But nations, or rather the men that govern them, are not accustomed to speculate on the interest 1 Throughout this discussion of free trade and protection I shall endeavor so far as possible to use the very words that are employed by partisans of each doctrine quoting free traders in support of free trade, and protec- tionists in defence of protective tariffs. C. W. A. V. 320 PRINCIPLES OF POLITICAL ECONOMY and welfare of humanity in general. They usually limit themselves to caring for the interests of the particular country in which they live; and this can hardly be regarded as a criminal offence. They contend, rightly or wrongly, for this is the point at issue, that international commerce, when left to take care of itself, is liable to ruin the industry of a nation, to restrict or even to stifle its productive forces, and indirectly to endanger its very existence. They hold that international trade does not confer equal and reciprocal advantages on both participants; that it may lead to the enrichment of one nation and the ruin of the other. There- fore it behooves a nation to beware that it shall not be ex- ploited by its commercial rivals. They do not regard international trade as simply a form or application of the division of labor and of solidarity, but as a kind of warfare, and as one form of the " struggle for life " among nations. Just as the art of actual war consists in invading the enemy's territory without permitting him to invade ours, so the tactics of international trade should consist in inundating foreign countries with our own goods while not allowing these countries to export their goods to our shores. To accomplish this it is necessary to build up home industries so that they may become vigorous enough to keep out foreign goods and even to compete successfully with them in foreign markets. This has been the object of protectionism for many years, an object which it seeks to attain by means of elaborate tactics based mainly on the following considerations : (1) As international trade possesses all the characteristics of a " struggle for life " among nations, it is likely to produce all the unfortunate effects that are inherent in economic war- fare and competition, even competition among individuals, namely, the destruction of the weak. For instance : France, Switzerland, and Japan, because of cheaper labor and perhaps because of better natural facilities, can produce silk goods cheaper than the United States ; therefore the unre- THE EFFECTS OF FREE TRADE 321 stricted importation of foreign silks would destroy this branch of American industry, which now produces, annually, more than 1100,000,000 worth of goods and employs 65,000 laborers receiving annual wages of nearly 121,000,000. For a large number of other American industries the case is very much the same. Suppose, now, that the tariff on all these protected prod- ucts be removed. Then a large share of the capital* and labor now employed in them, including the 65,000 laborers and the 81,000,000 of capital employed in silk manufactures, would become unprofitable. What, in such an event, can the silk manufacturers do ? They cannot turn to cotton manu- facturing, because England produces cotton goods cheaper than we. They are, moreover, excluded from many other productive occupations because (under a system of absolute free trade) other countries are our superiors in these branches. What, then, shall they do ? Will it be necessary for most of our manufacturing laborers, representing 22 per cent of the total population, to leave our cities and take to farm- ing and cattle-raising, in which this country appears to be superior to other nations ? We say " appears," because it is by no means certain that Russia will not be able to furnish the world with cereals cheaper than we, when her methods of production and her means of transportation have been brought up to date ; nor is it at all certain that the Argentine Republic is not our natural superior in raising cattle and producing meat for exportation. There is, however, one branch of production in which our natural advantages seem to be beyond contest, viz., that of raising raw cotton. Shall the manufacturers, and, in fact, the total population of the country, therefore migrate to the Southern cotton fields because cotton is the only, or almost the only, pursuit in which we are safe from ruinous foreign competition ? Will there be room for all American labor and capital in this single branch of production? Is it not obvious that under these circumstances the remunera- 322 PRINCIPLES OF POLITICAL ECONOMY tion for capital and labor, if, indeed, for a great part of it there would be any remuneration at all, would be ridicu- lously small, especially in view of the facts that the law of diminishing returns operates in this branch of production, and that the capital and labor now applied to cotton-raising already provide three-fourths of the world's demand for raw cotton ? Should any country prove inferior to others in all branches of production, that country would be dislodged from one occupation after another, and its only ultimate resource would be to transport its population and whatever capital it had left, to those countries which had triumphed over it in the competitive struggle. 1 Only thus could it profit by the conditions which assure the economic superiority of rival nations. In other words, if we can no longer bear foreign competition our only resource is to emigrate to foreign countries, to Russia, or to South America, or to England ! This, protectionists contend, is the logical outcome of a system that regards international trade simply as the method of economic organization best suited to getting the most out of the earth and its inhabitants, without reference to the fact that these inhabitants are divided into nations, and that each nation has the determination and the right to live and to prosper. It is comprehensible, protectionists continue, that in the case of human beings an out-and-out Darwinist might willingly sacrifice individuals to the interest of the race or the species. But we cannot expect a nation to permit its own destruction for the sake of mankind as a whole. To expect 1 This is what takes place in the case of commerce among various parts of the same country. Many counties in the United States have decreased in population between 1890 and 1900, despite the rapid growth of the total population. There is a strong tendency, moreover, toward the localization of certain branches of production in certain clearly defined districts. Interesting data regarding these phenomena are given by the Twelfth Census. But as these changes take place within the nation, and one part gains what the other loses, there is no need for governmental intervention. NATIONAL INTERESTS 323 this is all the more absurd when we bear in mind that the problem of international trade is fundamentally only a question of economic and commercial supremacy. The part played by the nations of the earth, however, is by no means confined to that of economic productivity. Shall we incur the risk of perhaps eliminating a new Greece from among the nations of the world simply because her arid soil may not enable her to produce goods as cheaply as her rivals ? (2) Let it be granted that in the struggle for supremacy no nation would succumb entirely, and that each nation would succeed in finding some branch of production in which it could retain its superiority, and to which all its productive energies would be devoted. Could this be called a desirable state of affairs ? The free trade school replies affirmatively, because it considers this result as a vast application of the division of labor. Free traders delight in regarding the universe as an immense work-shop in which each nation pro- duces but one kind of goods, namely, those which it can by nature produce best and most easily ; they contend that such a system would effect the completest utilization of the pro- ductive forces of our planet and of humanity. Thus France would produce only fine wines and objects of art, England would make textiles, China would raise only raw silk and tea, Japan would raise rice and raw silk, Australia would devote her productive energy to wool, Switzerland to silk goods, Russia to wheat, Spain to olives and fruit, Belgium to fire- arms, Scandinavia to dairy products, Brazil to coffee, Canada to lumber, Austria-Hungary to leather goods, and the United States to raw cotton. But in this case the national interest is entirely sacrificed to a supposed " general " interest which is purely an abstrac- tion. Such an ideal as this, admitting that it could be realized, would involve the degradation of all nations and consequently that of the whole human race. It has been found that for individuals specialization in a single kind of work is liable to prove disastrous to physical, intellectual, 324 PRINCIPLES OF POLITICAL ECONOMY and moral development. What, then, would be its effects for a whole nation ? A country in which all persons were engaged in the same occupation would be nothing more than an amorphous mass, a monstrous thing without intelligence and without vitality. Biology teaches that the development of an organism and its rank in the scale of life are directly determined by the variety and number of its functions and the differentiation of the organs that perform these functions. Exactly the same is true of a nation. If it would seek to rise to the level of a high and genuine civilization, it must en- deavor to encourage all forms of social activity, all manifesta- tions of national energy, and it must therefore take care that foreign competition does not destroy them one after the other. (3) The importation of foreign products, if not counter- balanced by a corresponding exportation of our own products, is likely to ruin a country by removing its money and reducing it to the position of a debtor nation. The importing nation will pay with money so long as it possesses any, whereupon it will be compelled to borrow the money required to pay for its purchases abroad. Indeed, this money may be borrowed from the very nations to which it must be paid ; in which case the situation becomes worse than before, because there is thus added to the debt incurred by imports the debt made by borrowing money and the necessity for paying interest on it. A country may in this manner be steadily and surely hastened toward bankruptcy. Such, for example, has been the experi- ence of Portugal and Turkey. 1 Political economy, it is true, teaches that imports sooner 1 This was the sense in which Cato declared : Patrem familias vendavem, non emacem esse oportet. (" De Agricultural') The Mosaic law says : " Ob- serve to do all the commandments which I command thee to-day. . . . thou shalt lend unto many nations, but thou shalt not borrow ; and thou shalt reign over many nations, but they shall not reign- over thee." (Deuteronomy xv. 6.) This command, to be sure, refers to loans and not to sales ; but these are ultimately the same, inasmuch as a purchasing nation in the long run always becomes a debtor nation. AMERICAN ARGUMENTS FOR PROTECTION 325 or later give rise to exports. But this law admitting its validity as clearly established is not sufficient to reassure protectionists. In fact, our explanation (page 299) demon- strated that although imports inevitably lead to exports, they do this by effecting a rise in the rate of exchange, an outflow of metallic money, and a general fall in prices. All these effects are very detrimental to a nation. They are, moreover, singularly aggravated when a nation, in order to meet its obligations, has recourse to loans. (4) Protectionists advance the fiscal argument that cus- toms duties are the best kind of taxes, because they are paid by foreign countries. A nation should therefore not hesitate to impose them, since they are advantageous not only as protecting home industries, but also as procuring resources without any cost to the citizens of a nation. The above arguments in favor of protection may be regarded as typical ; we encounter them in one form or another in every country where the problem of a commercial policy has given rise to controversy. Nowhere, however, has the problem of international trade been discussed more persistently than in the United States. Here it has been for many years in the foreground of political discussion and has received an amount of public attention beyond all proportion to its real and relative importance. Innumerable theories, some absurdly naive and others bewilderingly elaborate, have been advanced in this country in defence of "protection" or of "free trade." While it is of course entirely beyond the scope of this vol- ume to attempt anything like an exhaustive discussion of the problems involved, it may not be amiss, before termi- nating this section, to give a. brief statement of some of the theories that are most frequently employed in the United States in defence of protection. It is often claimed that a restrictive policy is a wise economy of the labor of the people. " The national economy of labor," says R. E. Thompson, " consists not in getting on with as little as possible of it, but in finding remunerative employment 326 PRINCIPLES OF POLITICAL ECONOMY for as much of it as possible. If labor be the source of wealth, then that country must advance to wealth which has work for all who are willing and able to do it." l The greater the variety of industries, the more the demand for labor and the better the labor is paid ; for instead of two workmen com- peting for every job, we shall have two masters, two sorts of masters, running after every workman. The creation of a diversified industry, furthermore, introduces such a change into farming itself as enables the farmer to employ a greater variety of labor. A home market takes the place of the dis- tant one, and crops are grown which require more care and attention, but which bring larger profits. Farming passes out of its wasteful extensive phase into the intensive stage, in which its operations are more productive and profitable. The natural drift and bent of the American character toward the mechanic arts and the inventions that facilitate them, would, in the absence or the undue subordination of the manufacturing industries, find little or no vent; the strongest side of the national intellect and the brightest gifts of the people would have no opportunities for development. Protection to industry is as much needed by the farmer as by the manufacturer. Just as the laborer's prosperity is measured by the relation of his wages to current prices, and not by the latter alone, so the farmer's is measured by the relation of the price of raw materials to the price of manu- factured goods, including food under the former, and not by the price of either one alone. Wherever the manu- facturer is found at work, the prices of the two converge; wherever he is found wanting, and the farmer stands alone, their prices diverge. When, in accordance with the classi- cal or cosmopolitan theory, some nations produce almost exclusively raw materials, and exchange them for manu- factured goods from abroad, one side pays for the trans- portation of bulky articles over great distances, while the other pays for the transfer of goods of the same value but 1 R. E. Thompson, " Political Economy" (Philadelphia). AMERICAN ARGUMENTS FOR PROTECTION 327 more compact form. The producer of food and of raw mate- rials has to bear the heaviest burden of this sort, namely, the cost of transportation for bulky commodities. Protection to industry gives the farmer a near, abundant and steady market for his breadstuffs, and creates a market for crops more remunerative than grain. The principal European market for our wheat and corn is furnished by England and is the most unsteady market that can be thought of. Whatever policy increases the number of those that are not engaged in farming, but must live on its products and pay for them, is the one which secures to the farmer the best and steadiest remuneration. The creation of a varied industry, moreover, enables the farmer to enrich himself without im- poverishing the soil, whereas his dependence on foreign markets leads him to produce crops that exhaust the soil and that reduce his farm to a wheat factory or a corn factory. A variety of industries brings the farmer and the artisan close together and gives the former facilities for making returns to the soil that he would not otherwise enjoy. It makes it worth while to farm more carefully, through the certainty of a permanent local market. Protection, furthermore, diminishes the risk of farming by giving variety to its products. The farmer who depends on exportation puts, so to speak, " all his eggs in one basket " ; but when the consumer is close at hand, he can raise and sell a variety of crops. If some of these crops fail, others are likely to succeed. By bringing the producer and the consumer near to each other, the restrictive policy diminishes their need of the trader, and weakens his power over them. The heavy tax of transpor- tation is saved ; men are set free from that most laborious and unproductive occupation to engage in others which are pro- ductive, and which this very policy has called into existence. The protectionist regards domestic trade always as more profitable than foreign trade. He maintains that it is more desirable to employ American capital in producing some of 328 PRINCIPLES OP POLITICAL ECONOMY the goods which we usually import, than to employ it in pur- chasing these goods from abroad. Therefore, he argues, we must remove the obstacles in the way of making manufac- tures at home profitable. A protective tariff does this, and is often the only way to create a varied industry in a new or poor country that could not otherwise possess it. John Stuart Mill, although he was one of the most ardent disci- ples of free trade, admitted that the superiority of one country over another in a particular branch of industry often arises from having begun it earlier. " A country," says Mill, " which has skill and experience to acquire, may in other respects be better adapted to the production than those earlier in the field; and, besides, it is a just remark that nothing has a greater tendency to produce improvement in any branch of production than its trial under a new set of conditions. But it cannot be expected that individuals should at their own risk, or rather to their certain loss, introduce a new manu- facture and bear the burthen of carrying it on until the pro- ducers have been educated up to the level of those with whom the processes have become traditional. A protecting duty continued for a reasonable time will sometimes be the least inconvenient mode in which a country can tax itself for the support of such an experiment." Protectionists go so far as to assert that the competition of home producers in the protected industry soon reduces prices to a point that is not above the ordinary level of profits in other industries. Protection, they hold, simply overcomes the obstacles to cheap production, namely : the risk of en- gaging capital in large undertakings for which the home market is not secured ; the inexperience of the laboring classes, whose industrial education is an investment that pays only in the long run ; and the delay that is required to organize an industry and accumulate the capital that makes it possible to produce on a large scale. 1 1 A good discussion of this point from the point of view of a free trader is given in Cairnes 1 "Some Leading Principles of Political Economy." AMERICAN ARGUMENTS FOR PROTECTION 329 One eminent American economist, Professor S. N. Patten, has applied considerable ingenuity to the defence of pro- tection. He distinguishes what he calls " static " societies from "dynamic" societies, and regards the United States as the type of a " dynamic " society. Our ideal, he maintains, must stand in sharp contrast with the static ideal advocated by most free traders. " The older theories of economics have always pushed to the front the conception of a static society, in which all the various elements would harmonize and thus form the highest state of civilization. The ideal I wish to emphasize, on the contrary, is based on the changing dynamic conditions which are necessary for any people to pass through in its progress toward the highest possible social state. Whether we shall have a static or dynamic society is really the centre of the discussion about the tariff." " The American people are in a dynamic state. There is at the present time a constant growth of population, and hence an increased number of laborers must find employment in some way. We must therefore continually seek for new opportunities for labor in which this increase of population can find employment. . . . The American people should be more progressive than those of Europe. The soil we occupy is newer than that of Europe, the mines of which we make use are superior, and these conditions, coupled with the spirit of activity which fills the American people, should push us along into a higher stage of civilization much more rapidly that it is possible for the people of older civilizations to advance." Professor Patten does not believe that there is but one theory 6f political economy, the doctrines of which hold true for every civilization. The same forces, probably, are at work everywhere, but their relative importance varies- with the industrial condition of each people. It is therefore quite possible that the best economic policy for America may be very different from that of other nations. " The world's progress is now dependent upon the develop- ment of internal resources, and not of external trade. We 330 PRINCIPLES OF POLITICAL ECONOMY need a systematic development of all those opportunities for labor with which each country has been endowed by nature. We must make a better use of all our natural resources if the world is to advance to a higher industrial state. Progress must come from the development of large continental nations, rich in natural resources. Small nations, deficient in many of those natural resources needed for a nation's development, must rely largely upon trade to obtain those things in which their resources are deficient. To such a nation the profits of trade can to a large degree be accepted as the criterion of national prosperity ; but large continental nations must look nearer the real source of national prosperity to obtain their criterions. They must become successful by the development of their natural resources. Their land and their mines must be opened up and the productive capacity of each laborer must be increased." In answer to his own query, Shall the ideal of American civilization be national or cosmopolitan? Professor Patten declares that " nationalism is a dynamic movement, and seeks to bring each nation through a series of changes and develop- ments that would bring a better harmony between its social conditions and its economic environment. It assumes that each nationality through differences of climate, soil, and other natural conditions has an economic environment peculiar to itself to which a particular type of man is best adjusted, and that a series of nations of different types, each fitted to its own environment, will make a better use of the world and reach a higher civilization as a whole than any one type could if it endeavored to occupy the whole world and retain the common characteristics. . . . Adjust the people of each nation to its own environment and mankind will be better adjusted to natural conditions of the whole world than in any other way." 1 1 S. N. Patten, " The Economic Basis of Protection " (Philadelphia, 1890). THE ARGUMENT FOR TUTELARY PROTECTION 331 VII. The Doctrine of Free Trade Free traders usually begin by refuting the arguments just enumerated. The argument drawn from the dangers of free competition, they admit, produces a great impression. But, observe the free traders, note what singular changes this argument has undergone, and to what contradictions it leads ! Formerly it was maintained that the weak must be protected against the strong, the young countries against the old. Thompson, for instance, declared that protection aims to overcome the initial obstacles in the way of founding new and diversified industries. This was known as tutelary protection, designed to educate labor and capital in hitherto untried occupations, and in the United States was known as " protection to infant industries." It was remarked that young industries have to contend with great disadvantages, that it is not easy for them to withstand the competition of enterprises already in possession of vast markets, and therefore enabled by reason of extensive production to carry the division of labor and large-scale methods to the highest degree of perfection. The struggle is all the more difficult for the reason that in new countries wages are high and capital is relatively scarce. It is well known that young trees cannot easily be made to grow in close proximity to old ones, because the latter, hav- ing already taken all the light from above as well as all the nutriment of the soil, leave but little room for the others to take root or to stretch out their branches. The argument seemed plausible. It seemed to be borne out by the experience of new countries, such as Australia and Canada, which, although educated in the school of pure free trade, did not hesitate to raise up protective barriers against other countries, even against England. The favorite example for protectionists the world over is the United States. Would American industries have grown so rapidly if they had been obliged in the beginning to struggle 832 PRINCIPLES OF POLITICAL ECONOMY unaided against English manufactures? Would they not at the very outset have been driven from the field? Per- haps so. 1 But the United States has brilliantly accomplished its economic evolution in this respect, and now ranks among the greatest manufacturing nations of the earth. And now that the nation is strong industrially, and its " infant indus- tries " have been fostered to maturity, has it torn down the protective barrier which sheltered them in their infancy ? By no means ! Mr. David A. Wells declares expressly that " there has never been an instance in the history of the coun- try where the representatives of such [infant] industries, who have enjoyed protection for a long series of years, have been willing to submit to a reduction of the tariff, or have proposed it. But on the contrary, their demands for still higher and higher duties are insatiable and never inter- mitted." Americans continue the protectionist policy, and at the same time abandon the infant industry argument as unworthy of a great industrial nation. By an inverse argu- ment they now declare that a nation that is advanced in civilization, that is wealthy and in the habit of paying high wages to its laborers, must be protected against nations pos- sessing a retrograde civilization and paying low wages for labor. 2 " Protection," says Professor Patten, in so many words, 1 According to free-trade authorities, principally Professor F. W. Taussig, the low duties prevailing during the thirty years before the Civil War (the so-called " era of free trade") do not seem to have checked the growth of manufactures. " In general," says Professor Taussig, " the extent to which mechanical branches of production have been brought into existence and maintained by the protective system is greatly exaggerated by its advocates ; and even the character and direction of their development have been influenced less than, on grounds of general reasoning, might have been expected. 2 American economists point out that just as Europe and Asia lower the American standard of civilization and living by sending their poor and fam- ished emigrants to the United States, so also they are working toward the same result by sending us their cheap products. Both our higher civiliza- tion and our higher wages must be defended against the invasion of cheap labor and the importation of goods produced by cheap labor. WHO NEEDS PROTECTION? 333 " now changes from a temporary expedient to gain specific ends to a consistent endeavor to keep society dynamic and progressive." Or, in the words of another well-known pro- tectionist writer, "the products of America do not need protection against those of England because our industries are younger, but because they are made under a higher civilization." Meanwhile, the nations of Europe declare that a high tariff barrier is indispensable to them precisely because they are old and require protection against the dangerous competition of new countries possessing the advantages of a cheap virgin soil and low taxes. Hence, free traders ask : What conclusion must be drawn from this varied application of the protectionist argument? To whom is protection really necessary ? Do the weak need it^gainst the strong, or the strong against the weak ? Do new countries require it against old ones, or the old against the new ? What are we to think of an argument that is made to serve equally well for the defence of two exactly opposite doctrines ? Free traders regard the fear that a nation could ever be depopulated by international commerce as vain and absurd. The awful protectionist picture 2 of a nation dislodged by foreign competition from all the branches of production suc- cessively, a nation reduced to the necessity of letting its soil lie fallow, and seeking an asylum within the boundaries of a successful competitor, they consider unutterably fan- tastic. No country, however unfortunate, is likely to be inferior to others in all the branches of production. And if such a case should ever occur, if ever a nation were so harshly treated by fate or by nature as to be forced to work harder on its own land in order to live, than anywhere else, certainly the prohibition of foreign imports would not make it any richer or happier. In such a case as this, laborers and capitalists would soon discover the path that leads to better 1 George Gunton, " Social Economics," page 338. 2 See page 322. 334 PRINCIPLES OF POLITICAL ECONOMY countries ; and to prevent them from taking it would require, not a barrier of duties on imports, but a prison wall. It is forgotten, moreover, in this argument, that inter- national commerce tends always to take the form of barter. Every importation occasions a counter-current of exporta- tion ; for how can a nation be supposed to buy abroad with- out giving anything in exchange, unless we assume that foreign nations will furnish their products gratuitously, in which case the situation of the importing nation would be more enviable than pitiable, and such a process as this could not possibly ruin it. If, in reality, any nation is too poor to send goods abroad, we may be perfectly sure that foreign countries will take care not to export anything to it. When protectionists claim that the possession of a large quantity of money is a great advantage, and that protective tariffs, by discouraging imports, tend to create a favorable " balaijce of trade," they overlook the fundamental nature of international trade. To be sure, there are periods when a nation may sell more than it buys abroad, and will therefore collect a balance in money. But the accumulation of money in one country and its withdrawal from another will cause high prices to prevail in the former country and low prices in the latter. The former country thus becomes a good market in which to sell, and a bad market in which to buy ; people will ship more goods than they would if the high prices did not prevail, and will take fewer goods from it ; they will withdraw gold from the place where prices are high, for use in the place where prices are low. The experience of four centuries has demonstrated the futility of trying to interfere with this movement of specie. On the other hand, the same forces make it impossible or improbable that a nation will ever be drained of its metallic money by international trade. 1 1 We have already explained why this is so. Even in the case of the South American Republics the cause for the scarcity of metallic money must be sought in the abuse of the credit system and issues of paper money, rather than in foreign imports. WHO PAYS THE DUTY? 335 It is absurd, moreover, to pretend as a general doctrine that protective tariffs are paid by foreign nations, and that they mean an increase of the public revenue without consti- tuting a burden on the nation which imposes them. 1 How exceedingly convenient it would be if a nation could provide itself with a revenue simply by taking money, as it were, from the pockets of foreign exporters ! Supposing that a government really possessed this remarkable power, is there not every reason to believe that it would not long remain a secret confined to one nation ? Would not all nations hasten to adopt this excellent means of providing a revenue by shifting the burden of taxation to the shoulders of foreign competitors? Thus, when all nations had adopted protec- tive duties as devices for taxing foreign countries, none would be better off than another, and their relative positions would be the same as before. It is true that under exceptional circumstances the burden of customs duties may really be borne by foreign exporters. 2 But as a general rule, and by virtue of what is known as the shifting of taxation, every tax paid by a producer or by a mer- chant is ordinarily transferred to the purchaser of the taxed goods and is ultimately paid by the consumer. This shifting of the burden from producer to consumer is even more likely to be effected in the case of foreign than of native products. 1 See page 325. 2 This case was pointed out by John Stuart Mill. Every rise in prices en- tails a reduction of consumption. If the article in question is a foreign prod- uct, the foreign producer will be compelled to consider whether it would not be advisable to make a sacrifice of part of his profits and reduce the price of his goods to the extent of the tariff, in order to retain all his customers by permitting them thus to buy the goods at the former price. It is evident that if the price is increased, many former purchasers will not continue to buy. Hence the producer must face the alternative of decreasing his sales or reduc- ing his prices to the extent of all or part of the duty. All things consid- ered, it is not unlikely that in some cases his interest will lead him to choose the second alternative. But in order that foreign producers shall submit to this burden, two conditions are requisite : (a) the cost of production must be low enough to permit a reduction in the price received by producers ; (6) producers must be unable to dispose of their goods in other markets. 336 PRINCIPLES OF POLITICAL ECONOMY But let us for a moment admit the entire validity of the protectionist argument that protective duties are really borne by the foreign producer and exporter. What will be the result ? Evidently, the price of the imported goods will not be changed, inasmuch as the duty is paid by the pro- ducer, and not added to the price which must be paid by the consumer. Consequently, the competition of foreign goods, and the discouraging influence of this competition on home industry, will in no wise be diminished. Therefore, home industries will attain none of the objects for which protection was considered desirable ; protective duties will neither ex- clude foreign goods nor raise prices. Hence, to the many arguments already brought against protection, we must add the objection that it does not protect. Protective duties, if they were borne by the foreign producer, would accom- plish absolutely none of the objects for which they are established. The oft-repeated argument that protection is needed to diversify the occupations of a people rests on the hypothesis that it is impossible for manufacturing industry to exist in a young country unless it receives fostering aid. But this hypothesis is unwarranted. When a country is first settled and sparsely populated, it possesses no sufficient supply of labor for the establishment of manufactures on an extensive scale. Gradually, however, as population increases, there will arise various branches of domestic industry which will supplement and assist in various ways the labor of those who are engaged in agriculture. With the cultivation of less accessible and poorer lands, the gains of farming continue to decrease, and the law of diminishing returns gives rise to the application of capital and labor to manufactures and trans- portation as soon as any department of these occupations offers promise of greater remuneration than that procured in farming under the least favorable circumstances. The im- position of protective duties, however, introduces a disturb- ing element, and induces labor and capital to engage in less THE DIVERSIFIED INDUSTRY ARGUMENT 337 profitable branches than they would otherwise have chosen. To the extent that they effect this diversion of labor and capital, they imply production carried on under more onerous conditions. The practical result will be not only a general rise of prices, but an increase in the cost cost, be it remem- bered, in the sense not of mere money outlay, but of actual difficulty, of real sacrifice of producing goods. These higher prices (or this higher cost) are paid by whom ? There is only one possible answer : By the people of the protectionist country. Thus tariffs seek to accomplish at great cost what would otherwise have been effected spontaneously and far more cheaply by the natural evolution of industry in such a country as the United States. Having regard to the geographical position, extent of ter- ritory, and extraordinary natural resources of this country, as well as to the character of its people, trained in all the arts of civilization and distinguished beyond all others by their eminent mechanical and business talents, there seems no valid reason why we should not take a position of com- manding influence in the world of industry and commerce, a position to which no other people on earth could aspire. But if we desire to command a market for our products in all quarters of the world, we must be prepared to admit the products of other countries freely to our own markets, and must learn to seek the benefits of international trade not in the vain ambition of making other countries pay tribute in gold and silver, but in that which constitutes its proper end and only rational purpose, the greater cheapening of com- modities, and the increased abundance and comfort which result to the whole family of mankind. The argument that protection produces economy by having goods consumed near the point of production, is in a large measure fallacious, for if people import an article from a distance it shows that the difference in price more than covers its cost of transportation. Therefore, the economy of importing goods must be sufficiently great to cover the 338 PRINCIPLES OF POLITICAL ECONOMY expenses of the whole trading class ; else goods would not be imported. The idea advanced by some protectionists that the exporting nation bears the burden of transporting goods, and the exporters of raw products consequently bear a heavier burden than exporters of manufactured goods, is equally unfounded. In order to prove the fallacy of this assumption, let us inquire what would be the effect of reduc- ing from 20 cents to 10 cents the cost of transporting a bushel of wheat from New York to Liverpool. If, after this reduction in freight, American wheat continued to sell in England at the same price as it did before, the profit realized on every bushel of American wheat sold in England would be increased by 10 cents. This opportunity of secur- ing extra profit would inevitably cause increased supplies of American wheat to be sent to England, and this would con- tinue until the price of American wheat was so much reduced in England that it was not more profitable to sell it there than in America. The difference in the price of wheat in New York and in England cannot be permanently greater than is the cost of exporting wheat from New York to Eng- land. If therefore this cost is reduced, the price of American wheat in England must be also reduced by nearly an equiva- lent amount. The fall in price would not probably be quite equal to the reduction in the cost of carriage ; because as American wheat became cheaper in England, the demand for it would become greater, and this increase in demand might produce a slight rise in its price in America. It still, how- ever, is certain that a lessening of the cost of carriage would produce an almost equivalent reduction of price in the im- porting country ; it follows, therefore, that the cost of car- riage, instead of being borne by the exporting country, falls almost entirely upon the importing country. The first effect of a rise in the freight between America and England obvi- ously would be to increase the price, to the English consumer, of wheat and all other products imported from America. The immediate effect of levying a protective duty upon a PROTECTION AND PRICES 339 foreign product is to increase by the amount of the duty the expense of importing the commodity. This means that the foreign product must be sold at a higher price. If the foreign product formerly sold at 11.00 and the duty is 50 per cent, the result will be to raise the price of the article to about $1.50. This is the very object of the duty, for the increased price is intended to induce domestic producers to engage in the industry. If domestic producers could have made a fair profit before the duty was imposed, there is manifestly no need to encourage capital to engage in this industry by offer- ing the inducement of artificially high prices. Protection, therefore, by causing artificially high prices, cannot under any circumstances be regarded as conducing to cheaper production. Very few of our " infant industries " regard themselves as self-supporting, and the industry that is not self-supporting causes a permanent economic waste to the whole community. Repeatedly, moreover, domestic pro- ducers in this country have combined to raise prices behind the barriers of the protective tariff. Suppose, for example, that foreign goods can be sold here at 81.00, and that a duty of 50 cents is imposed in order to preserve the home market for our own producers. In this event foreign goods cannot be sold here for less than 81.50. Now sup- pose that improved methods of production have made it possible for American producers to sell this article profit- ably at $1.25. If they form a combination, they can keep the price at a level far above the cost of production plus a reasonable profit ; they could, in the example here given, keep the price at $1.49, because the duty excludes foreign com- petition at any price less than $1.50. As a matter of fact, a number of our important products are now regularly sold to foreign customers at prices lower than those charged to American consumers. Our supposition is therefore no purely imaginary one. When there is no such combination among American producers as that adverted to, the article above referred to 340 PRINCIPLES OF POLITICAL ECONOMY will sell for $1.25, if domestic producers can supply all the domestic demand. In this case domestic consumers bear a burden of 25 cents on each article bought. In any case, domestic consumers are sure to bear a burden proportionate to the greater expense at which the domestic article is pro- duced. This burden on consumers ceases only when the domestic money cost of production becomes as low as the foreign cost, and then the protective duty is no longer needed. The essential features of the free-trade argument may be summed up in the following five points : (1) From the view-point of consumption, protective duties tend beyond all question either to actually increase the cost of living or to prevent its decrease. Living certainly is cheaper in free-trade countries like Belgium and England, or semi- free-trade countries like Switzerland, than in the United States or in France. Import duties usually cause an increase not only in the price of imported goods upon which the duty is levied, but in the price of all similar goods consumed within the country. In this way the public pays, out of its own pocket, in the guise of increased prices, much more than the government actually collects in customs duties. Suppose for instance that France imports 40,000,000 bushels of wheat, and that this wheat is worth, at the port of arrival, $1.00 per bushel. Because of foreign competition in wheat, the 300,000,000 bushels raised in France will also bring only $1.00 per bushel. This is precisely why French farmers complain. Now sup- pose that in accordance with the demands of the agricul- turists, a duty of 50 cents per bushel is levied on imported wheat. 1 The government will then collect, through its cus- toms officials, (provided the duty has not reduced imports) the sum of $20,000,000. But consider the position of the 1 The strongest advocates of protection in France and Germany are the agricultural classes. In Germany their influence has recently resulted in the passage of a high protectionist duty on imported cereals. PROTECTION AND PKICES 341 general public. Wheat consumers will now bear an addi- tional burden of 50 cents per bushel of foreign wheat, or a total of 120,000,000, the amount paid to the government. But this is not all ; the consumers will pay considerably more than this. French producers will naturally sell their wheat at the same price as foreign wheat, and the French people will therefore pay 50 cents more for every bushel of wheat raised in France, that is, an additional sum of $150,000,000. Above and beyond the amount brought into the government treasury, $ 150,000,000 must be paid by the public to native wheat-growers ; thus the consumers will be compelled to bear a total burden of $170,000,000, because of the protective duty on wheat which increases the govern- ment revenues by merely $20,000,000. It is true that the inverse effect may take place. It may happen that the protective duty, by keeping prices at an artificially high level, will give an excessive impetus to pro- duction, and then, because of relative overproduction, again entail a fall in prices. At the present time this very phenom- enon is taking place in France with regard to wine-growing. The high duty put on foreign wines, and the subsequent rise in prices, led to so great a production of wine that it exceeded the demand and resulted in the failure of many wine-growers to dispose of their goods. The same result, although on a smaller scale, has taken place in French wheat- production. When such effects as these are the result of protective duties, wherein does their advantage consist? Is it an ad- vantage for a country to be inundated with its own products rather than with foreign goods ? Is it not true, on the contrary, that overproduction at home is worse than over- production abroad, so far as we are concerned ? For against foreign overproduction we can defend ourselves very simply by purchasing no more than we require, whereas the refusal to buy native products will cause the ruin of some of our fellow-citizens. 342 PRINCIPLES OF POLITICAL ECONOMY (2) From the point of view of distribution, protective duties create injustice, because their effect is to guarantee an increased income to the producers of protected goods. And this favoritism is all the more objectionable in view of the fact that most governments persistently refuse to grant to laborers a legal minimum wage. (3) Even from the standpoint of national production, which protective duties are supposed to foster and sustain, free traders contend that these duties really do an incontest- able injury to home production by increasing the cost of raw materials (whenever there are duties on raw materials), im- plements, machinery, and all the equipment of productive enterprises. 1 We have already explained that all protective duties, whether on raw material or on manufactured goods, invite capital away from industries in which a nation has unparalleled advantages into industries where facilities are not so good. Their immediate effect, therefore, is to de- crease the productivity of a nation's capital and labor by turning it from its natural channels into protected industries and thus causing economic loss. It has been observed that when once any industry is pro- tected there immediately arises the necessity to protect others, which are handicapped by having to pay higher prices for some of the goods they require. " Fire," says Fawcett, " is not more certain to spread amongst inflammable material than is protection, when once sanctioned, to embrace a constantly increasing number of industries within its influence. Each new protective duty that is imposed inevitably creates a demand for protection in other industries." Free traders 1 Sometimes goods are admitted to a country free of duty on condition that they shall be reexported in a different form within a given space of time. Thus some countries admit iron, wheat, etc., free of duty on condition that they be reexported as manufactured goods. The producer importing these goods must give some guarantee that they shall be exported again within a given period. Drawbacks are duties which are repaid when goods brought into the country are again sent out of it. They are merely restituted customs duties. FREE TRADE AND PRODUCTION 343 assert, moreover, that nothing is better calculated to exert a deteriorating influence on a country than to encourage its industrial classes to be perpetually looking to the state for assistance. " This continual law-making about industry has been prolific of industrial and political mischief. It has tainted our political life with log-rolling, presidential wire- pulling, lobbying, and custom-house politics. It has created privileged classes in the free American community, who were saved from the risks and dangers of business to which the rest of us are liable." l (4) From the commercial point of view it has been noted that protective duties reduce imports and thus simultaneously tend to reduce exports. Hence they are entirely incompati- ble with the efforts made to faciliate intercourse between nations by building tunnels through mountains, construct- ing canals, spanning the seas with lines of subsidized ships, laying telegraphic cables, encouraging international exposi- tions, and establishing international monetary regulations. Can anything be more absurd than to spend millions for dig- ging canals and building roads, and then stationing customs officials at both ends or at the principal sea-ports of the nation in order to restrict the passage of as much merchandise as possible ? (5) From the point of view of industrial progress free trad- ers hold that protective duties slacken progress by remov- ing or attenuating foreign competition. Prince Bismarck in one of his political speeches spoke of those pike-fish that are sometimes placed in carp-ponds to keep the carps on the alert and prevent them from burying themselves in the mud. The comparison would be entirely appropriate in this connec- tion. For a country to retain its rank as a great industrial and commercial power, and this is precisely the aim of protectionists, it must constantly renew its industrial equipment and eliminate those methods and implements that 1 W. S. Sumner, "Lectures on the History of Protection in the United States." 344 PRINCIPLES OF POLITICAL ECONOMY are not entirely up-to-date. This necessity is always more or less unpleasant to producers, and it is extremely question- able whether they wo-uld feel it or submit to it with good grace unless they were forced to do so by the pressure of foreign competition. Thus far the free traders appear to have the better of the discussion. But there are two other arguments for protec- tion that have considerable force, and that cannot be put aside so easily as the preceding ones. The first which we have already suggested lies in the fact that a nation, having the right to exist as a nation, also has the right and the duty to develop all the dormant possi- bilities of economic development that lie within it, agricul- tural, industrial, and commercial. It should strive to make the best, the completest, and the most diversified use of its soil, its climate, and the qualities of its population. It should not be willing merely to become a wheel in the universal mechanism, but should develop and preserve its own peculiar genius and native characteristics. Protection may therefore be regarded as a kind of disci- pline, like that which prevents a pupil from having his tasks done by a companion more able than he and which thus obliges him to do them himself. Its purpose is not to raise prices, but to increase home production sufficiently to meet all the needs of the nation. There is of course some truth in this argument. But, it may be asked, is not free trade a superior " educative " system by virtue of the severer discipline to which it subjects home industry and agriculture ? Is it not better adapted to the development of the unknown resources of a country ? This question cannot be answered dogmatically; it is one that each country must answer according to its own peculiar tem- perament and ideals. The second argument is that the deplorable state of immi- nent war, or at least of armed peace, that characterizes the NATIONAL DEVELOPMENT AND DEFENCE 345 beginning of the twentieth century has created an abnormal situation and temporarily justifies the system of protection. As we happen to be living in a barbarous epoch wherein all nations fear the possibility of an almost universal war, it is natural that each country should defend the industries that are indispensable to its own safety. These indispensable industries include not only the production of weapons and of food, but also that of the coal which is necessary to propel trains and vessels, as well as the iron, horses, wheat, meat, cloth, leather, and all that is directly or remotely necessary to equip and maintain thousands of men under arms. Eng- land, to be sure, imports more than half her food supply from abroad ; but she dares do this only because she is mistress of the great maritime routes, and because she expends colossal sums of money in order to retain her naval superiority. If ever she had reason to fear that her maritime intercourse might be interrupted, there is no doubt that she would at once adopt measures for increasing her agricultural produc- tion, even though artificial encouragement were found neces- sary. Considering the vast proportions which modern warfare would probably assume, and the probability that nearly the whole adult male population of belligerent nations would be brought under arms, as well as the likelihood that all the economic resources of the nation would be drawn upon, it may be truthfully said that every occupation aids to some extent in the national defence. Granting all this, we must nevertheless inquire whether protection does .not have precisely the effect of creating the danger against which it pretends to defend us. Is not a " tariff war " likely to provoke war of the bloodier sort ? And would not free trade have the opposite effect by making war almost impossible ? A long time ago, Montesquieu said that "the natural effect of commerce is to produce peace." At all events, if protection is accepted as a military neces- sity, it must then be considered as a supplementary expense added to the war budget, and not as a national revenue. 346 PRINCIPLES OF POLITICAL ECONOMY Thus, one American economist calculated that a certain spin- ning mill had cost the country more than an armed cruiser. This manner of considering the subject does not appeal to protectionists ; they prefer keeping up the illusion of imagi- nary gains for the nation. But why should they fear to be frank ? It would be better to declare boldly that protective duties and tariff wars are fully as good as armed peace and actual warfare. They are, perhaps, quite as expensive ; but they may be necessary means for obtaining a due share in the world's prosperity and influence. VIII. The Relative Importance of Foreign and Domestic Commerce Whatever may be the theoretical merits of the policy of unrestricted foreign trade or of that which would erect tariff barriers between nations, it would be unjustifiable to leave this subject without calling attention to two matters which are often overlooked. The nations of the earth differ widely in area, population, the nature of their soil and subsoil, in the qualities of their inhabitants and in the genius of their institutions. All these elements must be taken into account in the discussion of a commercial policy. The size of some countries is such that they could under no circumstances aspire to national self- sufficiency in economic matters. The principality of Monaco, with an area of eight square miles and a population of 13,000, or the grand duchy of Luxemburg, with an area of about 1000 square miles and a population of 218,000, would scarcely act wisely in cutting off foreign trade. This is equally true of Denmark, Switzerland, Belgium, Portugal, Greece, Hol- land, Norway, and Sweden, with populations ranging from 2,000,000 to 6,000,000. There is but little variety in the products of these nations. Because of their limited size, the uniformity of their climate and their soil, they lack a large number of raw materials. If these nations undertook DIFFERENCES AMONG NATIONS 347 to produce all kinds of commodities for themselves, the di- vision of labor would necessarily be of the crudest sort. Countries possessing large territory, but a very sparse popu- lation like the Argentine Republic and Brazil are in a somewhat different position, but one which is nevertheless not altogether unlike that of the above-mentioned countries. These vast territories contain unlimited and varied natural resources, but their small population, a great part of which consists of negroes or of uncivilized indigenous tribes, makes it impossible to carry out the division of labor to any great degree, except for a few branches of production. The domestic commerce of such nations as Belgium and Holland, for instance, is of less importance than their for- eign trade. The Dutch have become wealthy by importing and exporting goods, and their present principal source of gain is the forwarding trade. Norway has but few com- modities to sell, and must buy a multitude of things abroad. Denmark, Switzerland, and several other nations occupy a similar position economically. On the other hand, large nations, like Russia and the United States, possessing immense territorial dominions and a large population of varied character, are evidently in a much more favorable position for the development of their economic self-sufficiency. They form, as it were, economic worlds in themselves, and would suffer little loss from the interrup- tion of international trade. Russia, with an area of over 8,000,000 square miles and a population of nearly 130,000,000, and the United States with an area of 3,000,000 square miles (excluding Alaska and our colonies) and a population of almost 80,000,000, evidently are not in the same category with Holland and Portugal. The United States occupies a compact strip across the Western Continent, extends from the subtropical regions to the region of long winters and short summers, and includes a greater variety of products than any other one country in the world. An elaborate system of communication and transportation, almost unlimited natural 348 PRINCIPLES OF POLITICAL ECONOMY resources, and the singularly inventive turn of mind of our population, give the United States, with but one-fifth the population of China, a greater productive capacity than that country possesses. Under these circumstances it is not surprising that our foreign commerce sinks into insignificance when compared with our domestic trade. The total value of imports and exports of the United States for the fiscal year 1902 was $2,285,040,349, and although this amount of foreign commerce was exceeded only by that of Great Britain and Germany, our domestic trade exceeded our foreign trade many times over. Within the borders of this nation lies the largest free- trade district in the world, with a volume of trade surpass- ing the entire foreign and domestic commerce of the United Kingdom. It is of course a more difficult matter to ascertain the extent of domestic commerce than that of foreign trade. As all goods imported and exported must pass through the cus- toms houses, where their kinds, quantities, and values go on record, the amount of foreign trade can be learned with com- parative exactness. The same is not true of domestic trade. " The railroads are required to keep an account of the quantity of freight they carry, but not of the value, and the kinds of goods are given only roughly. On the watercourses it is still more difficult to know what the trade is ; figures are published stating the number of tons of freight carried, but many of them are only estimated, and much freight never gets on record at all. If the long-distance traffic is thus imperfectly known, what shall be said of the local trade ? Farm wagons, drays, local express companies, and delivery wagons do the transporting when the customer does not carry away his purchases by hand ; only the dealers can give even an estimate of this business, and that they rarely do; still more rarely is the sum of the transactions of all dealers within a locality ever known with any degree of accuracy. Then there is a vast amount of trading in which merchants IMPORTANCE OF HOME TRADE 349 have no part ; Peter and Andrew trade knives, two farmers in the backwoods trade horses, a gardener sells some potatoes to a neighbor the volume of such transactions can of course never be known. Our compilation of statistics for domestic commerce will therefore be attended with much uncertainty." 1 Some figures, however, recently compiled by the Treasury Bureau of Statistics, which has become a part of the newly founded cabinet Department of Commerce and Labor, esti- mate the internal commerce of the United States at 120,000,000,000, more than the entire international com- merce of the world. In arriving at this estimate, the Bureau of Statistics includes only one transaction in each article pro- duced, whereas, in fact, a very large number of the articles produced pass through the hands of several middlemen before reaching the consumer. 2 The estimate is based on the figures of the Twelfth Census, which put the total value of manu- factures in 1900 at $13,000,000,000, those of agriculture at nearly 14,000,000,000, and those of minerals at over $1,000,000,000. Adding to these the products of the fisher- ies, the total value of the products of the great industries of 1900 would be $18,000,000,000. The rapid growth of all lines of industry since 1900, especially in manufacturing, seems to justify the conclusion that even a single transaction in all the products of the country would mean an aggregate for 1902 of nearly $20,000,000,000. 3 Estimating the domestic commerce of the country at former census years by the same method, the Bureau of Statistics finds that our total domestic commerce has grown approxi- 1 Clow, " Introduction to the Study of Commerce," p. 104. 2 The term commerce applies only to the change of ownership, as we have explained ; therefore goods which are kept by the producer for his own use do not properly fall under the head of commerce. But the amount of goods so kept is relatively small and constantly decreasing. 3 Mr. C. C. Adams,inhis " Commercial Geography," gives $28,000,000,000 as the value of our domestic trade, without, however, explaining how he reaches this figure. The same author is authority for the statement that the people of the United States buy $40 worth of home products for every dollar they expend for foreign goods. 350 PRINCIPLES OF POLITICAL ECONOMY mately as follows : $2,000,000,000 in 1850 ; 13,500,000,000 in 1860 ; $6,250,000,000 in 1870 ; $7,750,000,000 in 1880 ; and $12,000,000,000 in 1890. It will be seen from this esti- mate that our internal commerce has increased 50 per cent in the decade from 1890 to 1900, and is ten times as large in 1902 as in 1850 ; meanwhile, from 1850 to 1900, the popula- tion has increased three and one-half times. The foreign commerce of the nation has also increased during this period, but it is far from approaching the impor- tance of domestic commerce. IX. Some Moderate Forms of Protection Is there no other system to accomplish the object for which customs duties are devised? Can there not be protection without protective duties ? Theoretically, yes ; by means of premiums to producers. 1 This method seems to offer none of the objections to which a system of import duties gives rise ; it appears to be supe- rior to protective duties for the following reasons : (1) Premiums can be graded at will, in such a manner as to protect those producers that most need protection, and not the others ; while customs duties often establish an unequal protection, insufficient for the weak and unnecessary to the strong. Premiums can be adjusted to the cost of production, which is seldom exactly the same in any two establishments. Within any industry there may be ten or a hundred dif- ferent costs of production. Some establishments barely manage to pay expenses. Others make large profits for selling at the same price that the first establishments receive. (2) Premiums of this kind put no obstacle in the way of 1 Premiums on production must not be confounded with export premiums such as are employed by several nations (Germany, Austria, and France) in the case of sugar, and which produce the strange result that sugar is sold cheaper abroad by these countries than at home. It is likely that these premiums on exported sugar will be abolished very soon, in accordance with an international agreement made in 1902. MODERATE FORMS OF PROTECTION 351 foreign commerce ; they permit the development of exporta- tion and importation and do not raise the price of goods, whereas customs duties involve an expensive administration and give rise to the systematic, demoralizing practice of smuggling. (3) They are least likely to provoke international con- flicts. (4) They by no means hinder production, since they do not increase the price of raw materials, and are thus not open to the objection of artificially raising the cost of production. On the contrary, they may be instituted under conditions that will stimulate the progress of particular industries. (5) Finally, and above all, this system does not purport to be anything else than what it really is, namely, a sacrifice im- posed upon the nation for reasons of public utility. It gives rise to no misconceptions, and sanctions no misrepresenta- tions. The public knows that it is paying for this " protec- tion," and knows exactly how much it pays. Herein consists the great economic and moral superiority of this method. Customs duties, on the other hand, give rise among the people to a dangerous misunderstanding by leading them to regard as a gain that which in reality is a burden. But this last characteristic explains why protectionists prefer customs duties. Premiums or bounties to producers would make the matter too plain. This, moreover, is why such a system as we have suggested can never become popu- lar. It makes altogether too palpable and evident the fact that a sacrifice is required of all citizens and a privilege accorded to the few, thus violating the sentiment of equality. Its successful application, furthermore, requires a discern- ment and an impartiality which can scarcely be hoped for in any human government. 1 1 Other devices have also been employed for the same purposes : (a) dif- ferential charges, by which, for example in Austria, special railroad rates are accorded with a view to encouraging the exportation of certain commodi- ties ; (b) guaranteed interest on capital invested in some new industry which 352 PRINCIPLES OF POLITICAL ECONOMY Some years ago there began a movement which, without advocating either protection or free trade in general, favored reciprocity in the matter of customs tariffs. In England this is called fair trade, as opposed to free trade. It is often- times argued that by the adoption of restrictions upon trade nations do each other injury. It is said that free trade would be all very well if every nation adopted it ; but as long as other nations impose tariffs on our goods, we must be prepared to retaliate. Some of those who hold this view regard a tariff simply as a diplomatic means of securing mutual concessions, "sometimes treating these concessions as steps toward a general policy of tariff reduction the world over, which was the plan pursued by the ministers of Napo- leon III; sometimes bargaining for them as special privileges not to be granted to the world in general, which is the idea underlying the present reciprocity treaties of the United States. " When this view is accepted, a policy of tariff warfare follows as a matter of course. There are times when it seems as though a great many nations were carried away with this spirit of commercial hostility." l When this system is employed by way of reprisals to compel a protectionist country to reduce its duties, if, for example, England should answer the high tariffs of the United States by heavily taxing American products, it may very well be justified. In such a case, however, the question of tariffs is political rather than economic. But if we regard this conception as a scientific theory, we find that it has no logical basis. For if the protectionist system is good, it should be adopted; if it is bad, it should be abandoned. The question whether other countries have it is desirable to encourage (often used in South America and Mexico) ; (c) tax exemptions or reductions for new industries which a government seeks to acclimatize, frequent examples of which method are offered by Hungary and Roumania. 1 A. T. Hadley, "Economics," p. 444. COMMERCIAL TREATIES 353 adopted it or not has no bearing on the problem ; that is their concern, not ours. No doubt if the states of Europe were to levy duties on American products, they would harm the United States. But they would also harm themselves; and the evil which we are in a position to do our neighbors cannot be regarded as a compensation for that which we inflict upon ourselves. Another form of moderate protection consists of counter- vailing duties. Its advocates assert that when a country is more heavily burdened by taxation than foreign nations, it should, in order to reestablish equality in competition, burden foreign products with duties at least equal to the taxes paid by native producers. We must be careful to understand just what this mean,s. If it means simply that those goods which within the country are burdened with certain taxes, like whiskey and tobacco, should be taxed to the same extent when imported from abroad, no one will challenge this principle of fiscal equality. But if it means that whenever a country has the misfor- tune to be oppressed by heavy taxes of all kinds, it can lighten this burden by imposing high customs duties on foreign goods, it is utterly absurd. Indeed, such an argu- ment is entirely based on the notion that customs duties are paid by foreign exporters. If, as we have endeavored to show, these duties really fall on our own people in the form of higher prices, then we may grasp the peculiar nature of this plan of compensation, which, under pretence of equal- izing the struggle, doubles the burdens of a nation that is already most heavily laden. X. Commercial Treaties Between the system of free trade (meaning laissez faire and competition) and that of protection (meaning national autonomy and governmental regulation) there is fortunately another commercial policy, namely, that which is founded on international agreement and which we may call the con- 354 PRINCIPLES OF POLITICAL ECONOMY tractual system. It may be regarded as a true outcome of the spirit of international amity, and the expression of vol- untary solidarity. We have already given utterance to the hope that this solidarity will ultimately become the normal method of regulating economic relations among individuals (see pages 38-40) ; similarly, we hope that it may become the customary manner of determining relations among nations. Such is in fact the present tendency. Commercial treaties, by which nations peacefully and carefully reach some definite and permanent agreement with regard to their economic rela- tions to one another, seem the wisest policy that an enlight- ened nation can adopt. They place reasonable limitations upon countries that are disposed to make exaggerated claims. They give rise to a reciprocity of interests, and lay the foun- dation of friendliness and solidarity among the contracting nations. 1 Commercial treaties offer the following advantages : (1) They guarantee the stability of tariffs during a defi- nite period, generally ten years. This circumstance is very favorable to the development of commerce. It is of course true, on the other hand, that they bind the contracting nations and thus deprive them of the privilege of changing their cus- toms duties according to varying circumstances ; but this immutability should be regarded as a good, not as an evil. (2) They permit of a differentiation of duties, according to the country with which the treaty is made, whereas customs duties otherwise are necessarily uniform and special provision cannot be made for differences in the economic conditions of various nations. It is true that this advantage is practi- cally almost done away with by the so-called " most favored nation clause," which is usually inserted in all treaties, and by virtue of which any concession made by one nation to 1 The commercial treaties recently made by Germany, Austria, Switzer- land, and Belgium have founded a sort of Central European customs union. The United States has tried thus far without much success to form a customs union that shall include all the American republics. COMMERCIAL TREATIES 355 another is immediately extended ipso facto to all other nations having previously made treaties with the contracting nation. (3) They lead gradually to a more liberal regime and to the abolition or lowering of barriers between nations, because, with every renewal of a commercial treaty, the contracting parties wrest concessions from each other ; whereas the pro- tective system, once firmly established in a country, tends to grow more radical and more general, for the reason that all classes of the community claim a share of the spoils. There can be no doubt that, in many European countries, the recent rapid increase in the amount of goods imported from America has given rise to a movement in favor of pro- tective measures against American products. Particularly in Continental Europe this tendency appears to be growing stronger, and may culminate in measures that will seriously restrict American exportation to those countries. The adop- tion of commercial treaties upon the basis of mutual tariff concessions, however, will doubtless be found the most suc- cessful method of preserving and extending the European markets conquered by American goods. CHAPTER V CREDIT I. Credit is only an Extension of Exchange CREDIT is protracted exchange, that is to say, exchange which is not complete until a certain period of time has elapsed. Introduce the element of time into exchange, and it becomes credit. Hence credit may be defined as the exchange of present wealth for future wealth. For example : I sell you some wool, but you have no money with which to pay me, i.e. no present wealth to give me in exchange for what you have received. This does not pre- clude exchange between us. All that you will have to do is to give me, in exchange, part of the wealth which you intend/ to create with the wool, say an equivalent value in cloth when you have manufactured it of the wool I gave you. In this example the underlying exchange is perfectly obvi- ous. The transaction is a sale, differing from ordinary sales only in the circumstance that payment is not made immedi- ately but at some future date. Now this difference, which appears to have little significance, has very important conse- quences. It is, indeed, no small matter to introduce the element of futurity into the domain of contracts. There is another kind of transaction in which the under- lying fact of exchange is less perceptible, Suppose that, instead of selling you the wool, I lend it to you ; that is to say, its transfer is conditioned upon the return of some equiva- lent when you have used the wool to make cloth. Evidently, you will not return to me the same wool that I lent you, for you have employed it to make the cloth. You can, however, give me an equal value when you have sold the cloth. Here again, although there has really been no sale on my 356 CREDIT IS PROTRACTED EXCHANGE 357 part, it is obvious that present goods have been exchanged for future goods. The operations just described sale on condition of pay- ment at some future date, and loan are the two essential forms of credit. Other things being equal, present goods are always more desirable than future goods. Goods for which we must wait have less value than those already in our possession. When, therefore, present wealth is exchanged for future wealth, the equilibrium of exchange must be established by requiring the borrower to give back a somewhat higher value. When payment is deferred the price of goods is likely to be higher than when cash is paid; the difference between the two prices is commonly called discount. Wholesale business houses generally give discounts for the immediate payment of bills, or for their payment in shorter periods than are customarily allowed. The same principle explains why in the case of loans the sum returned is always somewhat larger than the sum loaned, the difference being called interest.* Credit involves the following characteristics : (1) The consumption of the object sold or loaned ; (2) the expecta- tion of some new object of value to take its place. The man who lets a house or a farm knows perfectly well that the house or farm remains the same whether he or a tenant occu- pies it, and that it will ultimately be restored to him. But the man who yields an object designed for consumption knows that he loses all control over the object. He knows that it will be destroyed ; that, in fact, is its purpose. Wheat, for instance, must be ground, to produce flour ; it must be planted, to give a new crop. Even money must be spent or invested in some way before it can produce additional money. The destruction of wealth, it should be noted, for the 1 Consult Boehm-Bawerk, "Capital and Interest." In this section we have nothing to do with the question whether discount and interest are legit- imate, nor with the question whether they can be done away with. These questions come under Distribution. 358 PRINCIPLES OF POLITICAL ECONOMY purpose of creating future wealth, is always a problematical operation for both lender and borrower. Consider first the lender. He always incurs more or less risk. To be sure, he expects to receive more than an equiva- lent amount of future wealth. But this anticipated wealth does not yet exist ; before he can receive it, it has to be produced, and whatever is future is ipso facto uncertain. For this reason legislators have sought to devise means for protecting the lender against loss ; and the devices and precautions which they have introduced from time to time constitute one of the most important branches of civil law : guaranty, liability, mortgages, etc. Notwithstanding legal protection, the lender always must have more or. less confidence in the borrower. This is why the term " credit " is applied to this particular kind of loan. Credit, as the word itself indicates (credo, I believe), means faith. Consider now the borrower. Unlike the tenant of a house or a farm, the borrower is not bound to preserve intact the object lent to him, and to return it to the owner at the expiration of a fixed period. In using it, that is to say in destroying it, he must create an equivalent value with which he can meet his debt when it is due. He must therefore be extremely careful to employ this wealth productively. If he consumes it unproductively (e.g. for personal expenses), or even if he fails to reproduce an amount of wealth at least equal in value to that which he borrowed, he suffers a loss. A list of the unfortunate borrowers of all nations and of all epochs, whose ruin was due largely to the misuse of credit, would be interminable. Credit, therefore, is an infi- nitely more dangerous productive device than those we have heretofore considered. It is likely to render efficient service, in production, only in communities which have reached a high stage of industrial education and development. THE INVENTION OF NEGOTIABLE PAPER 359 II. The History of Credit Of all systems of economic organization, that based on credit is the most recent. In fact, its function is too complex to permit of its introduction among primitive peoples. At present it presupposes the accumulation of capital in the form of money, although among primitive peoples credit appears to have existed in the custom of lending cattle. It may, indeed, be held that loans played an important part in Antiquity and in the Middle Ages. This is true. But loans were then regarded simply as a kind of assistance given by members of the same family or of the same social class to each other in cases of exceptional need, or as a method of exploiting foreigners and members of other social classes. 1 Credit was rarely employed as a method of encouraging pro- duction. Hence the opprobrium which attached to the loan of money or goods, and the riots which were frequently caused by debts of this nature. In the loan contracts of the Middle Ages the church fathers endeavored to distinguish those cases in which loans aided production (and for which they admitted that interest was legitimate) from those in which it was clearly unproductive (in which cases they called interest usury and forbade it). They did not reason so poorly as some critics have supposed, inasmuch as the measures that they adopted were dictated by the needs of the epoch. As a means of facilitating production, credit arose only when it became possible to regard future wealth, which is the true object of credit, as commercially transferable from one person to another. This important step was accomplished by the invention of negotiable paper, credit instruments that may be bought and sold in the market in much the same way that other goods are. The use of negotiable paper dates probably from the thirteenth century. 2 1 " Unto a stranger thou mayest lend upon usury ; but unto thy brother thou shalt not lend upon usury" (Deuteronomy xxiii. 20). 2 Professor Hildebrand, one of the founders of the German historical school of economists, made credit the basis of his division of economic evolu- 360 PRINCIPLES OF POLITICAL ECONOMY At the outset, credit instruments were not regarded as wealth, because they were neither consumable nor at all like material objects. A credit instrument was considered as a purely personal bond between creditor and debtor. In the significant words of the commentators on classical Roman law, the obligation adhered to the body or person of the debtor, ossibus haeret. If the debtor failed to repay, the creditor could not seize his goods ; there was nothing which he could seize but the person of the debtor. Roman law permitted the creditor to imprison the debtor or even to cut him in pieces, as the law of the Twelve Tables puts it, in partes secanto. Under such circumstances as these, the conception of transferable credit claims could not arise. But it was not long before Roman jurists took a great step forward ; credits or claims came to be regarded as wealth (jbona)) and by means of ingenious devices they were even made transferable (e.g. by what was called novatio and litis- contestatio) - 1 The transfer of credits, however, continued to tion. The first period was that of natural economy, in which there was no exchange or in which exchange took the form of barter ; the goods that were produced were consumed by the producers, and there was little or no change in the ownership of wealth. The second was that of money economy, marked by the introduction of sale and purchase. Exchange, which played an important part in the economic life of the community, was facilitated by the use of money. The third period is that of credit economy, characterized by the custom of deferred payment, by loans, and by other forms of protracted exchange transactions. This threefold division of economic evolution into Naturwirthschaft, Geld wirthschaft, and Creditwirthschaft must not be supposed to imply that at any time one of these systems prevailed alone. It is probable that barter will never entirely disappear ; indeed, we have shown that in many respects we have returned to what is practically a system of barter, e.g. in international trade. Credit, on the other hand, existed in an embryonic form among prim- itive tribes, where the custom prevailed of lending food or cattle. The above division, however, is true in the sense that certain periods have been charac- terized by the predominance of one system. Credit economy is only in its beginnings. There may come a time when it will do away entirely with money. (See page 290.) 1 Credit has likewise undergone another transformation which we can only indicate here because it belongs to the domain of law rather than that TRANSFERABLE CREDIT CLAIMS 361 be more difficult than the transfer of ordinary material goods, and even to-day, according to the French Civil Code (which may be regarded as the heir and outcome of the Roman legal system), the transfer of credit instruments involves formal- ities of a somewhat complicated nature, especially the notification of the debtor. But business law has always progressed more rapidly than civil law and served as a pioneer of legal evolution. Thus, in the Middle Ages, business law the " law merchant " devised admirable means of representing credit claims by certificates, transferable simply by indorsement. The most important kinds of negotiable credit instruments (" commer- cial paper") are bills of exchange and promissory notes. 1 of economics. It has lost the character of an exclusively personal matter, which it possessed at the outset, and become real, that is to say, it is now based upon some material security or lien, or at least upon the property of the debtor. Nevertheless, there appears here to be another example of that strange spiral evolution of which we have already mentioned several examples (page 287, note), inasmuch as the tendency now is to revert to personal credit, i.e. credit based solely on faith, which is the true and highest significance of the term. Examples of this are "lines of credit," cooperative credit socie- ties, etc. 1 In the case of a bill of exchange the creditor who has sold goods makes out a paper to this effect : NEW YORK, March 1, 1903. To William Wilson [the debtor], Chicago, Illinois. At sight of this bill, pay to John Jones, or order, One Hundred Dollars, for value received. (Signed') HENRY BROWN [the creditor]. Brown will sell this bill to Jones, who, if he chooses, may transfer it to any one else by indorsing it. The following is the form of a promissory note, made out by a purchaser of goods, or a borrower, to his creditor : PHILADELPHIA, March 1, 1903. Three months after date I promise to pay, to Henry White [the creditor], or order, the sum of Five Hundred Dollars, with interest at five per cent, for value received. (Signed) PHILIP JOHNSON [the debtor]. 362 PRINCIPLES OF POLITICAL ECONOMY Promissory notes are written promises to pay a sum of money upon demand or at some specified time. These notes may be transferred at will from one person to another, and circulate almost as freely as money. The payee or holder of the note may, by writing an order on the back and signing his name, make the note payable to a third person. By indorsing the note in this manner, any holder may use it as a means of paying his debts. When the final holder presents it for payment, it may have effected a number of exchanges. Transferability by indorsement is a marvellous simplifica- tion ; but indorsement is nevertheless a formality, and one of no mean importance, since it involves the legal responsi- bility of all those who sign the paper. Greater simplicity and wider use is attained by suppressing the need for a sig- nature, and creating credit instruments that may be passed from hand to hand as easily as money (e.g. notes payable to the bearer). With the accomplishment of this step we reach the latest stage in the evolution of credit. Henceforward vast amounts of wealth not fictitious wealth, but future wealth, which is something quite different are added to the sum total of present wealth, and circulate in the form of negotiable paper, or of paper payable to the bearer. These credit instruments of various kinds are now used to an extent that but a few years ago would have been almost inconceivable, and have given rise to a class of persons called bankers, whose business it is to deal in these instruments. An investigation made some years ago by the Comptroller of the Currency, concerning the use of various kinds of money and the use of checks, drafts, and other credit in- struments in the national banks of the United States, dis- A promissory note is simply a promise to pay made by a debtor to his creditor, but which the latter can transfer to other persons. A bill of ex- change (also called a draft} is somewhat more complicated ; it is an order addressed by the creditor to his debtor instructing him to pay a certain sum to some third person, designated in the bill, or his order, THE ADVANTAGE OF NEGOTIABLE PAPER 363 closed that less than 10 per cent of the receipts (in 1892) were in cash ; in the larger cities, such as New York, metallic money represented only 2 or 3 per cent of the bank receipts. But, it may be asked, what great advantage is there in representing credit by negotiable paper ? Although it is exceedingly desirable for a borrower or a person that buys on credit to have some capital at his dis- posal during a given period, it is not always convenient for the lender or the seller to be obliged, during the same period, to do without the money that is due him. A manufacturer daily finds it necessary to make purchases and to pay wages ; his business cannot continue unless his supply of capital is replenished from day to day by the sale of his manufactures. Suppose, however, that his manufactures are sold on credit, i.e. not for immediate, but for future, payment ; in this event it would seem impossible for him to continue his business. What, in this case, shall he do? It would appear that the same capital cannot be at the disposal of two persons at the same time, at the disposal of the lender as well as the bor- rower. Yet this apparent impossibility is accomplished by means of negotiable paper. In exchange for the capital which really belongs to him, but which he has for a time relinquished, the lender, or the dealer who sells on credit, receives an acknowledgment in the form of a bill of ex- change or a promissory note or some other negotiable or transferable paper ; this paper represents a value which, like all other values, can be bought and sold. Should the lender want his money, nothing is more simple than to get it ; all he has to do is to sell this paper, i.e. in the language of bankers, negotiate it. 1 III. Can Credit create Capital? Credit has acquired such importance in modern society that we are tempted to ascribe miraculous powers to it. 1 The expression buying and selling exchange is used frequently, and has reference to dealings in bills of exchange. 364 PRINCIPLES OF POLITICAL ECONOMY Speaking constantly of great fortunes founded on credit, and recognizing that the most extensive enterprises of mod- ern industrial life are built upon a basis of credit, we are easily persuaded that credit is a factor of production, and that it can create wealth quite as well as land or labor. But this is an illusion. Credit is not a factor or agent of production. It is a particular method of production, which is quite a different matter, just like exchange and the divi- sion of labor. It consists, as we have said, of the transfer of wealth or capital from one person to another. But to trans- fer is not to create. Credit can no more create wealth than exchange can create commodities. As John Stuart Mill has neatly put it, " Credit is simply permission to use the capital of others." What gives rise to the misconception which we are now discussing is the existence of credit instruments. We have seen that loaned capital is represented by an equal value of negotiable paper held by the lender. Hence it appears as though the act of lending doubles the amount of capital. The sum of $1000 which I have lent you, and your note for $1000 which I now have in my possession in place of the money, do not these two make a total of $2000 ? From the subjective or individual point of view the note is, in fact, capital ; it is capital for me, but not for the nation as a whole. For it is evident that I cannot negotiate the paper until some one will give me money or goods in ex- change for it. The note is therefore not capital per se, but simply affords me the possibility of obtaining other capital in lieu of that which I have relinquished. It is obvious, more- over, that whatever may be the use to which I want to devote the value represented by the note, whether I shall use it to pay my living expenses or use it for production, I can do this only by converting it into those articles of consump- tion or instruments of production which are offered for sale. It is not by means of pieces of paper that I shall support life or carry on production, but with the aid of whatever CREDIT HELPS PRODUCTION 365 tangible, actual wealth I can procure in exchange for this paper. 1 Although credit cannot be called productive in the strict sense of creating capital, it renders eminent services to pro- duction 2 by enabling us to use existing capital to the best possible advantage. 1 Mr. Macleod has acquired some distinction as an advocate of the theory that credit instruments are real wealth, true capital. He is, it must be ad- mitted, logical in his reasoning ; for he defines wealth as " everything that has exchange value." Credit instruments unquestionably possess exchange value, and would therefore fall under the head of wealth. But his defi- nition is wrong. If every credit instrument really constituted wealth, it would be possible to double the wealth of any community by simply having each citizen lend his estate to his neighbor in exchange for a note. Mr. Macleod maintains that these instruments at least represent future wealth. This is true, and exactly what we have said ; but the very fact that they are future wealth makes it illegitimate to count them as existing wealth. When they have become present wealth, they will be counted. Until then there will always be this important difference between present and future wealth : the former exists, whereas the latter does not exist. Men live and produce by means of present wealth, not by means of anticipated wealth. To reckon future wealth as part of a nation's riches would be like taking a census by adding to the present population those persons who will be born twenty years hence, on the ground that they are future members of the community. Professor Leroy-Beaulieu remarks that Macleod's theory is like maintain- ing that whenever a person is reflected in a mirror, there are two persons instead of one. 2 We speak advisedly of its services to "production," because credit for consumption ordinarily has disastrous consequences. Credit for consumption, however, may be admitted as rendering some services, such as : (a) helping us to tide over difficult situations while awaiting a turn of fortune ; (6) sim- plifying accounts and avoiding very frequent payments (for example, the daily purchase of bread " on credit " at the baker's). Professor Leroy-Beaulieu, in his interesting discussion of credit (Vol. Ill, page 374, " Economic politique "), points out these three advantages : (1) The transfer of capital effected by credit ordinarily results in a better use of this capital by the borrower (and by society) than would have been made by the lender. (2) By placing capital in the hands of those persons who are able to make a better use of it than those who accumulate it by saving, credit enables the former to give the latter, in return for the relinquishment of their funds, a share in the results of this better use of capital. Thus credit makes saving more advantageous and contributes to the growth of capital. 366 PRINCIPLES OF POLITICAL ECONOMY If capital could not be transferred from one person to another, and if everybody were reduced to the necessity of employing his own capital, and only his own capital, an enor- mous amount of wealth would remain unused. In all civil- ized societies there are many persons who cannot make use of their own capital, or, at least, cannot make the most profitable use of it. Among these persons are the follow- ing: (CL) Those who have too much capital. As soon as a man's fortune exceeds a certain sum, it is no easy matter for him to make the best use of it by his own ability alone ; usually, moreover, the possessor of a very large amount of capital is little disposed to take the necessary pains to make the most productive use of it. (6) Those who have not enough. Laborers, farmers, and servants, who have saved small sums of money, would be at a loss how to employ these small savings productively. But when these savings are united they amount to millions, and permit of carrying on vast productive enterprises. () they receive no dividends, and whatever profits there may be constitute a part of the general funds ; 396 PRINCIPLES OF POLITICAL ECONOMY ((?) the members are all liable, to the extent of their property, for each other's debts. The last of these features explains the exceptional moral and educational value of these organi- zations. 3. PEOPLE'S BANKS. It is a familiar remark that "only the rich can borrow," and the experience of every day seems to prove it. Yet the poor also may have need of credit, even more than the rich. How, then, can they obtain it? This problem is easily solved by cooperation. An isolated laborer or artisan, no matter how honest or industrious he may be, cannot furnish sufficient guarantee for a loan. Sickness, loss of work, and death, may at any time overtake him and make it impossible, despite his best intentions, to pay back what he has borrowed. But if laborers or artisans to the number of ten, a hundred, or a thousand are grouped in an organization, and held together, if need be, by the ties of collective responsibility, the security they have to offer will be considerably greater, and they will find it much easier to obtain credit without falling into the hands of usurers. The dues which are paid to such an organization, moreover, will ultimately build up a large amount of capital which the organization can lend to its members. Under the leadership of a man whose name is still con- nected with them, that of Schulze-Delitzsch, these coop- erative banks, the essential characteristic of which is the unlimited liability of all members, have achieved extraordi- nary success in Germany. 1 The heads of these associations 1 The first of these banks was established in 1849. The system made but slow progress until 1860, when it grew more rapidly. According to the latest report issued (that of 1901) there were 949 German cooperative banking asso- ciations and 621 consumers' cooperative societies. Statistics are given for only 870 of the former, having a total membership of 511,000, a capital (in- cluding shares, deposits, and loans) of $200,000,000. The loans made to members amounted to nearly $575,000,000. Compared with this enormous amount of business, the losses were insignificant, only one-twentieth of one per cent. The profits amounted to $3,000,000, most of which was divided among the members, not, as the cooperative principle would seem to dic- tate, according to their loans, but according to the value of their shares. BUILDING ASSOCIATIONS 397 hope that they will enable small-scale industry to compete with the larger industrial concerns, by helping them to obtain the capital and the equipment which they need. This will be an exceedingly important result, if ever it is accomplished. It should be pointed out, however, that these cooperative banks, whenever they succeed in sustaining small-scale com- merce and small-scale individualistic production, are accom- plishing an object diametrically opposed to that of consumers' and producers' cooperative associations. It is for this reason that cooperators of the latter type are not enthusiastic over institutions of the first-named variety. Apparently the only system which could to any noteworthy degree improve the conditions of our city working- classes is that which would grant credit to groups of producers and enable them collectively to acquire ownership of their instru- ments of production. (See the next Book.) Experiments along this line were made in France during the reign of Napoleon III. But up to the present, credit granted to groups of laborers for productive purposes has accomplished nothing of importance. 4. BUILDING ASSOCIATIONS. In England and the United States there seem to be no cooperative banks, strictly speak- ing. Cooperative credit in these countries has been confined almost exclusively to the so-called building and loan asso- ciations, the primary object of which is to enable working men to build or acquire homes for themselves, the property being mortgaged to the association till the amount advanced is fully repaid. The first building society in England was organized in 1781, although societies of this sort were not recognized by law until 1836. By the year 1898 there were some 2500 of them in England, with aggregate assets of nearly $300,000,000. The first building association in America was organized at Frankford (now a part of Philadelphia) in 1831. Accord- ing to the Report of the Commissioner of Labor (1893) there are nearly 6000 such associations in the United 398 PRINCIPLES OF POLITICAL ECONOMY States, with nearly 2,000,000 shareholders and assets of over $450,000,000. The building and loan association is practically a cooperative savings bank. Its chief advantage over the ordinary savings institution is that its funds are used by the depositors them- selves in their own interests, and not placed at the service of business men and corporations. Every member has a voice and vote in the management of the association, and shares in the profits. A board of managers has charge of super- vising the business of the association. As now commonly organized, they issue a fraction of the capital stock, usually one-tenth, in what is known as a " series," and require that it be paid in monthly instalments, commonly called dues, usually at the rate of $1 per month on a share of stock the par value of which is $200. Whenever the monthly pay- ments, plus the accumulated profits, equal the face value of the shares, the series is retired. A series usually extends over ten to twelve years. The money obtained by the association is loaned to share- holders who desire to buy or build homes. No member can borrow more than the face value of his shares. Thus, the man who has subscribed to five shares may borrow as much as $1000, if sufficient funds are on hand. When the amount in the treasury is inadequate to meet the wants of all who wish to borrow, the loan is awarded to whoever will give the highest premium for the use of the money ; this " premium " consists in the payment of a few cents on each share, above and beyond the interest required by the association. As a rule, the money paid into the association by a bor- rowing member during the life of the series in which he is interested amounts to little more than the rental price of the mortgaged property for the same period ; hence it is some- times said by those who get homes with the help of a build- ing association that "the rent pays for the place." The borrower who regularly pays his dues and the interest on his loan will in a few years find himself in possession of THE THEORY OF FREE BANKING 399 paid-up shares which will cancel the principal of the debt when it becomes due and leave him owner of his house with- out encumbrance. There can be no doubt that these organizations have ren- dered noteworthy services. The 4500 societies for which reports were made in 1893 had helped in the acquisition of over 300,000 homes. It was therefore not entirely without justification that Hon. Seymour Dexter, president of the National League of Local Building and Loan Associations, declared these organizations "the most successful form of cooperation yet evolved ; every association the center of an influence stimulating industry, frugality, temperance, home- owning and good citizenship." XII. Free Banks The economists of half a century ago upheld the doctrine of free banks quite as strenuously as the doctrine of free trade. They insisted that there should be both free compe- tition and free issue ; in other words, that any one should have the right to engage in the banking business if he chose to do so, and that all banks should have the right to issue notes at their own discretion and upon their own responsibil- ity. Let us consider these two points. I. The argument advanced for free competition in the banking business was the classical plea that monopoly means dearness, whereas competition means cheapness. By dearness and cheapness in this connection they meant the high or low price demanded by the banks for their services. To this we may reply, first of all, that it is by no means certain that competition necessarily causes cheapness or that monopoly causes dearness. There are numerous exceptions to this economic principle, even with regard to the produc- tion of ordinary commodities (see page 153); and in the present case it is of particularly doubtful validity. Experi- ence does not prove that the cost of discounting is lowest 400 PRINCIPLES OF POLITICAL ECONOMY wherever banks are most numerous. Although the Bank of France, for example, enjoys a privileged position, and does business by right of a government grant, its rate of discount rarely exceeds 3J per cent. It should be noted, moreover, that the above classical argu- ment has nothing to do with the most important aspect of the question. The problem of monopoly versus competition does not arise with reference to banking operations in general, nor especially with reference to discounting. No one denies the right of any bank or similar organization to discount commercial paper. Hence it is mainly with reference to the issue of notes that the problem of monopoly versus competition arises. But this problem concerns the gen- eral public much more than the commercial classes. The bank note is for its possessor simply a kind of money, and scarcely anybody advocates free competition in the issue of money. The right to coin money is reserved by the govern- ment to itself, and the Supreme Court of the United States has held that the power to issue paper money is one of the powers belonging to sovereignty. Therefore, when we have to do with the issuing of bank notes it is perfectly reasonable for the government, when it does not exercise this right, to confer it upon such institution or institutions as command the confidence of the nation. When there are many banks of issue there is likely to be a great variety of bank notes, unless the government provides for a uniform system such as that which prevails in the United States and Switzerland. There is, on the other hand, a reasonable .hope that when there are but a few great banks or only one bank of issue in each country, we may more easily approach a state of affairs in which there will be but one kind of bank note, circulating in all countries without diffi- culty and thus realizing the long-sought ideal of a universal money. (See page 227, note 1.) II. As regards the unrestricted issue of notes and the sup- pression of all governmental intervention in this respect, the I FOR FREE ISSUE 401 stock argument is that there can never be any danger of an excessive issue of notes. This danger, it is claimed, is purely illusory ; the simple play of economic forces will confine the issue within proper limits, even though the banks should try to overstep them. The reasons given for this are three in number : (#) In the first place, bank notes are issued only in the course of banking operations, i.e. by way of discounts or advances on credit instruments. In order, therefore, that bank notes shall circulate, it is not sufficient for the bank merely to desire that they shall do so ; some one must be disposed to borrow money from the bank and to accept its notes. Issues are thus regulated by the needs of the public, and not by the wishes of bankers. The quantity of notes that the hank can issue depends on the amount of commercial paper presented for discount, and the quantity of this paper depends in turn on the condition of business. (5) Again, bank notes circulate only for a short time. A few weeks after being issued, they return to the bank. Take, for example, a note for $100 which is issued in exchange for a draft ; in a few weeks, ninety days at the most, when the bank collects the draft, the $100 note will probably be returned. Perhaps it will not be the same note. But what does that matter, provided it be a bank note ? The lank will, in the course of a month's or a year's business, take in about as many notes as it issues. ( small" capital, the private ownership of which is legitimate because it is the result of the owner's labor ; and " large " capital, private property in which it is illegitimate because 1 Rodbertus preceded Marx in many points, as his most important works were written half a century ago. Almost totally ignored for a long time, Rodbertus has recently acquired considerable celebrity as a forerunner of the great collectivist doctrines. An excellent account of his work may be found in W. H. Dawson, " Socialism and Ferdinand Lassalle," and Charles Andler, "Les Origines du Socialisme d'Etat en Allemagne." 2 It is also often said that true productive capital consists of workshops and factories, machinery, utilizable natural forces, mines, and raw materials. All these things are the result of the labor of many persons, of inventions, trials, and experiments, carried on during many centuries by millions of men. No one would pretend to be the owner of the steam-engine, not even James Watt, THE OWNERSHIP OF CAPITAL 555 it involves the appropriation of the product of others' labor. Now, as all " large " capital evidently must have been " small " at one time, it would follow that the private ownership of capital is legitimate at the outset, continues to be so up to a certain point in its growth difficult to determine, and then becomes an abuse. We object to the assertion that capital, by its very nature, can be increased only by plundering the workingman. We believe that this is a perversion of its nature (although it doubtless does take place frequently), and that we can and should try to prevent it. At all events, we are not called upon to justify the private ownership of vampiric capital, but of that capital which, as we have denned it, is the result of individual labor or saving. Even in the light of what is said above, this ownership is justifiable. It is, moreover, dictated by social utility. As the development of production absolutely requires a supply of accumulated wealth (see page 120), one must admit that those who accumulate wealth and thus create capital perform a function of very great social importance ; and certainly the most effectual method of encouraging this accumulation of wealth for productive pur 7 poses is to attribute the property of that wealth to those who, by not consuming it, have created capital. The problem of private property in capital once settled, there are still two others to be solved : Has the owner of capital the right to use it to set others to work, making a profit thereby ? This question we shall study in the following section (pages 558 ff.) and in the chapter on Profits. who invented it. Why, then, are steam-engines owned by individuals who grow rich by their use ? This is a popular argument entirely devoid of sense. No capitalist pre- tends to own a force of nature (aside from certain reserves to be discussed under the head of land -rent), or the steam-engine in genere ; for these would be of inestimable value. He simply claims to be the owner of the value of the machines in his possession, this value representing what it cost him to have them built. 556 PRINCIPLES OF POLITICAL ECONOMY Has the owner of capital the right to lend it to others on condition that they pay him interest for its use ? This ques- tion we shall answer first. II. The Legitimacy of Interest Of all kinds of income the legitimacy of which has been called into question, none has been more violently contested than that which is due to the loan of capital and is called interest. For over two thousand years this problem has given rise to vehement and unceasing polemic. The following are the principal points that have been raised during this controversy : (1) It was asserted, by Aristotle among others, that money is unproductive: one coin has never given birth to another coin. To this, economists reply that money only represents capi- tal, which is productive both by its nature and according to its definition. With money, as Bentham observed, one can buy sheep, and sheep give birth to sheep. (2) It was asserted that in loaning money the lender undergoes no genuine privation and consequently has no right to an indemnity in the shape of interest. In answer to this, economists endeavor to prove that the capitalist must deprive himself in order to create capital; some have even declared, with Senior, that abstinence is the sole source of capital. (3) It was asserted that the perpetuity of interest is un- natural and unjust. At the rate of five per cent (and with- out reckoning compound interest) the lender will recover his entire loan in twenty years, in the guise of annual interest- payments. In forty years, he will collect the original sum twice over, and in a century, five times ; nevertheless, he still retains his right to the entire reimbursement of the loan ! To this it is answered that the regular payment of inter- est is by no means the same thing as the gradual restitu- THE LEGITIMACY OF INTEREST 557 tion of the loan, any more than the annual rent of a farm is part of the purchase-price of the land. Payment for the use of a thing, and the return of the thing itself or an equivalent for it, are two distinct and different operations. Interest, like the rent of a farm, is the payment for the use of wealth that is perpetual, or, at least, wealth that can be made per- petual by constant renewal. And if the use that one can make of a thing is perpetual, why should not the price paid for its use be also perpetual ? l (4) It was asserted that the borrower is obliged to pay back more than he has received. This the economist denies. For if I give you a dinner to-day, in exchange for a dinner just like it which you will give me a hundred years hence, I am giving you much more than I receive, and you are getting decidedly the better of the bargain. Why ? Because a dinner a hundred years hence is not worth as much as a dinner now. For the same reason, if I give you $100 to-day in exchange for $100 which you will give me a century later, the transaction is unfair. Even if you paid back the money a year later, your payment would not be equitable. For me, as for everybody else, the future is not as good as the present ; and precisely in order to equalize matters, it is agreed that I shall now give you $100 in exchange for $105 which you will give me a year later. This difference of $5 indicates the difference of value between the present and the future, and measures the superiority of present goods over future goods. 2 In antiquity and the Middle Ages the discussion with regard to interest was largely ethical or religious, and the participants in the controversy had in mind the payment 1 But if the borrower has used up the wealth loaned him, and he may have borrowed it only to consume it, will it then be renewed ? Certainly not. Loans for consumption lead to the destruction of wealth and are liable to ruin the debtor, a fact that we have already indicated (page 358). 2 This argument, presented long ago by Turgot, constitutes the basis of Boehm-Bawerk's entire theory of interest. (Consult this author's remark- able book on " Capital and Interest," and page 561.) 558 PRINCIPLES OF POLITICAL ECONOMY of interest for borrowed capital. The problem they sought to solve, as we shall explain in the next section, was this: Ought the borrower to pay interest for a loan, and ought the lender to exact its payment ? With the classical econo- mists and their successors, however, the problem became primarily economic, not ethical or religious, and is better stated in these terms: How can we account for the gain which a capitalist receives for employing capital in a business enterprise? The answers to this question are by no means unanimous, and although we cannot here undertake a com- plete discussion of each of them, we shall give a brief state- ment of the several groups of answers, 1 following the classification made by Boehm-Bawerk : 1. The productivity theories. This name is applied to the theories based on the familiar fact that a workman provided with capital (tools, machines, etc.) can produce more products or better products than without capital. This additional product " produced by capital " constitutes in- terest. J. B. Say seems to have been the first author to speak of the " productive power " and the " productive ser- vices " of capital. The earlier advocates of the productivity theory do not inquire whether or why goods produced with the aid of capital are worth more than the cost of their pro- duction, including the cost of the capital itself or of the wear and tear of capital during the productive process. Subse- quent partisans of this theory, while retaining the idea of the actual physical productivity of capital, recognize the necessity for some explanation of the gain in value, i.e. the economic productivity of capital. 2. The use theory asserts, in brief, that in capitalistic production there is a sacrifice not only of the material sub- 1 For a further discussion of this subject we refer the reader to the books upon which our own resume' is based: Boehm-Bawerk, " Capital and Inter- est," Vol. I; Macfarlane, "Value and Distribution" ; the article on "Zins" in Conrad's " Handwoerterbuch der Staatswissenschaften " ; Kleinwachter, " Das Einkommen und seine Vertheilung. " THE USE THEORY OF INTEREST 559 stance of capital, but also a sacrifice of the use of the capital during the period of production. The best and fullest state- ment of this theory is found in the work of the brilliant Austrian economist, Carl Menger, from which we quote as follows : "Production always demands a certain period of time, sometimes long, sometimes short. For the purpose of pro- duction it is necessary that a person should have productive goods at his disposal not only at any single stage inside that period, but that he should retain them at his disposal during the whole period, and unite them in the process of produc- tion. The disposal over quantities of capital-goods during certain periods of time therefore constitutes one of the con- ditions of production. " This use of capital, or power to dispose of it, so far as it is in demand and not to be had in sufficient quantity, may thus obtain a value and become an economic commodity. When this happens, as is usually the case, then, over and above the other means of production employed in any actual productive process, there enters into the sum of value con- tained in the anticipated product the disposal (or power to dispose) of the goods requisite for production." This theory clearly rests on the contention that there is a use of capital distinct and separate from that involved in the using of the capital itself. 3. The abstinence theory, first clearly stated by N. W. Senior, is based on the thought that if men postpone the present enjoyment of their wealth, and devote the resources so spared to the purposes of production, it is manifest that the resulting increase in product is very intimately con- nected with the saving which made possible the adoption of the more productive methods. In other words, the cost of production must include not only the labor and capital that is used in the process of production, but also the disutility involved in the postponement of present enjoyment, or, in brief, abstinence. 560 PRINCIPLES OF POLITICAL ECONOMY 4. The labor theories. Under this name Boehm-Bawerk includes a number of theories which agree in considering interest as the remuneration for " labor " performed by the capitalist. Concerning the nature of this " labor " there is a divergence of views. (a) The English group of authors, especially James Mill, regards interest as wages for the labor of producing capital. (5) The French group, chief among which is Courcelle- Seneuil, defines interest as the " wages of saving," and em- phasizes the will-power and firmness of purpose required to save wealth. (c) The German group, to which many so-called " social- ists of the chair " belong, regards the ownership of land and of capital as a social office or "function," and defines the return from land and capital as a kind of salary due to the leaders of agricultural or industrial enterprises. This con- ception manifestly makes little or no distinction between profits and interest. 5. The exploitation theory. This celebrated theory, founded by Rodbertus and Karl Marx, regards rent, interest, and profits as all due to the exploitation of workingmen. Accepting the defective terminology of the orthodox econo- mists, these authors frequently employ profits and interest as interchangeable terms, and direct their attack against the whole complex return secured by the capitalist. The social- istic attack is much more effectual with regard to profit than with regard to interest ; we shall therefore discuss the ex- ploitation .theory when we take up the legitimacy of profits. As applied to interest, the exploitation theory may be fairly stated in the following propositions : The value of any commodity is measured by the quantity of labor required to produce it. Capital is not an original and independent factor of pro- duction, but may be resolved into the labor that produced it. The whole product belongs in equity to the laborer. The capitalist, however, takes advantage of the laborer's necessi- THE TIME THEORY OF INTEREST 561 ties and compels him to make a wage-contract that despoils the wage-earner of a large part of the product of his labor; this is done, of course, under the sanction of law and custom. 6. The sixth group of authors treats the problem of interest as primarily a problem of value and regards the influence of time, in the estimation of values, as the fundamental cause of all economic phenomena connected with interest. " Present goods," says Boehm-Bawerk, the principal advocate of this theory, "are as a rule worth more than. future goods of like kind and number." The productivity of capital is not the only cause of this higher valuation of present goods ; there are two other causes. One is the fact that many men are less efficiently provided for in the present than they hope to be in the future. There is, moreover, a tendency of mankind to underrate or discount anything in the future. Roundabout methods of production are generally more profitable than direct methods. But long, circuitous pro- cesses of production require the necessary money or present goods to meet the demands that arise during production. Hence present goods, which enable us to obtain the advan- tage of roundabout methods, are worth more than future goods, which are not yet applicable productively. In other words, the capitalist may obtain, with a proportionately smaller quantity of present (and therefore more valuable) goods, a proportionately larger quantity of future (and there- fore less valuable) goods, which, as time goes on, gradually grow in value until they reach, so to speak, the status and value of present goods. Whoever exchanges present for future goods demands some premium, some surplus in value ; this premium or surplus is interest. Some of these theories are endeavors to explain interest as an economic category. Others are attempts to justify the capitalist's income. We may safely accept the principle that so long as there is capital there will be interest, and as the socialists by no means contemplate the destruction of capital, interest will exist in a socialistic community. But who shall 562 PRINCIPLES OF "POLITICAL ECONOMY collect this interest? That is an entirely different question. Does not the owner of capital in modern society possess a despotic power, and does not interest therefore partake of the nature of an unfair income ? Nowadays, the discussion regarding the legitimacy of in- terest has been shifted to another domain ; and the present form of the question is : Shall we admit the legitimacy of private property in capital ? If we do, the legitimacy of interest follows as a logical consequence. Likewise, once we have admitted that houses may become objects of private property, the legitimacy of rent requires no proof. What is the need of inquiring whether the house can be employed productively, or whether the owner, by not occupying it, undergoes privation ? Even in case borrowed wealth has not been employed pro- ductively, and could not, by reason of circumstances, have been so employed ; or, in other words, in case it is not capital, but simply objects of consumption, why should the owner of wealth be obliged to lend it without compensation? The admonition mutuum date nil inde sperantes is evidently not economic, but evangelical, like the teaching that he who has two garments should give away one of them. From the economic and legal point of view, a sufficient justification of interest consists in the simple principle that no man shall be deprived of his belongings, and that whoever consents to relinquish possession of them to the advantage of others has a right to do this on whatsoever conditions it may please him to prescribe. What matters it whether or not the lender thus experi- ences privation and makes a sacrifice ? Since when is a per- son's remuneration, be it profit or wages, proportionate to the sacrifice he has made or the privation he has experienced ? By virtue of what principle shall I be obliged to put gratui- tously at the disposal of my fellow-men all the property that I cannot or do not wish to make use of for myself ? Must I allow other people to occupy my apartments because I am THE HISTORY OF INTEREST 563 compelled to be away, or let them eat my dinner because I am not hungry ? Such a doctrine would need to be based on the principle that in this world a man has a right only to the amount of wealth strictly necessary for his own consumption, and that the surplus belongs by right to all mankind. To accept this principle is to adopt communism pure and simple. For these reasons, the question is to-day scarcely a matter for discussion. Catholic social reformers, while retaining the old dislike for interest, usura vorax, confine themselves to seeking a means for diminishing the power of money ; and this is a perfectly legitimate endeavor. Socialists themselves, at least those belonging to the collectivist school, frankly admit that interest is an inevitable consequence of the right of private property. They simply shift the controversy to another quarter, and, instead of attacking the legitimacy of interest, they attack the legitimacy of private property in capital, as we 'have pointed out in the preceding section. It is plain that whenever the individual ownership of capital is abolished, the payment of interest will also cease. As the legitimacy of interest seems so evident to-day, why has it so long been denied ? Because of historical circum- stances which we shall now consider. III. History of Loans at Interest Throughout antiquity, loans were made at interest, and often on hard conditions. But such great men as Moses, Aristotle, and the severe Cato himself, have roundly stigma- tized it. After the advent of the Christian religion, even more vigorous attacks were made upon it by the Church Fathers ; and when the power of the Church had been firmly established, loans at interest were expressly forbidden by civil as well as by canon law. 1 1 The formal prohibition of loans at interest between Christians dates from the Council of Vienna, held in 1311. It was still permittee! on the part of Jews, because it was felt that money-lenders could not be dispensed with, and that the Jews rendered Christians a great service by bearing the burden of this sin. 564 PRINCIPLES OF POLITICAL ECONOMY Although this attitude subsequently came to be regarded with profound contempt and considered as betraying total ignorance of economic laws, it can very easily be explained by the conditions which prevailed at that time. We have already called attention (page 359) to the fact that until a comparatively recent period, credit the loan of money could not possess a productive character ; it could serve, and as a matter of fact did serve, only for consump- tion. When, therefore, the ancients and the canonists condemned interest as usurious, they were not so greatly mistaken as is sometimes supposed. They showed that they possessed an accurate knowledge of the economic state of their own times. The borrowers in those days were poor plebeians who asked the Roman patricians for means to buy bread, or im- pecunious knights who obtained their equipment for the crusades from the Jews or the Lombards of the Middle Ages. In both cases we have examples of personal, and therefore unproductive, consumption. When the time for settlement came, the debtors could pay neither interest nor capital; they were therefore forced to surrender themselves and their labor, and become the slaves of their creditors. 1 Under these circumstances, loans at interest led, on the part of the lender, to an abuse of the right of property, and from the bor- rower's point of view became an instrument of spoliation and destruction. This is sufficient to explain the old and stubborn prejudice against interest. In those days capital was scarcely known, even by name. (See page 118.) Land was almost the only kind of produc- tive wealth. Hence no one thought of denying the justice of rent for land ; for when a farm is leased, one can see the 1 The houses of Roman patricians contained cellars that served as prisons (ergastula) for insolvent debtors. In the Middle Ages, Shakespeare's example of Shy lock notwithstanding, customs became less severe ; a powerful but insolvent debtor was only required to send hostages to his creditor and to pay for their food, which was still a very burdensome obligation. Does not this condition of things justify the canonists' saying, jus belli, jus usurae ? MEDIEVAL VIEWS CONCERNING INTEREST 565 income proceed, so to speak, from the soil itself in the shape of crops, and it was clearly felt that the rent paid to the landlord was not paid out of the tenant's pocket. But the same was not true of money, and it seemed perfectly correct to declare with Aristotle that money cannot produce more money. This was why St. John Chrysostom, contrasting the landlord with the capitalist, became indignant because the lender " practised a damnable kind of agriculture, reap- ing where he had not sown." Moreover, a proof that the arguments of the canonists were not pure casuistry consists in the fact that in all cases where it was plain that the borrower would obtain a profit from the use of the loan (by carrying on trade, for example), and where the lender incurred some risk, interest was con- sidered legitimate. 1 Yet it might be objected that, since the canonists frankly admitted private property in capital, or at least in money, they ought also to have seen the force of such arguments as those contained in the preceding section, and admitted the legitimacy of interest. But this objection would not be valid. The loan of money necessarily implies the use of the money lent, i.e. its exchange for something else; and it seemed absurd to the canonists that the lender, after having given up the money lent, should exact a money-payment for its use. 2 But if the lender transferred the full ownership of the amount to the borrower, and thus gave up all claim to his capital, they readily admitted the legitimacy of the resultant 1 The Lateran Council of 1515 stated the matter with perfect clearness: ' ' There is usury wherever there is profit which does not arise from something productive and which implies neither labor, nor expense, nor risk on the part of the lender." 2 Albertus Magnus and Thomas Aquinas insisted that money cannot be used by one person and owned by another. A lender, they argued, is *' therefore not entitled to compensation for the use of money loaned, but only to its restitution, since the fact of borrowing vested ownership in the borrower ; nor can he claim compensation for the time that elapsed between the act of lending and the restitution, for time belongs to God, and cannot be bought and sold. Therefore a loan must be either made outright, or else 566 PRINCIPLES OF POLITICAL ECONOMY income of the creditor, for then the loan became an income- yielding investment. The Reformation naturally brought about a reaction against the canonical doctrine. Calvin showed a disposition to tol- erate loans at interest under certain conditions ; and in the eighteenth century two great French Huguenot jurists, Dumoulin and Saumaise, refuted the scholastic arguments against usury. 1 Yet not until we reach the scientific econo- mists, Turgot (" Memoire sur les prets d'argent," 1769) and Bentham ("Defence of Usury," 1787), is the economic doc- trine in favor of loans at interest firmly established. Econo- mists are now unanimous in its acceptance, and their opinion is well founded. Why ? Because the economic conditions of life are not what they were at the time of the Church Fathers and the scholastics. On the one hand, the parts have been inverted. To-day the impecunious do not usually borrow from the wealthy, nor the common people from the patricians; but the rich and powerful speculators, gigantic corporations, banks, the owners of gold mines, and, above all, the governments of great in the form of a mortgage or bill of sale, and cannot involve a thing like money, the very nature of which is repugnant to the rules providing for com- pensation in cases of borrowing and lending." COSSA, "Introduction to the Study of Political Economy." The student must bear in mind that the term usury originally meant use- money and was synonymous with our term interest, although to-day it is used to mean exorbitant or extortionate interest. 1 It is interesting to note that the Jesuits contributed quite as effectively as the Protestants to the recognition of loans at interest as permissible. They invented subtle devices for avoiding the prohibitory law, such as the con- tractus trinuSj a more or less fictitious contract by which the lender was regarded as a partner in the risks and profits of an enterprise, who insured himself against losses and gave up his claim to profits, in consideration of a fixed sum paya^e annually. Interest was also allowed in the form of a penalty for the failure to repay the loan at the specified time ; and as nothing prevented specifying the time for repayment as the day after making the loan, it was a very simple matter thus to elude the law. (For further details, consult Ashley, "Economic History," Chapter 7, and Boehm-Bawerk, " Capital and Interest," Vol. I.) THE CHANGED NATURE OF LOANS 567 nations most frequently borrow from the public, from the common people, and make up their funds out of the savings of the masses. The result is that oftentimes the lender is a worthier object of compassion than the borrower. Public opinion and the law are not needed to protect the weak and defenceless borrower against the rapacity of the lender, but rather to prevent the ignorant lender from being exploited by individuals and corporations that make a practice of borrowing enormous amounts from the general public, of which modern financial history furnishes so many scan- dalous examples. 1 On the other hand, the two changes were concomitant, the very nature of the loan contract became different from what it was. Men, as a rule, do not now borrow in order to obtain food, but in order to increase their wealth. To borrow for purposes of personal consumption is the ex- ception, and credit has assumed the true economic character of a method of production. 2 The entrepreneur, that is to 1 " Everybody knows what brigandage is carried on to-day under the guise of founding stock companies. Nothing is more shameful or more criminal. It is one of the saddest symptoms of public demoralization. . . . The place of the great bands of adventurers and robbers who held merchants for ran- som, and pillaged the country in the Middle Ages, is now taken by stock companies, many of which carry on their operations with more security, more impunity, and more leisure and profit for their founders and directors than their mediaeval compeers." LEROY-BEAULIEU in the Economiste franqais for July 21, 1881. 2 This is not yet universally true. In the country districts, and especially in the farming regions of Russia, along the Danube, in Italy, in Algeria, etc., credit still possesses its former nature, peasant borrowers being exploited and ultimately expropriated by money-lenders. This state of affairs has given rise to the anti-semitic movement, and shows that in some countries, and under certain conditions, the old laws against usury may be perfectly defensible. But even in these places agricultural credit associations, to which we have already referred (page 395), have begun to change the respective situations of debtors and creditors. In advanced countries, credit for purposes of consumption, i.e. borrowing money in order to spend it unproductively, is practised only by wealthy prodigals and a few of those who patronize the pawnshops. We must, how- ever, place in the same category the governments of great nations, which, 568 PRINCIPLES OF POLITICAL ECONOMY say, the real agent and director of production (see page 484); hires the capital and pays the interest ; and this interest is part of the cost of production just as much as the wages of labor or the rent of the factory. It would, therefore, be absurd to dispense, for humanitarian reasons, with the payment of interest ; for this would simply increase the entrepreneur's profits. Even to-day, however, laws concerning the loan of capital bear traces of the old condemnation of interest. Many of the states of the Union have so-called usury laws, which fix the maximum rate of interest, and declare that any excess above this rate shall not be recoverable. In only a few of them is a higher rate than twelve per cent allowed by law, despite the constant protests of economists, who would have the rate of interest determined by the forces of demand and supply, like wages and rent. IV. The Laws of Interest Early modern political economists took no particular pains to define the term interest. Indeed, many of the classical economists were unable to get a very accurate notion of the term, because of their failure to separate the earnings of capital per se from the remuneration due to the work of suc- cessful superintendence ; because, in other words, interest and profits were treated together under the general name of profits. In popular speech to-day, profits are sometimes made to include the interest of capital, as when a man not only directs an enterprise, but also supplies the capital re- quired to found it and carry it on. The two incomes here united, are, nevertheless, distinct ; if the director of the enterprise, i.e. the entrepreneur, were obliged to borrow his during the past century, have consumed, for the most part unproductively, and even in works of destruction, $30,000,000,000 of capital, for which the unfortunate taxpayers will pay interest forever, or at least until these governments are declared bankrupt. This class of borrowers is, to be sure, too powerful to need compassion ; it is the taxpayers that have a right to be pitied. PURE INTEREST 569 capital, it would immediately become apparent that profits and interest are separate and different incomes. The distinction between profits and interest, however, is not the only one that economists have deemed it advisable to draw, in this connection, for the sake of clear thinking. They have found that the term interest is itself often applied to a composite of various elements ; they have therefore endeav- ored to remove from the concept of interest several elements which, in popular parlance, are included in that term. It follows, therefore, that the term interest means, in the vocabulary of economic science, something different from its customary acceptation. Pure interest, i.e. interest in the strictest economic sense of the term, which may be defined as the price paid for the use of capital, or, from the distribu- tive point of view, as the share of the capitalist in the product of industry, springs from the circumstance that the value of goods produced with the help of capital is greater than the value of the goods consumed in their production plus the cost of the labor employed. In the real world of business we rarely encounter interest pure and simple, but nearly always find it combined with other kinds of compensation, of which the following two are most frequently present: (#) The cost of renewing fixed capital for example, a house or a piano the constant use of which involves wear and tear amounting to gradual destruction. The owner of borrowed capital must therefore receive, besides a payment for the use of the house or the piano, a sum sufficient to keep it in constant repair. (5) The payment for the risk attending the investment of capital. 1 1 This element of risk, to which we refer again later, may depend, as Roscher points out, "on the doubtful reliability of the person to whom the capital is confided ; on the uncertainty of the branch of business in which it is intended to employ it ; or on the uncertainty of the commercial situation in general; but especially may it depend on the uncertainty of the laws." "Principles of Political Economy," translated by Lalor, Vol. II, page 100. 570 ' PRINCIPLES OF POLITICAL ECONOMY Whenever the transaction of loans involves exceptionally high expenses of management, as in the case of loans made by pawnshops, the term interest usually involves a third element, consisting of the charge due to these exceptional expenses involved in placing the loan. Whatever remains when these foreign elements have been removed constitutes pure interest. Pure interest, therefore, so nearly as we can approach it in reality, is that which would be paid for the loan of money, in large sums and for long periods, under conditions of absolute security. If capital were loaned in the shape of commodities, such as factories, machinery, and other instruments of production, and not in the shape of money, a different price would have to be paid for the loan or hire of each commodity, according to its quality, durability, and productivity, just as the rent of farms differs according to their fertility and acces- sibility. But capital is usually lent by means of money or of credit-instruments representing money, because the bor- rower prefers to receive money instead of goods, which may be ill suited for the purposes that he has in view; and, furthermore, because capital is necessarily offered in this form by those who have saved wealth and want to invest it. Men do not usually save capital in the shape of commodities, but in the shape of money. This fact accounts for the frequency of the statement that interest is paid for the use of money. What the borrower really wants, however, is not money, but the goods that money will buy, the goods needed to carry on a produc- tive enterprise. As Walker puts it : " One borrows $5000 and gives a note for that sum, with interest. With this money, he purchases live stock, machinery for his fac- tory, or goods for his trade : these were what he wanted ; these were what he really borrowed ; these are what he really pays interest upon. The money was solely a means to that end." An important consequence of this fact, clearly perceived MONEY AND INTEREST 571 by Hume long before Adam Smith published his " Wealth of Nations," is that the rate of interest does not depend on the amount of gold and silver that the country possesses, "but on the amount of its riches or stock." Yet it is still a popu- lar idea that the rate of interest, i.e. the price paid for the use of capital, depends solely or largely on the amount of money in the country. When interest is high, people say that money is scarce. When it is low, they declare that money is abundant. This idea is correct in the case of short-time loans, usually made by bankers to business men who have contracted debts in buying goods, and who must make pay- ment for them before they can be sold. These loans are usually made in the form of bank discounts. When money becomes "tight," banks find that their reserves diminish, and are obliged to curtail their loan and discount business by raising the interest on loans and increasing the rate of discount. 1 But this idea is false in the case of long-time loans, the only kind which concerns us here in connection with the study of the capitalist's income. In refutation of the idea that an increase in the supply of money lowers the interest on permanent investments, while a decreased supply raises it, let it suffice to say that the income from loaned capital, as well as the capital itself, exists in the form of money, and that therefore the rate of interest, i.e. the ratio between income and capital, cannot be affected by a factor which, as a fluctuation in the value of money, operates equally and simultaneously upon both terms of the ratio. The substitution of money for commodities in loan-trans- actions, by which what would otherwise have been simply a case of hire becomes money-lending, or investment prop- erly speaking, involves two further consequences of great importance. In the first place, it introduces in the determination of 1 We have already seen that there is a close connection between the supply of money and the rate of discount (page 388, etc.). 572 PRINCIPLES OF POLITICAL ECONOMY interest (in the wide sense of the term) a new and im- portant element already referred to, viz. the solvency of -the debtor. If the debtor's solvency, that is, his ability to meet his obligations, is doubtful, this involves additional risk for the lender, and will lead him to demand higher interest to counterbalance the possibility of losing his capital. This premium for insurance against the risk of loss 1 the lender furnishing his own insurance accounts almost entirely for variations in the rate of interest on different investments. In the second place, it tends, when there is equal security and perfect mobility of capital, 2 to eliminate all other causes of variation in the rate of interest and to equalize the cost of borrowing any or all kinds of capital. The different em- ployments of capital tend uniformly to pay the same rate of interest, for if one branch of business is much more profit- able than another, capital is allowed to flow into the former and out of the latter until a level is reached. Money-capital, we have already learned, can be sent almost without cost from any part of the world to any other part. All kinds of capital, therefore, being lent and borrowed in the form of money, are on the same footing ; qualitative differences dis- appear, and only quantitative differences remain. 3 1 This is what the Germans aptly call Eisikopramie. 2 We have already said, elsewhere, that the assumption of perfect mobility and perfectly free competition is more likely to be realized in regard to money- capital than in regard to most other commodities. Yet the fact that there are differing rates of interest in different markets, even for investments offer- ing precisely the same degree of risk, shows that competition is not perfect. The causes for this must be found in the disinclination of capital to emi- grate, the inertia of capitalists or borrowers, the lender's or borrower's ignorance of the money-market, or the pressing nature of the borrower's need for capital. 3 There would seem to be no differences of durability so long as capital is in the form of money. When capital is concrete, i.e. when it exists in the shape of productive goods, the cost of its maintenance is an important matter, and something must be paid in addition to the cost of its use for the " wear and tear" to which such capital is subjected. Money-capital being by nature indestructible, and undergoing no wear and tear, all differences in SUPPLY AND DEMAND IN CAPITAL 573 It follows from what has been said regarding the excep- tional mobility of money-capital, that there is at a given time but one and the same rate of interest in the money- market of a whole nation, or even of the whole world. The question now arises : What are the natural economic laws which determine this general rate of interest, i.e. the price paid for the use of money-capital ? Unlike the question concerning the fundamental reasons for the existence of in- terest as a category of income, a question with regard to which Boehm-Bawerk divides political economists into six separate and distinct groups or tendencies, 1 there is con- siderable agreement among economists with regard to this subject. We have a pretty fair idea of the causes affecting the general rate of interest. We cannot, to be sure, attribute its determination to any single cause, any more than we succeeded in discovering a single determinant of the value of goods (page 64) or of the price of labor (page 521); there are really many factors, which may be summed up in the old formula of supply and demand or in the newer doc- trine of final utility. In this connection, as, indeed, in every attempt to inter- pret it scientifically, the formula of supply and demand re- quires some explanation. The supply of capital, seeking investment in the form of money and credit instruments, depends on the following factors : (a) On the nation's capacity for saving, promoted by good institutions to facilitate the storing of wealth and good credit institutions to provide investment for the capital thus created. (5) On the security afforded to investors ; if the cost of capital that are due to this necessity for maintaining the value of concrete capital should disappear. For the borrower of capital, the matter is different. He must return the capital at the end of a certain period, say ten years ; for him, this is equiva- lent to its destruction in that space of time. If he is a careful business man, he will provide for the renewal of the capital just as though it existed in the shape of concrete goods. All industrial firms act on this principle. 1 See page 558. 574 PRINCIPLES OF POLITICAL ECONOMY this is lacking, the economized wealth will not be put on the loan-market, but hoarded unproductively. (c) On the ex- istence of a large class of persons unable or unwilling to utilize their own capital in active business ; for it is evident that when every member of society employs his own capital, capital will not be offered on the market, no matter how abundant it may be. The demand for capital, on the other hand, is determined by its productivity. 1 Unlike the cost of hiring land, which depends so largely on the fertility of each particular farm, we are, in the case of loans in capital, not concerned with the productivity of this or that particular kind of capital ; we ai*e not considering capital in the form of goods, but capi- tal in genere, capable of being transformed into any kind of commodity; we are, in other words, concerned with capital as a mobile, homogeneous fund. Professor J. B. Clark, 2 who has probably done more than any other economist to distin- guish this concept of capital from the idea of capital as a sum of concrete commodities, contends that it is not money, nor even materials, machines, or buildings that the capitalist lends, but a sort of general draft upon society, value in a readily convertible form ; a sort of abstract fund which the entrepreneur converts into concrete capital. In a new country possessing an abundance of natural resources, virgin lands to be brought under cultivation, mines to be worked, and roads to be built ; or even in an old country in times of great industrial progress, such as the middle of the nineteenth century, this general state of productiveness will, as experience has shown, cause a great increase in the rate of interest. But whether a country be new or old, as long as there is any advantage in the employment of capital, or of increased 1 When loans are made for purposes of consumption, the productivity of the capital is of course out of the question, and the rate of interest is limited only by the need of the borrower ; hence it may become exorbitant. 2 Annals of the American Academy, July, 1890. THE PRODUCTIVITY OF CAPITAL 575 quantities of capital, in any branch whatever, the demand for capital will continue to increase. The point beyond which the use of additional capital would not be advan- tageous has never been reached in the industrial life of any nation ; nor is it likely ever to be reached. In economic life, therefore, we find, on the one hand, a practically unlimited demand for capital for productive purposes, and, on the other hand, a supply of capital insufficient to satisfy the demand. This circumstance is of the utmost importance in determining the rate of interest. Wherever the supply of any commod- ity is not fully equal to the demand (in the widest sense of that term), part of the demand must forego satisfaction ; it remains, so to speak, " potential." Capital will, of course, first seek those investments in which the returns are greatest and surest ; and whatever capital is not thus employed must turn to less and less productive uses. Let us suppose that the earliest and most productive uses yield an interest of ten per cent, whereas subsequent invest- ments of capital yield decreasing returns, until we find that the best rate the capitalist can obtain for additional capital is three per cent, 1 because no entrepreneur is willing to pay more for its use under existing conditions of production. 1 This must not be supposed to imply that the supply of capital necessarily increases more rapidly than the new opportunities for its investment, and that therefore the rate of interest is bound to fall continually. (See the next sec- tion.) This may or may not be the case. In a progressive nation it is not unlikely that possibilities of new and more profitable investments for capital will be offered from time to time. If this be the case, and the supply of capital fails to increase rapidly enough to permit carrying on all the old as well as all the new enterprises, capital will be removed from some of the former to the latter ; hence the marginal utility of capital (the productivity of the increment of capital which is applied least productively, but which the owner nevertheless continues to apply) may be greater than before, and thus cause a rise in the rate of interest. The important point is that some capital is less productively employed than all the rest. Yet interest must be paid for it ; and as there can be but one price for all the increments of a uniform commodity, i.e. one rate of interest for capital in genere, this rate will be that paid for the capital engaged least productively, whether it be "old" or " new.' 1 576 PKINCIPLES OF POLITICAL ECONOMY New capital, if invested at all, will have to be invested at this rate. But will those entrepreneurs who borrowed capital at ten per cent continue to pay this interest for a commodity now obtainable at three per cent ? Evidently not ; and there- fore, sooner or later, all capitalists will have to be satisfied with three per cent. As Roscher puts it, the rate of interest is determined by the "return from the least productive application of capital which must nevertheless be made in order to find investment for all the capital that seeks it"; or as Von Thuenen, the acknowledged founder of this law, formulated it, interest is determined by the return secured "from the last increment of capital that is employed productively." Interest resembles wages and rent in the respect that the lender of capital, as well as the laborer and the landlord, con- tracts for a specific sum, agreed on in advance and in no wise influenced by the outcome of the productive enterprise in which his goods or services are applied. In return for a fixed annuity, expressed in per cent of the sum loaned (which is called the " principal "), the capitalist relinquishes all claim to a share in the profits of the enterprise. There are, however, lenders who would rather share the chances of profit and loss in an enterprise than be satisfied with a fixed but sure compensation. For such as these, modern credit has devised an arrangement by which the borrower, instead of guaranteeing a fixed return, agrees to pay the lender a share of the profits if there are any, or pay nothing at all if there is no surplus above costs. If there are actual losses, these are met with the creditor's capital. Under this arrangement the credit instruments owned by the lender do not belong to the category of bonds or notes, 1 A statement of Von Thuenen's theory may be found in Boehm-Bawerk's " Capital and Interest," and in an essay on " Thuenen's Wertlehre " by the translator of this volume. A later form of the same theory, developed by Professor J. B. Clark, is summarized and criticised by Macfarlane in " Value and Distribution." THE RATE OF INTEREST 577 but are called shares of stock, and the income derived there- from is not called interest, but dividends. Dividends should, of course, be greater than interest, because they constitute a more hazardous kind of income and partake of the nature of profits. We shall again discuss this subject when we take up Profits. V. Does the Rate of Interest tend to Fall? If it be desirable that wages shall increase, it .is, on the other hand, equally desirable that the rate of interest shall fall. This is desirable, first, from the standpoint of distribution. It would reduce the share of the total product that is appro- priated by capitalists as such, and would thus increase, by so much, the share that may go to the other participants in production, including the laborer. Besides, the rate of interest determines not only the income of capitalists ; indirectly, it also influences profits, the rent of buildings, and even the rent of land ; in other words, it affects the entire income of the propertied classes. It is desirable, secondly, from the standpoint of produc- tion. By constantly lowering the cost of getting capital, and thus diminishing the cost of production, it facilitates the completion of enterprises that are otherwise impos- sible. Here, let us say, is a piece of land that needs to be cleared, or houses that ought to be built to provide homes for workingmen; but everybody knows that neither the land nor the houses would yield more than three per cent. If, therefore, the current rate of interest is five per cent, it will be impossible to find capital for these undertak- ings, inasmuch as they can be carried out only at a loss. Hence they will not be attempted. But suppose the rate of interest falls to two per cent. We should immediately push forward the execution of these enterprises. Turgot, in a celebrated figure, compared a fall in the rate of inter- 578 PRINCIPLES OF POLITICAL ECONOMY est to a falling sea-level, which makes it possible to bring more land under cultivation. But it is not sufficient to show the desirability of a fall in the rate of interest. We must ask whether it is likely to occur. Is it of a permanent nature ? Can it, moreover, be regarded as a true, natural, economic law, like that of the increasing value of land or even that of the decreasing value of metallic money ? Political economists, especially those of the French opti- mistic school, from Turgot down to Leroy-Beaulieu, have answered these questions affirmatively. Bastiat regarded the law of a falling rate of interest as among the most re- markable of "economic harmonies." This opinion is defended both by theory and fact. We shall briefly state the considerations in its favor. As a matter of fact, there has been a noteworthy decline in the rate of interest ; it has fallen during the past thirty or forty years from six and seven to three and four per cent. This is one of the most characteristic economic phenomena of the second half of the nineteenth century. The theoretical argument is that in a progressive country, capital, like all kinds of artificial wealth, will constantly grow more and more abundant, and that its final utility and value must consequently continue to decrease. The security of investments, moreover, is constantly increasing, at least if we admit that progress means greater faithfulness on the part of individuals in the fulfilment of business engage- ments, and, on the part of governments, more effective means of enforcing credit claims. If, therefore, capital is becoming more abundant, and investments are becoming more secure, there are grounds for believing that capital will become less productive and bring less revenue to its owners. There are valid reasons for believing that the returns from agriculture will decrease by virtue of the law of diminishing returns, while those of industry and transportation will decrease because the opportunities for the employment of capital in THE FALLING RATE OF INTEREST 579 these branches are limited. It is, for example, undeniable that the railroads still to be built in this country will be much less productive than the great lines already con- structed. Thus, of all the factors that must be taken into account, there is not one that does not lead us to expect a permanent and continual, although perhaps a gradual, fall in the rate of interest. There would even appear to be no assignable limit to this decline ; for there is here no minimum limit such as that which we encounter in the case of commodities, the value of which cannot long remain below the cost of production, or in the case of wages, which cannot fall below the cost of the laborer's subsistence. The sole minimum limit to the rate of interest is that below which the capitalist would be unwilling to lend, and would prefer either to hoard or to con- sume his capital. Now what is the rate below which he would prefer either to spend his savings or keep them under lock and key ? Is it one per cent or one per thousand ? This is a question that no one can answer. 1 These are the arguments of those who prophesy a constant decline in the rate of interest ; but none of them, in our opinion, is conclusive. In fact, the very suddenness and extent of the decline which the rate of interest for money has undergone in less than a generation is sufficiently indicative that this is not one 1 Bastiat declares that interest may fall below any assignable quantity, without, however, reaching zero, thus resembling the curves, known to mathematicians as asymptotic, which continually approach a straight line without ever touching it. Mr. Foxwell, an English economist, has even gone so far as to assert that the time will come when capitalists, instead of receiving interest from those to whom they intrust their money, will pay them for keeping it. This would mean the realization of Proudhon's dream of "gratuitous credit," which has been so thoroughly ridiculed. It is only fair to add that Mr. Foxwell refers especially to loans made to banks in the shape of deposits. And in this case it is quite possible that, in consideration of the service which they render depositors, banks may not only pay no interest, but exact the payment of a compensation for safe-keep- ing. This was what they did formerly. 580 PRINCIPLES OF POLITICAL ECONOMY of those great historical changes that constitute economic evolution, but a temporary and probably periodic oscillation. History, indeed, confirms this supposition. Under the Roman Empire the rate of interest was no higher than in the middle of the nineteenth century; and in the eighteenth century in Holland it fell as low as it is to-day. The present period of decline, moreover, seems already to be at an end ; for since 1899 there has been a noticeable rise in the rate of interest, or (what amounts to the same thing) in the rate of capitalization for the principal kinds of investments. The prophecies regarding a decrease in the risks incurred by capitalists and the diminished productivity of capital are of doubtful validity. Consider, first, the risks of investment. Can it be said that there are to-day fewer insolvent debtors, fewer business failures, fewer enormous swindles, smaller amounts of capital sunk in hazardous enterprises, than formerly? Are we justified, then, in concluding that things will be different in the future ? l With regard to the productivity of capital it is certain that if we consider a particular industry, such as that of railroad transportation or gas illumination, there is a limit to its development. But we must consider production in general, and note that old industries are constantly making room for new ones. Nothing sanctions the assumption, for instance, that transportation by balloon will not be as re- munerative as transportation by railroads, or that illumina- tion by electricity or acetylene will be less profitable than illumination by gas. 2 1 "We must even take into account some new risks, such as that due to strikes, and consider the increasing burdens which the laws tend to impose upon employers, capitalists, and landlords. 2 Professor Paul Leroy-Beaulieu, the most ardent advocate of the doctrine of a continual decline in the rate of interest, develops the productivity argu- ment in great detail, and attaches great importance to it ; yet this argument, founded in the last analysis on a pessimistic idea, that of an unavoidable limit to the progress of human industry, does not seem to harmonize very well with the optimistic views held by this author with regard both to pro- GRATUITOUS CREDIT 581 In short, what seems to us most likely is that the rate of interest will rise again, after having reached a certain mini- mum level which we are doubtless not far from having attained. The reaction, in fact, has already begun. It is probable that in the future the rate of interest will pass through long alternating periods of rise and fall, just as it has done in the past. A steady and uninterrupted decline in the rate of interest might be brought about, and Proudhon's dream of gratuitous credit realized, not through the operation of supposed natu- ral laws concerning this matter, but through the rational and persevering effort of men combined into mutual credit associations. 1 This would, indeed, be a most sensible form of collectivism ; for if everybody could obtain the use of capital almost gratuitously, what would be the objection to the individual ownership of capital ? duction and to distribution. This contradiction is revealed in a curious manner by the fact that Leroy-Beaulieu, who alleges the decreasing pro- ductivity of capital, refuses to admit the law of diminishing returns in agriculture, and rebukes Ricardo and Mill for accepting it. 1 Consider in this connection the organization of Raiffeisen banks, dis- cussed on page 395. CHAPTER III THE RENT OF LAND I. The Law of Rent DOES land yield a revenue ? The question seems almost absurd. It is a self-evident truth that all land, except under abnormal circumstances, yields something ; and if any proof of this were needed, the fact that land may be sold or rented ought to be sufficient, for it is plain that land would find no tenant or purchaser (except for purposes of pleasure) if it yielded no return. But that is not the real question. We want to know whether there is a surplus income that is peculiar to the land, separate and distinct from the return for labor and the return for the use of capital. Some economists deny the existence of such a separate and distinct return. They maintain we shall see how they try to prove it that the revenue from land is nothing but the product of capital put into the land by its owner or his predecessors ; and that in the last analysis the return from land is necessarily made up of wages, interest, and profit. But this theory is not generally accepted ; it seems to be inspired primarily by a desire to justify and defend private property in land. The classical economists looked at this matter differently. The Physiocrats, and even Adam Smith and J. B. Say, re- garded the return from land as really due to natural, pro- ductive qualities of the soil ; and if the landlord profits by these qualities, this is simply because property in land con- stitutes a genuine monopoly, a privilege which gives him control of the forces of nature and the fruitfulness of the 582 RICARDO'S THEORY OF RENT 583 soil. They defended this monopoly, moreover, on grounds of public utility which we shall examine presently. The landlord may either take advantage of this natural source of wealth himself, by selling the products of the land, or he may transfer the privilege of exploitation to some one else in exchange for a regular nuJhey-payment resembling that received by the capitalist for the use of his capital. This explanation of the revenue from land implies the idea that nature can create value; it implies adherence to the doctrine that value is based on utility in the material sense of this term. 1 Such an explanation could not satisfy the acute mind of Ricardo. We know that this great economist was the prin- cipal author of the theory according to which value depends on labor and the cost of production. Therefore he could not, on the one hand, without demolishing this whole theory, admit that the value of land or of its products is created partly by nature. Nor could he, on the other hand, hold that the return from land represented nothing more than the labor of cultivation; for everybody knew that land, especially in England, could be hired to tenants, who, after paying rent for it out of the product of the soil, still had enough left to live on and to pay all the expenses of cultivation. In order to escape this dilemma, Ricardo in- vented his celebrated theory of land-rent, which has served for more than half a century as the subject of innumerable discussions among economists. Originally, says Ricardo, as men were obliged to cultivate only a small section of land, they chose the best plots. 2 1 This was evidently Adam Smith's meaning when he said: "In agri- culture, nature labors along with man;" the share due to her help "is seldom less than a fourth, and frequently more than a third, of the whole produce." 2 At the risk of tedious repetition, we here quote Ricardo's own words concerning the fundamental part of his theory. " On the first settling of a country, in which there is an abundance of rich and fertile land, a very small proportion of which is required to be cul^ 584 PRINCIPLES OF POLITICAL ECONOMY Still, despite the fertility of these plots, their cultivation did not yield a greater income than could have been obtained from any other employment of labor and capital ; as there was plenty of land to be had for the taking, land and its products were subject to the law of competition, which re- duces the value of all commodities to the level of the cost of production. But the increase of population necessitates an increase of production; and when all the land of the first quality has been appropriated, less fertile land must be put under cultiva- tion ; that is to say, land on which the cost of production is higher. Let us suppose that land of the first degree yields 30 bushels of wheat per acre, at an outlay of $30, or fl per bushel. Then land of the second degree will produce, let us say, only 20 bushels for the same expenditure, and tivated for the support of the actual population, or indeed can be cultivated with the capital which the population can command, there will be no rent ; for no one would pay for the use of land, when there is an abundant quantity of it not yet appropriated, and, therefore, at the disposal of whosoever might choose to cultivate it." " On the common principles of supply and demand, no rent could be paid for such land, for the reason why nothing is given for the use of air and water, or for any other of the gifts of nature which exist in boundless quan- tity." " If all land had the same properties, if it were unlimited in quantity, and uniform in quality, no charge could be made for its use, unless where it possessed peculiar advantages of situation. It is only, then, because land is not unlimited in quantity and uniform in quality, and because in the progress of population, land of an inferior quality, or less advantageously situated, is called into cultivation, that rent is ever paid for the use of it. When, in the progress of society, land of the second degree of fertility is taken into cultivation, rent immediately commences on that of the first qual- ity, and the amount of that rent will depend on the difference in the quality of these two portions of land." " With every step in the progress of population which shall oblige a coun- try to have recourse to land of a worse quality, to enable it to raise its supply of food, rent, on all the more fertile land, will rise." "The exchangeable value of all commodities [and therefore the price of agricultural products] is always regulated by those who continue to produce them under the most unfavorable circumstances ; meaning, by the most unfavorable circumstances, the most unfavorable under which the quantity of produce required renders it necessary to carry on the production." RICARDO'S THEORY OF RENT 585 the cost of production per bushel will be $1.50. It is clear that the owners of this land will not be able to sell their wheat for less than $1.50, for any lower price than this would involve loss, and they would cease raising wheat. We assume, however, that the population cannot get along without them. It is equally clear that those who produce on land of the first degree will not consent to sell their wheat at a lower price than their neighbors. They, too, will sell it at $1.50 per bushel. But as it still costs only $1 to pro- duce, they will now realize a gain of 50 cents per bushel, or $10 per acre ; and this gain is precisely what, in Ricardo's theory and in the recognized vocabulary of political economy, is called rent. At a later stage, as population continues to grow and to require an increased supply of the means of subsistence, men are obliged to cultivate lands of even inferior quality, 1 lands, for example, that will yield only 15 bushels of wheat per acre. 2 This means an outlay of $2 per bushel. For 1 Or, lands of inferior accessibility. Given, two farms of uniform fertility (whose product is necessary to satisfy the demand for wheat in a given com- munity), one of which is twice as faraway from the market as the other, so that the cost of transporting a bushel of wheat from one to the market is 50 cents more than when the wheat is brought from the other farm ; here, clearly, the second farm has an advantage involving the same consequences as greater fertility. Differences in accessibility may be quite as important as differences in fertility. Especially in the case of land in or near cities, this is an important element even for agricultural purposes. Although Ricardo saw its impor- tance, von Thuenen was apparently the first author to appreciate its full significance and fully to discuss, in connection with accessibility and rent, the influence of transportation facilities. 2 Why is it assumed that men will be obliged, in order to increase produc- tion, to bring new land under cultivation ? Can they not increase the output by applying better, more intense methods to the good land already cultivated ? There is no doubt that they can. But, by virtue of the law of diminishing returns, every increase in the yield, beyond a certain limit, means more than proportionate increase of outlay, and will consequently involve a rise in the cost of production. Take the land yielding 30 bushels at an outlay of $30 per acre. We might, perhaps, succeed in getting 60 bushels per acre out of this land, but it would mean an expenditure of $80 or $90, certainly more 586 PRINCIPLES OF POLITICAL ECONOMY reasons stated above, this will be the price for all the wheat on the market. Henceforward the owners of land of the first category will have a surplus or rent of $1 per bushel, or $30 per acre, and the owners of land of the second category will begin to receive a surplus or rent of 50 cents per bushel, or $ 10 per acre. This " order of cultivation," as Bicardo calls it, may go on indefinitely, always causing a rise in the price of food, to the detriment of consumers, and an increase in rent, to the bene- fit of landlords whose income is augmented without any effort on their part, and whose prosperity has its source in the impoverishment of the rest of the community. 1 In Ricardo's theory we must take it for granted and this assumption has given rise to numerous objections that there is always some land for which no rent is paid in the strict sense of the term, i.e. land which yields no return except for the capital and labor expended on it. This is the land, however, that plays a decisive part in the determination of rent, inasmuch as it serves as the standard, as the basis of comparison with other lands. The income of all these other than $60, and the cost of production would rise to $1.30 or $1.50 per bushel. The ultimate result would thus be the same whether we bring new land under cultivation or apply a more careful 'and costlier system of agri- culture to the old land. In this connection the section on the Law of Diminishing Returns should be re-read (page 92). 1 Ricardo's whole theory was aimed, in the opinion of Professor S. N. Patten (who has made a careful study of the work of the English economist), at the controlling political power of British landlords three-fourths of a cen- tury ago. "Nothing," says Ricardo, "is more common than to hear of the advantages which the land possesses over every other source of useful pro- duce, on account of the surplus which it yields in the form of rent. Yet when land is most abundant, when most productive, and most fertile, it yields no rent ; and it is only when its powers decay, and less is yielded in return for labor, that a share of the original produce of the more fertile portions is set apart for rent. It is singular that this quality in the land, which should have been noticed as an imperfection, compared with the natural agents by which manufactures are assisted, has been pointed out as constituting its peculiar pre-eminence." KENT AND PRICES 587 lands is due, not precisely to their fertility (for if each plot were alone under cultivation, not even the most fertile would yield a surplus, for the reasons that we have stated), but to their relative fertility, i.e. to the comparative barrenness of competing lands ; rent is not due to the generosity of nature, but to her niggardliness. The owner of a fertile plot of land occupies a privileged position. He enjoys, as it were, a monopoly ; but a monopoly of a peculiar kind, which does not consist in being able to sell above the market price, but in being able to produce cheaper than the market price. It may be objected that this is a distinction without a difference. But this objection is not valid ; for while the ordinary mo- nopolist causes a disadvantage to the public by screwing up prices, the landlord who receives rent must abide by the price fixed in the market by forces that are beyond his control. Even if a spirit of generosity should prompt all the owners of wheat farms to relinquish their rent, the current price of wheat would not fall one cent ; such conduct would simply amount to a gift to their tenants or those who happened to buy the wheat first. 1 In other words, prices are not high because rent is paid, but rent is paid because prices are high. Rent is not the cause, but the effect of the price. 2 1 In this statement we have in mind the present system of private prop- 'erty ; for things would be different under a system of common ownership. If society collectively owned all the land, it would be possible to establish an average price somewhat lower than the cost of production on the poorer lands and somewhat higher than that on the better lands, thus balancing the losses on the former by the gains on the latter in such a way as just to cover the total costs. It cannot be denied, on theoretical grounds, that this would mean a reduction of the price. 2 Says Ricardo : " Corn is not high because a rent is paid, but a rent is paid because corn is high." The same idea may be expressed by the celebrated formula : Sent is not part of the cost of production. Wages and interest alone constitute the cost of production ; indirectly, under the pressure of free competition, they consti- tute the value of the product. From this theory the interesting conclusion is drawn that one might confis- cate the entire rent of land by taxation, without affecting the price of cereals. 588 PRINCIPLES OF POLITICAL ECONOMY This theory of land-rent is now somewhat out of favor. Economists of the liberal school regard it as dangerous to the right of private property, whereas socialists find it too pessimistic with regard to the future of production. Yet we must accept the theory as true in its general fea- tures, except the historical order of cultivation, which seems to be an a priori hypothesis. Although Ricardo regarded this " order " as the very basis of his theory, it is by no means an essential part of it. 1 Here, let us say, are a hundred bushels of wheat offered for sale in any European market. It is clear that they have not all been produced under the same conditions. Some of the wheat was raised with the help of much fertilizer and intense labor ; some of it grew on fertile land almost of its own accord. Some of it came from San Francisco, after passing round Cape Horn ; the rest of it, possibly, came from a near-by farm. If each bushel, therefore, bore a label indicating its cost of production, there would probably not be two bushels bearing the same figures. Their original cost of production might easily range, for example, from 25 cents to $2. But we know, on the other hand, that for goods of the same kind there can only be one and the same price. (See page 187.) The price of all the wheat must there- 1 By a theory which is diametrically the opposite of Ricardo's, and which was celebrated for a time, the American economist Henry C. Carey at- tempted to show that the "order of cultivation" is precisely the inverse of that laid down by Ricardo. The most fertile lands, says Carey, are those most difficult to clear because of this very fertility, which results in exuber- ant vegetation, huge forests, and marshes giving rise to miasma and fevers. The best lands cannot, therefore, be brought under cultivation until agricul- ture has made considerable progress and is in possession of powerful instru- ments and advanced methods. This theory is true for a young nation. It was true for the United States at the time Carey propounded it. It is no longer applicable to the United States of to-day, and it ceased many centuries ago to be applicable to Euro- pean nations. It would be absurd now to maintain that the most fertile land in France or England is that which still remains to be cultivated. THE PECULIARITY OF RENT 589 fore be the same. How, then, the cost of production being different in each case, and the selling-price being the same, is the connection established between the uniform selling- price and the cost of production ? The answer is this : The selling-price coincides with the cost of production only in the case of that bushel of wheat which cost most to produce. In the example chosen above, this would be the bushel that cost $2. The reason for this is plain. The selling-price must be at least sufficient to cover the expense of production borne by the unfortunate seller who raised his wheat under the most unfavorable con- ditions of production ; for if it were not so, this producer would no longer raise wheat for the market; and, as we assume that the quantity of wheat is not greater than the effectual demand for it, it would be impossible to dispense with this last producer. We may therefore formulate this proposition : Whenever like products are sold in the same market, the value of all tends to coincide with the maximum cost of pro- duction. Now it is plain that this price of $2 will mean a gain for all wheat-producers whose cost of production is less than this amount ; a gain of $1 for him whose wheat cost $1 to produce, of 80 cents for him whose wheat cost $1.20, of 50 cents for him whose wheat cost $1.50, and so forth. This gain or surplus is called rent, in the economic sense of the term. It is of a peculiar nature that distinguishes it from profit, because, on the one hand, it is wholly beyond the influence of competition, and because, on the other hand, it is due to forces absolutely independent of the con- duct of him who receives it. The landlord plays a purely passive part ; he profits by circumstances, but does not create them. 1 1 It was Anderson, a Scotchman, who first expounded the law of rent (1777). But Ricardo has taken all the glory of its discovery. Both of them considered it applicable only to agricultural products, but it really constitutes 590 PRINCIPLES OF POLITICAL ECONOMY As used popularly, the term rent is applied to what- ever is annually paid to a landlord by his tenant. This is, of course, a much wider use of the term than Ricardo would sanction, for it really includes other elements than economic rent. 1 When the farmer is his own landlord, there is no regular payment either of money or goods. Yet there is rent, in the economic sense of the term, wherever there are differences in the fertility or accessibility of land, no matter whether or not the land is owned by those that cultivate it. II. The Unearned Increment of Land Although the historical " order of cultivation " laid down by Ricardo must be rejected, the essential fact which this a universal economic phenomenon. Whenever like products are sold at the same price, rent, which is really simply the difference between the cost of production and the selling-price, goes to those who have produced goods under favorable circumstances. In manufactures, however, this phenomenon occurs only temporarily, because in this branch the most favorably situated producers are able to satisfy the whole demand by increasing their output indefinitely. Instead of utilizing their position of vantage by continuing to sell at the old prices, they prefer to lower prices, undersell their competitors, and drive them gradually from the market. They thus make less profit on each article sold, but greater total profits. (See page 194, note 1.) In this case the general market price is not determined by the maximum cost of production, but by the minimum cost of production, a result which constitutes a great advantage for the public. 1 Ricardo makes this clear by an example. If, of two adjoining farms of the same extent and of the same natural fertility, one had all the conven- iences of farming buildings, and, besides, were properly drained and manured, and advantageously divided by hedges, fences, and walls, while the other had none of these advantages, more remuneration would naturally be paid for the use of one than for the use of the other ; yet in both cases this remu- neration would be called rent. But it is evident that a portion only of the money annually to be paid for the improved farm would be given for the natural properties and advantages of the soil ; the other portion would be paid for the use of the capital which had been employed in ameliorating the quality of the land and in erecting such buildings as were necessary to secure and preserve the produce. THE UNEARNED INCREMENT 591 hypothesis merely served to emphasize, viz. the spontaneous and in a sense inevitable increase in the value of land and in the revenue arising therefrom, nevertheless remains true. We must bear in mind that land is a kind of wealth sui generis, and has three characteristics which no other wealth possesses in the same degree. These are : (1) It provides for the satisfaction of human wants that are essential and permanent. (2) It is limited in quantity. (3) It lasts forever. In view of these facts we can easily understand why the value of the land and of its products increases constantly, at least in a progressive society, and how almost all the forces of economic and social progress contribute to its increase. The growth of population is the principal cause of increas- ing rent, because the more people there are, the greater the quantity of food that the land must produce for them, and the wider the area they will require to live upon. 1 But the general accumulation of wealth, the building of highways and railroads, the rise of great cities, and even the develop- ment of public order and safety, also inevitably contribute to increase that surplus value of land which English economists designate by the .significant name of unearned increment? 1 Henry George lias eloquently developed the theory that the value of the land is directly proportionate to the population that lives upon it. As land is the ultimate source of nearly all raw materials, the increased consumption of almost any kind of wealth means greater demands upon the land. Blatchford, an English socialist, puts this rather forcibly when he says : "All wealth comes from the land all flesh is grass. Vegetable food comes directly from the land ; animal food comes indirectly from the land, all animals being fed on the land. So the stuff of which we make our cloth- ing, our houses, our fuel, our tools, arms, ships, engines, toys, ornaments, is all got from the land. For the land yields timber, metals, vegetables, and the food on which feed the animals from which we get feathers, fur, meat, milk, leather, ivory, bone, glue, and many other things." 2 Naturally enough, this surplus value of land is most striking in new countries, such as the United States, because in these countries the forces to 592 PRINCIPLES OP POLITICAL ECONOMY There are but two factors capable of arresting the increase of rent or causing it actually to decrease. The first is the competition of new lands, which may take place as the result of colonization on a large scale or great improvements in the means of transportation. This factor is now operating with extraordinary intensity. 1 But it must, nevertheless, be regarded as a mere accident in eco- nomic evolution, as a temporary disturbing element. In the second half of the nineteenth century so much new and unoccupied land was brought under cultivation that the supply of agricultural products exceeded the consumptive power of the population. But this state of affairs cannot long continue, and when the new countries will be more thickly populated, the law of increasing land-rent, for a time suspended in its operation, will again go into force. The second factor that may counteract the rising tendency of rent is a great and sudden improvement in the methods of farming. This is the most paradoxical as well as a most certain consequence of Ricardo's theory. Without accept- ing Ricardo's assumption that improved methods would lead to the abandonment of the least productive farms, we can readily see that all progress in agriculture, by increasing which we have referred are most intense. Many of the fabulous fortunes of American millionnaires are largely due to the unearned increment from land. In older countries where these forces are less pronounced and the increase of population is less rapid, the surplus value of the land is less noticeable ; yet in the past it has played an important part. In 1800, the rent of land in England was calculated to be $100,000,000, and in 1880, $300,000,000. During the same period, the population of Eng- land likewise had increased to three times what it was in 1800. But the rent (especially of agricultural land) has certainly fallen considerably since 1880, despite the continued growth of the English population. 1 Ricardo's theory is by no means overthrown by this fact, but confirmed by it ; for he declares expressly that there will be no rent in colonies or new countries. The competition of new countries and of colonies is precisely what has caused a temporary pause in the rise of rents in old countries. It should be noted, however, that although colonization and better means of transportation make rent decline in old countries, they make it increase rapidly in new countries. THE LEGITIMACY OF KENT 593 the supply of farm products, must decrease the final utility and value of these products, and therefore lower the value of the land itself. It should be noted that neither the one nor the other of these two possible causes of a decline in rent would affect building lots. This is why the value of these lots has increased so astoundingly, and this, too, is why no category of private expenditure has increased more rapidly than that for the rent of buildings. 1 III. The Legitimacy of the Rent of Land If we accept the theory that has just been explained, it follows : (a) that land-rent is the result of a kind of mo- nopoly ; (5) that this income is bound to increase in con- sequence of social forces entirely beyond the influence of the landlord. It must be admitted that these circumstances do not speak in favor of the legitimacy of land-rent. Yet if the legitimacy of private property in land is firmly established, that of land- rent would necessarily follow, just as the legitimacy of interest is inseparable from that of private property in capital. But if we turn from land-rent to property in land, and examine the legitimacy of the latter, the problem is no nearer a satisfactory solution. Not only does land present the three characteristics sui generis which we enumerated in the last section, and which alone would suffice to make the justice of property in land questionable, but, above all, it possesses the unique characteristic of not being a product of labor. All goods are the product of labor, except land. 2 Hence if we accept the theory that the basis of property is labor, we must 1 In 1895 a small building lot on Lombard Street in London sold for $600 per square foot. 2 It may be objected that a diamond is not the product of labor. This would be false, for a diamond has no value unless it is found and taken out of the ground. 594 PRINCIPLES OF POLITICAL ECONOMY conclude that all things may properly come under private ownership, except land. 1 The simplicity and logic of this distinction strongly im- press the mind. It is of ancient date, for we shall presently see that it can be traced to the very beginnings of property. It is also a modern idea, for in our own times it has met with the approval, not only of socialists, but also of a number of contemporary economists and philosophers. The optimistic school, however, absolutely denies this dis- tinction, and asserts that land is just as much a product of the farmer's labor as the clay vase fashioned by the potter is the product of the potter's labor. Man, to be sure, has not made the land; but neither has he made the clay. Labor, in fact, never creates anything ; it simply modifies the materials that nature provides. Now this modifying influence of labor is no less real or effectual when applied 1 Some persons have endeavored to justify the private ownership and rent of land by the following childish argument : Property in land is legitimate because all land has been bought, i.e. exchanged for money, and therefore the rent of land is simply the interest on the money thus invested. This argument entirely misses the question. A piece of land does not yield a rent of $4000 because it was bought for $100,000 ; but it sells for $100,000 because it will yield $4000 rent independently of any labor on the part of the owner. What we want to know is why and how the land does this ! The above argument is precisely like attempting to silence those who criticise the monopoly of money-changers in France, by saying that their right to this position is legitimate and unquestionable because the present incumbents paid for it. The only valid conclusion that we can draw from this argument is that the landowner (like the holder of any privilege bought with money) has a right if the land is taken from him to the repayment of the price paid. But this is an entirely different question. Nor has prescription (the acquisition of property by immemorial or long- continued and uninterrupted possession), often urged as justifying private property in land, any better validity. In some particular cases, and in order to avoid lawsuits impossible to decide, jurists have determined that long possession properly leads to the presumption that the title to land has been lost and may take the place of a legal title. But it would be absurd to make this proposition general and to declare that landed property in general is based on the presumption of legal titles that cannot be shown. LAND AND LABOR 595 to the soil itself than when applied to the materials drawn from the earth's bosom. The optimists refer us, moreover, to such patches of land as those which peasants of the Valais or the Pyrenees have literally constructed on the sides of the mountains by carrying all the earth for that purpose in baskets upon their backs. An ancient author tells us how a peasant, accused of sorcery because of the abundant crops that he obtained from his land, while the neighboring tracts were perfectly barren, was called to appear before the Roman magistrate, and there, showing his two arms as the only de- fence he had to offer, exclaimed, "These are my sole magic." Landed property, to defend itself against the attacks now made upon it, need only give the same proud answer. And even if the land were not a direct product of labor, it is (says the optimistic school) at least the product of capital. The value of land and its growing surplus value are sufficiently explained by the improvements made in the land and the expenditure incurred by its owners. It is even said that if we kept account of all the expenditure incurred by the successive owners of the land, we should reach the conclusion that no land is now worth what it has cost. 1 Despite the element of truth which this argument con- tains, it does not seem to us conclusive. No doubt man and land have ever been bound together by the tie of daily labor, often labor of the severest kind. The biblical prophecy, " In the sweat of thy face shalt thou eat bread," applied to agricultural labor ; indeed, the word labor itself originally re- ferred to tilling the soil, and the modern French " labourer " has the same meaning. But although land is the instrument of labor, it is not the product of labor. It existed before any human labor. 2 There can be no doubt that man, by labor 1 The historian Michelet declared that " man has the best of claims to the land, that of having made it." The physiocrats also based the right of property on the expenditures made to create the farm, and called them " advances on the land." 2 The school of Bastiat, in order to prove that the value of land is due solely to labor, emphasizes the fact that where land is uncultivated, as in 596 PRINCIPLES OF POLITICAL ECONOMY and expenditure, improves and modifies this marvellous in- strument of production which nature has provided. In other words, he adapts it better to his purposes ; and in this case he evidently confers upon it additional utility and in- creased value. We must, moreover, recognize that with every advance in the methods of agriculture, the land tends to become more and more a product of labor. For example, in many European countries vegetable gardening is carried on in large marshy tracts, covered with artificial substances that are prepared entirely by the gardener ; the value of such tracts is manifestly due largely to labor. But it is always possible, theoretically if not practically, to discover the value of the original soil itself under the successive additions of capital and labor. This original value is most easily perceptible in the forest that has not yet been cleared, and the prairie that is still uncultivated, but that may be sold or rented at a high price. It is plainly visible in the tracts of sandy shore in the French departments of Gard and Herault which have never certain parts of America, it possesses no value. This fact is true enough, but the argument based on it does not prove anything. Land situated on the banks of the Amazon is valueless, not because it is uncultivated, but simply because it is situated in a wild and uninhabited section where there are no men to utilize things, and where the very idea of wealth cannot arise. It is obvious that no land had any value before the first human being appeared upon its surface, and that it will cease to possess any value when the human race has disappeared. (See pages 46 ff.) But the virginity of the land proves nothing in this respect. If we were able, by some magic process, to transport these wild Brazilian tracts to the shores of the Hudson or the Delaware just as they are, they would be worth as much as the oldest farms in New York or Pennsylvania, although the latter have been worked and tilled and cared for by the labor of many generations. Lest the above supposition be found too fantastic, let us suppose a farm anywhere in the country to be surrounded by a wall and entirely abandoned for a hundred years, until every trace of human labor upon it had entirely disappeared. Would any one dare say that in this condition the land would lose all its value, and that no tenant or purchaser could be found for it? It is extremely likely, on the contrary, that even though it were left in this state it would be worth much more in a hundred years than now. LAND AND LABOR 597 been tilled by man, but which nevertheless made the fortunes of their lucky possessors when it was accident- ally discovered that grape-vines planted there are not subject to the phylloxera. It is equally plain in the case of building lots in large cities, lots over which no plough has ever passed, yet which have a much higher value than the most carefully cultivated farm. Even in the case of cultivated land, the natural value of the soil is evidenced by the unequal fertility of different farms. How often it happens that although two plots of land have been subject to equal labor and expenditure, one may yield large returns every year, while the other scarcely yields enough to cover expenses. The argument that no land is worth what it has cost is mathematically false, as we shall explain presently. This argument, moreover, does not apply to land for building pur- poses, because this land is always uncultivated. It is certain that if we add the value of all the labor and capital expended on a given piece of ground in one of our Eastern states, beginning with the colonial settler who first cleared it, we shall get a total far in excess of the present value of the land. But for our calculation to be complete and correct, it would be necessary also to add all the receipts from the land, beginning with the same date. If we do this, there is no doubt that the balance of such corrected and completed accounts will show that the land has yielded a constantly increasing revenue. If, then, private property in land seems so hard to defend from the standpoint of abstract justice, why has it existed since time immemorial, and why has it been maintained by the laws of almost all civilized peoples ? Simply because it is based upon public utility, which, indeed, is a sufficiently firm basis. 1 Its origin is due to historical forces which we 1 The important distinction between landed property and other kinds of property is clearly indicated by the Servian Code of Laws in the following clauses : 598 PRINCIPLES OF POLITICAL ECONOMY shall discuss in the following section. These forces gradu- ally did away with primitive communism, and ultimately brought land under the scope of free and individual property, thus making it more nearly like property in movable com- modities. They gave rise, with the progress of agriculture and the development of civilization, to the gradual trans- formation of property and land. These forces were as follows : (1) The growth of population compelled mankind to practise more " intensive " farming, in order to produce an increasing food-supply. (2) To stimulate labor it was considered necessary to give the cultivator not only a right to the products of the land, but also to the land itself as the instrument of his labor. This right was at first temporary ; but the period of its duration was made longer and longer, as the progress of agriculture required labors of longer duration. Finally, the right of property in land was made perpetual. 1 Have these considerations, which originally gave rise to private property in land, now lost their validity as a means "The right of property in products and movable objects acquired by human exertion is based on the laws of nature." " The right of property in immovable objects and in the soil, whether culti- vated or uncultivated, is confirmed by the constitution of the country and due to civil laws." But some economists are unwilling to admit any distinction between what is absolutely just and what is socially desirable and convenient. Hence some of them continue trying to justify private property in land by basing it on labor, while others (such as Mr. L6on Walras) give up all attempt to defend it, and advocate the transformation of the individual ownership of land into social property. (See the section on the Nationalization of Land.) 1 The right to the fruits of the earth carries with it a right to the earth it- self, at least for a certain period. The man who has sown the seed must be given time to reap the harvest. The planter of vines must wait six or seven years for his first vintage ; half a century must elapse before the acorn becomes a full-grown oak. Moreover, even annual crops, if the methods of farming are at all advanced, require certain labors (such as manuring, improvements of the soil, drainage, and irrigation), which will not pay for themselves in less than ten, twenty, or even fifty years. The man who has PRIVATE PROPERTY IN LAND 599 of defence against the attacks of its adversaries ? We think not. With a more or less rapid but nevertheless constant in- crease of population, it is always important to choose that method of cultivating the soil and that system of ownership carried on these labors must be given a chance to recoup himself ; otherwise he would never have undertaken them. Yet if property in land be based only on reasons of social utility, the pres- ent system has overshot the mark in two respects : (1) It would have been sufficient to confine the right of property to the land to which labor has really been applied. This principle, curiously enough, underlies the laws of the Mohammedans regarding property in land, which are more in conformity with the principles of economics than ours. The Mohammedan law confines private property to such land as has been made the object of actual labor, land that has been irrigated, or drained, or built upon, or planted upon, or tilled, or cleared, or levelled. This land is designated as living land, in contradistinction to uncultivated or dead land, which remains collective property. " When a man has put life into dead land," says the prophet, " it shall belong to him, and he shall have an exclusive right to it." The application of this principle accounts for the fact that collective property in Algeria and Java, for example, still occupies an important place. Two-fifths of the area of France (54,000,000 acres) is in a " state of nature," but less than one-third of this land (15,000,000 acres) still belongs to the nation or the communes. All the rest has been brought under private property, on the basis of no other title than occupation. (2) We may well ask if it was really necessary to make the right of private property perpetual ? This characteristic far surpasses the exigencies of cul- tivation. Man, whose lifetime is but a brief span, does not require all eternity for the accomplishment of even the greatest enterprises. The franchises of railroad and canal companies are granted only for terms of ninety-nine years, as a rule. In England, moreover, the laws are such that the possession of most of the land and buildings is limited to a period of ninety-nine years. Rigorous logic, however, would appear to justify the conclusion that the right of property should last as long as the object to which it applies. And the object in question is perpetual. The earth, in fact, is the only wealth which possesses this quality. Time, the destroyer of all things, tempus edax rerum, has no effect on the land except to give it a new youth with each returning spring. This argument, however, is a specious one. What lasts forever is the productive power of natural forces, not the transforma- tions effected by labor, even though they be incorporated with the soil. In other words, that which gives most value to the land, labor, advantageous location, etc. , does not constitute an everlasting part of it. 600 PRINCIPLES OF POLITICAL ECONOMY which, for a given area, will provide food for the largest possible number of persons. 1 We believe that in strict justice society as a whole should own all the land. But society cannot better promote the interests of all than by delegating this right to those who can make the best use of the land. 2 Thus far, individual owners have succeeded in doing this, and, until proof to the contrary is forthcoming, we are justified in thinking that they are the persons to whom this social function may most safely be intrusted. 3 IV. The Evolution of Property in Land Not only is private property in land sanctioned by all modern systems of legislation, but it is regarded as the very type of private property. When we speak of a man's property, without using any qualifying term, we are generally understood to mean landed property or real estate. Yet we may regard it as certain, in spite of numerous con- troversies which have recently been waged on this subject, that property in land is an institution of relatively recent 1 In Canada it has been observed that the indigenous races which live by hunting require the enormous area of fifteen square miles per person in order to obtain sufficient food. Below this limit, famine decreases their numbers. But the system of agriculture practised in Western Europe enables the same area to support more than four thousand persons. 2 After having wavered somewhat, this is the conclusion which Herbert Spencer reached in his book on Justice. " While I adhere to the inference originally drawn, that the aggregate of men forming the community are the supreme owners of the land an inference harmonizing with legal doctrine and daily acted upon in legislation a fuller consideration of the matter has led me to the conclusion that individual ownership, subject to state-suzer- ainty should be maintained." 3 Collectivists assure us that the collective cultivation of the soil would produce far better results than those obtained by individual ownership, be- cause it alone would permit the employment of large-scale methods of produc- tion and procure the advantages that ensue therefrom. In this connection, the reader should refer to what has been said of large-scale and small-scale agriculture on page 170. THE EVOLUTION OF LANDED PROPERTY 601 date, and that its establishment was even a matter of great difficulty. 1 We may distinguish, in the evolution of landed property, six successive stages which we shall describe briefly. 2 (1) It is obvious that landed property cannot arise among peoples that live by hunting, or among pastoral races lead- ing a nomadic life. It can arise only with the beginnings of agriculture. And even in the early phases of agricultural life, landed property is not yet instituted. This is due to two circumstances. First, because the land is superabundant and no one feels the need of marking off his share. Secondly, because agricultural methods are still in a primitive state; the farmer leaves one field as soon as it is exhausted, and takes another. The land is cultivated in common, or at least without any effort to attribute separate, well-defined parts of it to particular individuals. It belongs to society as a whole, or rather to the tribe. Only the product of the soil belongs to the man or family cultivating it. 3 (2) Gradually the population becomes more sedentary 1 The establishment of absolute private property in land is perhaps the most characteristic feature of Roman law ; and yet, even in the early history of Rome, it seems beyond question that individual property applied only to the home and to a narrowly limited area surrounding it. Among the authors who consider that property was collective at the beginning, we may refer to : De Laveleye, "Primitive Property " ; Sir Henry Maine, "Ancient Law"; Paul Lafargue, "The Evolution of Property." The opposite position is upheld by Fustel de Coulanges, " Origin of Property in Land" ; Guiraud, " La proprie"t fonciere en Grece." 2 The order here given is logical rather than chronological. We must not be understood to mean that in all countries property has gone through each of these stages in precisely the order given. The dominium ex jure quiritium, for instance, a form of free and absolute property, preceded feudal prop- erty in point of time, although logically it was a superior form. 3 Arvaper annos mutant (they change their land annually) is a famous phrase used by Tacitus in speaking of the old Germans. The meaning of this phrase has recently been contested, and a new and somewhat paradoxical translation proposed, viz. "They change their rotation of crops yearly." The system of tribal ownership of land is still found in several countries, e.g. the arch of the indigenous tribes of Algeria. 602 PRINCIPLES OF POLITICAL ECONOMY and more closely attached to the land. It also becomes denser, and is forced to adopt more productive methods of agricul- ture. Thus the first stage is succeeded by a second, viz. that of temporary possession together with periodical divi- sions. Though the land is still regarded as belonging to society, it is divided equally among all the heads of families. This division, moreover, is temporary, not permanent. First of all, it is only for a period of one year, this space of time being sufficient for the ordinary cycle of agricultural opera- tions. Then, as methods of husbandry improve and culti- vators require a longer time for the accomplishment and fruition of their labors, the partition of the land is gradually allowed to last for much longer periods. This system of a periodical division of the land still exists in Russia, and is known as the mir ; it is even found in several Swiss can- tons under the name of allmend. The community as a whole (i.e. the population of each village), owns the land and distributes it among its members by a periodical division, the frequency of which varies from one commune to another. 1 (3) There comes a time when these periodical divisions fall into disuse. Skilful farmers who have improved the land do not willingly submit to an arrangement which at certain intervals deprives them, to the profit of the community, of the increase of value due to their labor. Thus arises 1 The territory of the commune is divided into three classes. The first includes the land upon which buildings have been erected, together with the gardens around them. This property is hereditary ; it may be sold, and is not subject to division. The second includes the arable land, which is divided at certain intervals into portions as equal as possible, according to the num- ber of inhabitants. The third consists of meadow-land and forests, and generally remains undivided both with regard to use and to ownership. The mir, an assembly consisting of the heads of the families, has sovereign power in the distribution of shares and the system of cultivation. (For further details consult Kovalewsky, " Le Regime Economique de la Russie.) It is a matter of controversy among Russian economists whether this institution is only a survival, bound soon to disappear (as it has already disappeared in the rest of Europe), or, on the contrary, the precursor of a future form of property. THE CONQUEST OF LAND 603 the institution of family proprietorship, each family hence- forward being regarded as the permanent owner of its share of land. Yet this is not individual property, for the right of disposal does not exist. The head of the family can neither sell the land, nor give it away, nor bequeath it after his death ; for it is regarded as a collective patrimony and not as individual property. This system can now be studied in the family communities of Eastern Europe, especially the Zadrugas of Bulgaria and Croatia, which consist of between fifty and sixty persons ; they are now rapidly disappearing because of the spirit of independence manifested by the younger members of the family. (4) The evolution of landed property passes also through a stage which, though accidental, has never been wanting in the history of human societies. I refer to conquest. There is probably not a single territory anywhere on the surface of the earth that has not been taken by force at some time or other from the people that occupied it, and been appropria- ted by the conquering race. 1 The victors, however, in virtue of their position as conquerors and masters did not care to cultivate the land, but merely assumed the legal ownership and " oveiiordship," leaving the subjected people practically in possession of the soil. Land tenure was more or less akin to actual ownership, but always limited by the terms of an agreement between lord and vassal ; " obligations " were im- posed upon the latter ; dues and services were exacted from him by the lord ; and he could not alienate the land or leave it without the lord's permission. 2 For several centuries 1 As a proof of the influence which conquest has had upon the evolution of landed property, Herbert Spencer makes the interesting observation that the regions in which the old forms of collective property have been best preserved are precisely those poor and mountainous localities whose situation has ena- bled them to escape conquest. 2 Accounts of the system of land-holding under feudalism, the very basis of which was a peculiar system of land-tenure, may be found in the following publications: A. R. Wallace, "Land Nationalization 1 '; S. W. Thackeray, "The Land and the Community " ; the article on "Land" in Bliss' Ency- 604 PRINCIPLES OF POLITICAL ECONOMY this system, known as feudalism, was the foundation of the social and political constitution of Europe. There are still traces of it in many countries. Especially in England, almost all landed property is still, in the eyes of the law, held by a limited tenure, and is hedged about by a multitude of re- strictions very difficult to remove. 1 (5) The growth of individualism and of equality before the law, together with the abolition of the feudal system, particularly in those countries which felt the influence of the French Revolution of 1789, led to a fifth stage which marks our own epoch. This is characterized by the final establish- ment of free property in land, with all its attributes. Never- theless, property in land is not entirely on the same footing as personal or movable property. There are numerous points of difference, familiar to lawyers ; but the essential difference consists of additional difficulties connected with the trans- fer of property in land, or so-called realty? clopedia of Social Reform; Cunningham, Growth of English Industry and Commerce," Vol. I; Emerton, "Medieval Europe." 1 "Thus was established, in our English law, the cardinal maxim with re- gard to the possession of lands, viz., that the king is the sole master and the original owner of all the land in the kingdom." (Consult Blackstone's ' ' Commentaries. ' ' ) 2 By the English statute of frauds, reenacted by the great majority of our state legislatures, a conveyance of an estate or interest in land (except leases for three years or less) is required to be in writing and signed by the party undertaking the same. As a general rule this conveyance must also be ' ' under seal," although such seal in some of our states may be a mere flourish of the pen. Again, a wife must join with her husband in signing or acknowledging a deed or mortgage of land, in order that the title may be perfect. Other instances of the formalities and difficulties trammelling the transfer of land in this country are these : As soon as the grantee of real estate obtains a deed or mortgage of it, he must have it recorded by a public official, generally the county clerk or register of deeds. In order to entitle it to record, the conveyance must be acknowledged by the grantor before a proper officer, a notary public, a commissioner of deeds, or the like. Upon the sale of real estate it is custom- ary for the vendor to furnish an " abstract of title " or " search," showing the true condition of the title. TRANSFERABILITY OF LAND 605 (6) But one more step must be taken in order that landed property shall be precisely like personal property. This step consists in making property in land perfectly mobile or trans- ferable, i.e. making it possible for any person not only to call the land his own, but to dispose of it as simply and as easily as of any other object of value. This final step has been accomplished in a new country, Australia, by the cele- brated Torrens system, 1 which enables the owner of real estate to put his land, so to speak, into his pocket-book in the form of a piece of paper, and to transfer it to some one else as easily as if it were a bank note, or at least a bill of exchange. Efforts have recently been made to introduce this system in the old countries of Europe, and it is probable that the logic of facts and the natural laws of social evolution outlined above will lead to its ultimate acceptance everywhere. The inference that may be drawn from this rapid review is that property in land has gradually and steadily departed from its original collective form and become increasingly indi- vidualistic, thus approaching more and more closely the state of affairs in which private property in land is practically 1 This system, named after the man who caused its adoption in New South Wales about fifty years ago, consists essentially of the following features : (1) There is a register in which each plot of ground has its own page, giving a plan and description of it and containing, as it were, a history of the land since the time when it became private property. (2) There is a title-deed, which is a facsimile sometimes even a photo- graphic reproduction, of the corresponding leaf in the register. When this has been handed over to the owner, it absolutely represents the land itself and may be sold, given for security, etc. The purpose of this system, as Torrens himself declared, is to rid landed property of all the barriers that prevented free access to it, " like the port- cullis, drawbridge and moats which prevented access to the castles of our ancestors." This system, adopted in turn by all the Australasian colonies, as well as in some other English colonies and in Tunis, is under consideration in several countries. Several legislative attempts have been made to introduce it in England. It was adopted in Illinois a number of years ago, but soon declared unconstitutional by the Supreme Court of that state. 606 PRINCIPLES OF POLITICAL ECONOMY indistinguishable from private property in personal goods and capital. 1 V. The Hire of Land In the United States, agriculture has been carried on chiefly by the proprietors themselves, not by agricultural tenants. There are millions of farms just large enough to employ profitably the labor of the proprietor and his family. 2 The good effects of the system of private land tenure are most conspicuously seen, when, as is here the case, the owner and the occupier of the land are one and the same person. " Under these conditions, land ownership serves at once as a motive to zeal in labor and to liberality in investment. When one man owns the land and another occupies it, the right of the owner to the benefit of all improvements not 1 This tendency furnishes presumptive evidence against a future collec- tivistic organization of society. Yet it is not conclusive evidence, for we have already pointed out several cases of regressive evolution. 2 The following census statistics show the character of our agricultural tenures. YEAR CULTIVATED BY OWNER RENTED FOR MONET EENTED FOR SHARES Total Per cent Total Per cent Total Per cent 1900 1890 1880 3,712,408 3,269,728 2,984,306 64.7 71.6 74.5 751,665 454,659 322,357 13.1 10.0 8.0 1,273,299 840,254 702,244 22.2 18.4 17.5 The figures for 1880 and 1890 do not include farms with an area of less than 3 acres which reported the sale of less than $500 worth of products in the census year. On the other hand, many farms were counted twice in those years whenever they were tilled in part by the owner, and rented in part. Although the relative number of farms cultivated by owners has decreased since 1880, the census authorities call attention to the fact that the farms operated by owners have increased faster since 1850 than the agricultural population. Such an increase can only be possible providing the increase in the number of tenants has been by the elevation of former wage employees to the position of farm tenants. (See Twelfth Census, Vol. V, pages xliii and Ixxvii.) THE KENT CONTRACT 607 infrequently acts as a discouragement to the occupier and prevents him from laboring with the zeal or the skill which he would otherwise use." 1 In England, the land is usually owned by some rich man who possesses large estates, but does not care to engage in the active business of farming. The farmer hires the land and its improvements from the proprietor, and stocks it with cattle, carts, improved implements of all kinds, and then employs day-laborers to do the manual work, laboring him- self in superintendence, in keeping accounts, buying and selling, etc. The laborer, generally speaking, is nothing but a laborer, and the tenant-farmer is his employer. 2 Rent, by which we now mean the income which the pro- prietor of a farm receives for letting it to an entrepre- neur, closely resembles the income from labor (called wages), and the income from capital (called interest). Like wages and interest, rent is agreed upon by contract in ad- vance of the business enterprise in which land, labor, or capital are to be engaged ; in consideration of a regular money annuity, 3 the landlord abandons all claim to the prod- ucts of the farm. But although there is a close legal resemblance, there is in reality a great difference. For in the contract between the laborer and the entrepreneur or em- 1 Hadley, " Economics," page 130. When the farms cultivated by owners are very small, the methods of farming are likely to be primitive, capital is likely to be insufficient, and a few bad seasons may lead to distress and ruin. The disadvantages under which so-called peasant proprietors suffer are briefly indicated in Jevons, " Primer of Political Economy," page 89. 2 Jevons, " Primer of Political Economy." 3 It must be noted, however, that just as the wage system has been amended by what is known as profit-sharing, and the payment of interest transformed into the payment of dividends, so also the system of tenantry or leasing land to others is sometimes supplanted by the metayer system, which plays an important part in France, Italy, and several other countries. This system, whereby the cultivator gives a share of the product to the pro- prietor, who generally furnishes the stock and improvements, also prevails to a large extent in the south of the United States. (See the statistics regard- ing share tenantry on page 606, note 2.) 608 PRINCIPLES OF POLITICAL ECONOMY ployer, the latter occupies the predominant situation, whereas in the contract between the landowner and the entrepreneur known as the tenant, the former undoubtedly has the advan- tage. History furnishes few instances of employers exploited by their laborers ; but it offers innumerable examples of tenants robbed by their landlords. While legislative bodies sometimes feel called upon, on the one hand, to establish a minimum rate of wages (as in Belgium), they are also obliged, on the other hand, to fix a maximum rental (as in Ireland) . We have already said that the price actually paid for the use of a farm does not necessarily coincide with economic rent, which is distinct and separate from wages and in- terest, and due solely to forces that are independent of the landlord's conduct. The price paid for the hire of a farm (for which the French vocabulary has a distinct term, fermage), is usually greater than the land-rent. There are usually buildings, roads, fences, drains, and other im- provements, of which the landlord is also the owner; in respect of these, he is a capitalist, and the return he receives is interest. Again, the pressure of necessity may oblige the tenant to pay the landlord not only the surplus that is due to natural and social forces, but, in addition to this, a part of the reward of his own labor. Yet it may happen, contrariwise, when tenants are not numerous but in great demand, that the price for hiring farms will be less than the land-rent ; in which case the tenant retains for himself a part of the proceeds due to the natural advantages of the land. The price which the tenant pays for the use of a farm is governed by the same laws as the rate of wages or of interest, i.e. by the laws of supply and demand. In new countries, where land is abundant, and where everybody can find vacant land upon which to settle as landlord, tenants usually will not consent to pay more for hiring a farm than the interest on the capital that has been put into it. Wherever, THE TENANT SYSTEM 609 on the other hand, the population is very dense, the land entirely occupied, and the wealth of the nation entirely agri- cultural as in Algeria or Ireland the high rent may leave the tenant barely enough to support life. 1 The system of tenantry and the income due to it, although sanctioned by venerable custom, must be regarded as incom- patible with the best interests of society, for reasons quite 1 In Algeria, the tenants called khammes retain only one-fifth of the harvest. It is well known that in Ireland the rent of farms has increased to such an extent that part of the population has died of hunger, another part of it has been obliged to emigrate, while those who remain are in permanent insurrection. Since 1881 a series of land laws have been promulgated for the sole purpose of introducing more humane conditions among tenants. The remarkable law of 1903, which will probably mark an epoch in the his- tory of the country, provides that the British government shall assist Irish tenants to purchase their land upon equitable terms. Where the system of tenantry prevails, as in England, a great deal de- pends, of course, on the nature of the agreement between the landowner and the farmer. Many English landlords refuse to let their land for long periods. They like to have farmers who are tenants at will, and can be turned off their farms at a year's notice, and deprived of the value of all improvements they have made, if they offend the great landowner. Tenants at will have no inducement to improve their farms, because this would tempt the landowner to turn them out or to raise the rent. " There are two modes of remedying the unfortunate state of land tenure in this country," says Professor Jevons, speaking of Great Britain, "namely, (1) By a system of long leases; (2) By tenant right." "A lease is a formal agreement to let land or houses to a tenant for a certain number of years, at a fixed rent and with various conditions which are carefully stated to prevent misunderstanding. When land is taken by a farmer under a lease for thirty years or more, it becomes almost like his own property, because, in the earlier part of his term, he can make great improvements, and yet be sure of getting the value back before the lease comes to an end. In the eastern parts of England and Scotland, where the farms are largest and best managed, these long leases are the usual mode of letting land." " Another good arrangement is tenant right, which consists in giving the tenant a right to claim the value of any unexhausted improvements which he may have made in his farm, if he be turned out of it." Modern society often so far modifies the principle of private property in land as to introduce judicial rents instead of competitive ones ; that is to say, the rent is determined by public arbitration between landlord and tenant. 610 PRINCIPLES OF POLITICAL ECONOMY different from those which led us to antagonize the wage system. We believe that tenancy is bound to make way for direct cultivation by the owners themselves, either separately or, better still, through partnership or cooperation. Our first objection to the tenant system is that it under- mines private property in land by destroying the validity of the principal argument in favor of that institution. We have pointed out that private property in land does not owe its existence to "natural" or "divine" law, but simply to the recognition that it is the most productive method of cultivating the soil, and the system most conform to the general interest. We have taken it for granted that no one can make better use of the land than the owner him- self. But this assumption loses all sense when the owner, by leasing his land to a tenant, shifts the work of culti- vation upon some one else and goes off to a large city or a foreign country to live on the income drawn from his estates. The landlord who, instead of cultivating the soil, uses it simply as an instrument of money-making and a means to live in idleness, is ill suited for the social mission assigned to him. It is difficult to conceive that the land has been distributed to certain men simply in order to furnish them with an income, fruges consumere nati, in the same way that kings formerly distributed benefices and prebends among their favorites. The very reasons which seemed sufficient to justify the right of property in land militate against the system of tenantry. A second complaint against the system is that the separa- tion of the roles of landowner and farmer, which results from the leasing of land, is disastrous to agriculture. To make the best and fullest use of the land, a man must love the soil and cling to it. But when the land is cultivated by tenants, this love of the soil is necessarily weakened, both in the landlord and the tenant. The former often lives far away from the land and sometimes knows nothing about it ; THE TENANT SYSTEM 611 the latter merely hires it for a while and does not care what ultimately becomes of it. 1 The arguments presented in favor of the tenant system are these : (1) It is uncommon to find a landlord unless he be an absentee who has absolutely no interest in the land. The system of tenantry, moreover, constitutes a division of labor in perfect harmony with a satisfactory organization of production. " The landlord," says Professor Leroy-Beau- lieu, "stands for the future and perpetual interests of the farm, whereas the tenant considers its present and tempo- rary interests." But even supposing that the landlord always understands his part perfectly, it is possible that these present and future interests may conflict with each other ; hence it would be better that both interests be in care of the same person. (2) To forbid leasing land to tenants would compel many owners to sell their estates, and would thus exclude from land-holding a number of persons whose age, sex, or profes- sion, or whose obligatory absence or extensive possessions make it impossible for them to cultivate their estates them- selves. This may well be true; but this result constitutes an advantage rather than an evil. If these persons cannot 1 In certain parts of France, whenever people remark upon the inferiority of crops on certain farms, it is not uncommon to hear the reply, "Oh, one can't expect anything better. That land is only hired land." The metayer system is not open to the objections stated above. The customary complaint against it is that it is a system of cultivation suited only for barbarous, comparatively uncivilized peoples, and compatible solely with poor and primitive methods of farming. But this depends on the method of agriculture and on the terms of the contract, which are very elastic. In Tuscany the metayer system has been found perfectly com- patible with advanced methods of cultivation. It possesses, over the system of tenantry, the following two advantages : (1) It prevents the landlord from losing interest in the cultivation. (2) It never embarrasses the tenant with regard to paying rent, inasmuch as he pays in goods out of each harvest when there is one. 612 PRINCIPLES OF POLITICAL ECONOMY properly perform their function as landowners, let them cease to be landowners! If we want to preserve private property in land, it must become an occupation, a profession, a function, and all economic and legal means must be em- ployed to attain a social condition of affairs in which the function of landowner shall fall only to the lot of those persons who are willing and competent to perform it, i.e. to those who will themselves cultivate the land. 1 A function that is so important for the welfare of society must not be "leased" or delegated. In the United States the present favorable condition of affairs is largely due to the fact that millions of settlers have found homes on land obtained from the government by gift or at prices of from 11.25 to $2.50 per acre. Land may be secured through the General Land Office, either by direct purchase or under the homestead laws. 2 Hence, the public- land states of the Central West, built up by settlers upon land purchased or granted out of the " public domain," are composed for the most part of a large number of proprietors, not of separate classes of landlords and tenants. Under the homestead law, "any citizen of the United States, or any person who has declared his intention of becoming such, who is the head of a family, or has attained his majority, or has 1 The above statement must not be interpreted as an acceptance of the formula: "The land should belong to small proprietors." Small farming with scant capital is as undesirable as the tenantry system. Small proprietors are usually unprogressive. It is not necessary that the land be held only by those who guide the plough or wield the hoe. Large landowners frequently introduce better methods, which would never have been tried by small proprietors unless the former had proved them to be successful. 2 Before 1820, the minimum price of land was $2 per acre; the price was then reduced to $1.25. Some lands may still be purchased at that rate, while others are held at $2.50 per acre. The public domain of the United States open to settlement comprised, on July 1, 1902, over five hundred mil- lion acres (excluding Alaska and our new insular possessions). These lands are partly situated in the Rocky Mountain and Pacific Coast states and terri- tories ; a large share are arid, and probably can never be brought under cultivation. LAND TENURE IN FRANCE 613 served in the army or navy in time of war, and is not already the proprietor of more than 160 acres of land in any state or territory, is entitled to enter a quarter section (160 acres), or any less amount of unappropriated public land, and may acquire title thereto by establishing and maintaining resi- dence thereon, and improving and cultivating the land for a period of five years." 1 In France, the law encourages cultivation by the owners themselves and facilitates the formation of small landed estates. 2 These laws, however, have injurious effects when they increase the limitations on the transfer of land belong- ing to minors, to married women, or to corporations. For in this case it becomes necessary to let the land to tenants, inas- much as the land is forcibly kept in the hands of persons who cannot cultivate it themselves. Thus, under the pretext of protecting the interests of certain individuals, the welfare of society is jeopardized. 1 For the fiscal year ended June 30, 1902, the homestead entries amounted to 14,033,246 acres. The sales of public lands for the same period amounted to $5,880,088.65. The extent to which advantage has been taken of our land laws and home- stead laws by the people of the country accounts in no small measure for the facts indicated on page 606, note 2. The following figures from the census of 1900 are also interesting in this connection : Families occupying encumbered farms of their own .... 1,094,573 Families occupying unencumbered "*** .... 2,422,678 Total families occupying their own farms 3,517,251 Families occupying hired farms 2,013,903 Total families occupying farms 5,531,154 2 About one-third of the farms of France 36 per cent are under the regime of tenantry, 12 per cent under the metayer system, and 52 per cent cultivated by the owners themselves. This is a favorable state of affairs. There are few countries, except new ones and colonies, in which the system of tenantry occupies so small a place. In Great Britain, for ex- ample, the conditions of tenure are radically different, for there ten-elev- enths of the land (according to Mulhall) belong to one two-hundredths part of the population. 614 PRINCIPLES OF POLITICAL ECONOMY VI. Plans for Nationalizing the Land The classical economists themselves grasped the nature and essential consequences of private property in land. They pointed out that it is a sort of monopoly, justified by present custom, but hardly defensible on grounds of social justice. Naturally, therefore, social reformers have long sought to bring actual conditions into better harmony with our ideals of justice. Not only full-fledged socialists, but economists and philosophers having little sympathy with socialism, and even liberals and individualists, have either condemned individual property in land, or at least admitted the desirability of some kind of social co-proprietorship as a corrective of its disadvantages. They have, in other words, suggested an extension of what is known as the government's "right of eminent domain," and proposed methods for re- forming, in the interests of society as a whole, the institution of property in land. 1 The most important plans for reform may be summarized as follows : (1) The perpetuity of property rights in land should be sup- pressed, and a system of leases substituted for it. The govern- ment should buy the land and lease it to individuals for culti- 1 We cannot here discuss the agrarian socialism of antiquity, despite its importance, nor devote any space to an account of the rise of land nationalization schemes in the various countries of Europe. The names most closely associated with this movement are as follows : In Belgium, Colins and de Laveleye ; in Switzerland, Le"on Walras and Charles Secre"tan ; in France, Renouvier and Fouille'e ; in Germany, H. H. Gossen and M. Fliirscheim. In England, the theory of land nationalization goes back at least as far as Thomas Spence, who in 1775 advocated the " parochializing " of land "so that there shall be no more nor other landlords than the parishes." The most eminent of recent land national izers are A. R. Wallace, the naturalist, and a school of Christian socialists who teach categorically that private property in land is illegitimate. ("All the earth is mine," said the Lord.) Herbert Spencer, an extreme individualist, expressly condemned landed property in his earlier works, but subsequently changed his views somewhat. PURCHASING THE LAND 615 vation during periods of fifty, seventy, or even ninety-nine years, in much the same manner that it grants franchises to rail- road companies. When this time had elapsed, the government would again acquire possession of the land, just as the French government will acquire the ownership of French railroads in 1950. Then the government could lease the land for a new period, requiring the lessees to pay, either in a lump sum or in annual rent, the surplus value or unearned increment of the land. In this way the government or the " State," representing society as a whole, would receive all the un- earned increment, and collect an enormous revenue that would ultimately permit the abolition of all taxes. Although Leroy-Beaulieu asserts the contrary, such a system would not be incompatible with good husbandry ; the greatest undertakings of modern times such as rail- roads, the Suez Canal, etc. have been carried on under this system. Precautions should, of course, be taken to renew leases a sufficient time before they expire. It must be con- ceded that this arrangement would be more likely to promote good husbandry than the system (now prevailing in many countries) under which almost all the land is cultivated by poor tenants who may be sent away at the caprice of the landowner. But the execution of this project would at the very outset encounter an insurmountable obstacle, inasmuch as justice would require that the land be bought from its present owners at an equitable price ; and this would be absolutely ruinous. The present value of land in this country is probably more than thirty billion dollars, i.e. about fifteen times the total national debt of the United States. This amount would have to be borrowed to indemnify the landowners. 1 1 A few years ago we suggested, as a practicable scheme, that the govern- ment purchase the lands by paying for them immediately, but not require their actual transfer until ninety-nine years afterward. Under these circum- stances, land could be bought at low prices ; for the proprietor would compare, ou the one hand, the relinquishment of his property at a time so far distant 616 PRINCIPLES OF POLITICAL ECONOMY (2) A second system, advocated by the elder and the younger Mill, and perhaps even by the Physiocrats, has acquired widespread celebrity since its advocacy by Henry George, 1 an American, under the name of single tax system. It con- sists simply in levying an increasing tax on land values, the increase being so adjusted as to " absorb the whole economic rent, or what is sometimes styled the unearned increment of land values. " 2 Mr. George, who must not be called a social- that neither he nor even his grandchildren would suffer from it, and on the other hand, the sum of money that might be had immediately. Under these circumstances, he would hardly hesitate to accept -a very low price. The amounts to be offered can be calculated by means of annuity tables : $1000 to be paid in a hundred years, i.e. in 2003, at the rate of 5 per cent would now be worth $7.98. Thus $30,000,000,000, taking this to be the value of the land in the United States, deliverable in 100 years, are theoretically worth about $240,000,000, paid now in cash. Professor Leroy-Beaulieu, while designating this system of purchase as "perhaps the most ingenious" of all that have been proposed, rejects it as impracticable. We will admit that a social reform for which we must wait a hundred years is not worth much. The rate of capitalization, moreover, has changed since the above plan was proposed, and the whole calculation must be greatly modified. At the present customary interest-rate of 3 per cent, many more million dollars would have to be paid now as a mathe- matical equivalent of thirty billions payable one hundred years hence. 1 George's book, "Progress and Poverty," finished in 1879, has been translated into several foreign languages and has aroused considerable com- ment in nearly all the nations of Western Europe. 2 It is plain that the two "systems" summarized by Professor Gide resemble each other very closely. The difference between them lies mainly in the fact that Mr. George proposes to gradually "tax the rent," while the first system proposes gradually to " take the land." The first system is in no wise incompatible with the taxation of land values, but it lays most stress upon the actual acquisition of the land by public authorities. Mr. George's system would " tax the landlord out of existence," and is opposed to indemni- fication. The first system seems to coincide with that of the English " Land Nationalization Society," which proposes to pay for the land. The second system, on the other hand, appears identical with that of the English " Land Restoration League," now called the "League for the Taxation of Land Values." This league opposes every proposal for " land purchase " or "for creating a new class of landlords under the name of peasant proprietors." It should be noted, however, that John Stuart Mill contemplated the full compensation of the existing body of landowners. THE SINGLE TAX 617 1st, for he accepts the institution of private property, holds that the economic rent of land is due entirely to the growth of population, which increases the demand for products of the land, and raises rents ; he holds that a " single tax," equal to the rental value of all land, apart from improve- ments, would yield more than enough to support the gov- ernment and would make all other taxation unnecessary. 1 The great practical objection to this plan is that there are usually two elements in the increased value of land: one arises from various social and impersonal causes ; but the other is due to the labor of the landowner, or at least to the capital that he has advanced. In establishing such a tax we should have to be careful not to touch this second element not only for fear of violating the principles of equity, but also for fear of discouraging all spirit of enterprise and all progress in agriculture, which even now is too much subject to routine. The separation of these two elements, however, is practically impossible ; the landowner himself could not do it accurately, nor would a public officer be better able to do it. Note, moreover, that if society profits by all gains in the value of land, on the ground that they are due to no exertion or sacrifice on the part of the owner, it is in equity bound to make good all losses arising from the decreased value due to social causes over which he has no control, and this for precisely the same reasons. 2 Finally, we must raise the same objection as that urged against the first system. The confiscation of rent by taxa- 1 Space does not permit a detailed examination here of the single tax sys- tem proposed by Mr. George. We refer the reader to " Progress and Pov- erty," and to the following literature: Bliss, "Encyclopaedia of Social Reform" (articles on Land, Land Nationalization and Single Tax); Walker, "Political Economy" ; Bullock, "Political Economy" ; Bastable, "Public Finance"; Plehn, "Public Finance"; Ely, "Taxation"; Seligman, "Es- says in Taxation." These books contain a discussion of the economic, ethical, practical, and financial aspects of the scheme. 2 As Francis Walker put it : " ' Heads I win, tails you lose,' is not a game at which the state can, in decency or fairness, play with its citizens." 618 PRINCIPLES OF POLITICAL ECONOMY tion would have the same effect as the confiscation of the land itself. It would destroy the value of land as such and give rise to the necessity for paying an indemnity to the present holders, although Henry George expressly denies this. The ensuing financial difficulties would be much like those already pointed out. 1 While it must be admitted that the unqualified ownership of land enables the land-holding class to reap an unearned benefit at the expense of the community, yet, for the reasons given above, we regard land nationalization as impracticable in so far as it concerns property already established. But our objections are not entirely valid with regard to future property, that is to say, the right to cultivate new lands. In most new countries and colonies, there is still a large public domain which is rapidly being cut down by enormous grants of land, or sales made at very low prices by the gov- ernment. We believe that the government could easily have retained the proprietorship of this soil, and merely granted leases to individual cultivators. In this way the government could have retained control of property that will ultimately become very valuable, thus making it much easier, perhaps, for future generations to solve the social problem. 2 But the evil effects of private property in land are least felt in those very countries in which it would be an exceedingly simple 1 Many of the present possessors of the land having paid the full price in good faith, it would, as Francis Walker declares, be simple robbery for the state to reassert its interest in the land without fully indemnifying the owners. If the present system is changed, why should the burden be thrown upon the single class of landowners ? 2 Refer to the note on page 600. The Dutch government has followed this plan with its vast colonial possessions. It has not sold the land, but leased it for periods of about 75 years. In Australia a league that was formed for the pur- pose of introducing the same system there did not meet with success. The prin- ciple of national ownership has been adopted in a somewhat platonic form by New Zealand, the government of which leases the land for a period of 999 years. Even in old countries this plan could be applied in the case of mines. The ownership of mines is distinct and different, economically and legally, from property in land. LANDED PROPERTY IN NEW COUNTRIES 619 matter to prevent them. In fact, private property in land has innumerable advantages and no disadvantages in a new country still in the early stages of its economic development, -such as the Argentine Republic or Australia. In these countries, landed property is confined to areas that have been cleared, and spreads only with the spread of cultiva- tion ; hence this property is hallowed, as it were, by labor. The soil under private ownership, moreover, represents but a fraction of the whole soil, and land is still superabundant ; therefore, land and agriculture, like any other commodity or occupation, are subject to the law of competition and do not constitute monopolies. With the development of society, however, and as the population becomes denser, the character of landed property begins to change and gradually acquires the nature of a monopoly; this monopolistic nature, moreover, continually becomes more pronounced. And when this stage is reached, it is too late to buy back the land. 1 1 It is not a mere coincidence that Henry George's theories have found so wide an acceptance in Great Britain, where there is now no general customary access to portions of the soil for the great mass of the people, and where the great majority of the population, in Ireland as well as England and Scotland, depend on a few landowners both for a dwelling-place and for an oppor- tunity to carry on any kind of production. According to an unsigned article on Land in Bliss's " Encyclopaedia of Social Reform," "in England only one person in twenty is an owner of land ; in Scotland, one in twenty- five ; in Ireland, one in seventy-nine ; and the great majority of landholders in Great Britain own less than one acre each." Nor is it a simple coincidence that the greatest American advocate of the single tax made most of his observations in San Francisco, at a time when the number and wealth of the population was increasing at a marvellous rate, and many fortunes were made by the sale of unimproved land, the value of which increased enormously in a very brief space of time. It is in large cities, and especially in rapidly growing cities in new countries, that the unearned increment of land is most striking. Take an example of this : Mr. F. R. Chandler, a Chicago Real Estate Agent, found that a quarter acre of raw prairie land now at the intersection of two prominent business streets in that city, which, in 1830, was worth $20, or the equivalent of 13| days' labor at $1.50 a day, in 1894 was worth $1,250,000, or the equivalent of 2777 years' labor. 620 PRINCIPLES OF POLITICAL ECONOMY VII. The Subdivision of Property in Land Social evolution, by which property in land tends ever more closely to resemble property in capital or commodities (see page 605), naturally diminishes the evils of the indi- vidual ownership of land. It facilitates, on the one hand, the division of land, thus distributing the land among a large number of persons. Arid what danger, we are led to ask, can there be in a monopoly when millions of men, including a majority of the citizens (as in the United States and France) share in it ? It facilitates, on the other hand, the transfer ability of land, that is to say its rapid and frequent change of ownership, thus depriving the unearned value of the land of the char- acter of a perpetual and increasing advantage. The increase of unearned value, being as a rule very slow and intermittent, produces scarcely perceptible effects during the short time that the property is in the possession of the same person; it is, moreover, taken into account whenever the land changes owners. The forces which bring about these two results are pri- marily economic. But legislative bodies are certainly able to exert great influence by adopting measures for either favor- ing them or counteracting them, as the case may be. In old countries, where land is scarce, the establishment of a protectionist system, for example, would manifestly tend to aggravate the monopolistic character of land-ownership, whereas free trade would impair it by admitting the compe- tition of foreign soils. Again, the laws of inheritance are potent factors for good or evil in this respect. In England, for instance, the legis- lature, prompted by a desire to maintain the position of the aristocracy, which has helped make the nation great, has established a number of " rights " which make it well-nigh impossible to alienate the land, and which thus keep the PRIMOGENITURE AND ENTAIL 621 land almost by force in the constant possession of the same family. In addition to countless expenditures and formali- ties attending the transfer of land, there is the "right of primogeniture," the "right of entail," the "right of substitu- tion," etc. By the first of these " rights," the eldest son in- herits the real estate of an intestate person, in exclusion of the younger sons and all the daughters ; by the second, the inheritance of an estate is limited to a particular class of per- sons and its sale prohibited ; by the third a series or succes- sion of heirs is established, from which the law allows no deviation. Because of such devices as these landed property nowhere appears more odious than in Great Britain. 1 Marked by the original and indelible stain of confiscations following the Norman conquest and the mastery of Ireland, and the wholesale usurpation carried on in the fifteenth and sixteenth centuries, when the common lands came into the possession of the landlords (by so-called " enclosure "), Great Britain offers the scandalous spectacle of colossal fortunes obtained without exertion and increasing with the growing number and wants of the disinherited masses. The right of primogeniture has long passed away in the United States, and almost all the states of the Union nar- rowly limit the power of entailment. Throughout continen- tal Europe, moreover, these and similar privileges have been curtailed or abolished. In France, for example, since the Revolution of 1789, the law requires that estates shall be divided equally among all the children of deceased parents, or, in the absence of children, among the other relatives. 2 1 There are 1,200,000 landowners in the United Kingdom, but the immense majority of them, at least three-fourths, own insignificant plots of less than an acre ; just enough for a cottage and garden. A more accurate idea of the distribution of land may be obtained from these facts, together with the data given on page 613, note 2 : Half of England and Wales is owned by 4500 persons, half of Ireland by 744 persons, and half of Scotland by only 70 persons. 2 Article 826 of the French Civil Code decrees not only that an estate shall be divided into parts having equal values, but that the estate itself shall actu- 622 PRINCIPLES OF POLITICAL ECONOMY This has had quite as pronounced an effect on the distribu- tion of land as the English system, but in precisely the opposite direction. It has resulted in cutting up the land into small sections. 1 Unfortunately this system does not only cut up the large estates, but it also divides the small ones into fragments, and thus carries the partition of estates far beyond the limits compatible with good husbandry. It jeopardizes the interests of agriculture without accomplish- ing anything in the interests of democracy. It even violates the aim which it has in view, for after the division of estates, or when estates are sold to share the proceeds, small heri- tages are often purchased at ridiculously low prices by the owners of large estates. ally be divided into equal parts. That is to say, the smallest plot of ground and the humblest cottage must be divided. If the heirs cannot arrange matters among themselves, the estate must be sold by the authorities, at con- siderable expense to the heirs. 1 According to the agricultural statistics for 1892, persons engaged in agri- culture in France were classified as follows : Owners managing their own farms . . . 2,199,220 or 33% Farm-hands, servants, and day-laborers working for an employer 3,275,890 or 49% Persons working part of the time for themselves and part as day-laborers or farm-hands for others 1,188,025 or 18% The first and the third classes comprise independent cultivators, i.e. those who cultivate their own farm or who have charge of its cultivation. The total number is 3,387,000, which, when we add their families, means a population of 12,000,000 persons, or a little more than half the agricultural popula- tion. (Compare the figures for the United States, page 606, note 2, and page 613, note 1.) CHAPTER IV PROFITS I. The Nature and Definition of Profits WE have already had occasion to speak of the important person whom economists call the entrepreneur (the projector and manager of an enterprise), and we know that his income is called profits. But it is difficult to define the exact nature of his function and of his income. We may distin- guish the following three explanations, or theories, of the part played by the entrepreneur and of the essential nature of profits : (1) English economists have usually regarded the entre- preneur and the capitalist as identical, and have designated both by the latter name. They have therefore regarded profits as a capitalistic income, analogous to interest, but fixed at a somewhat higher level for reasons which we shall state presently. It must be admitted that this way of looking at things seems quite in conformity with facts. In practice, it is the entrepreneur who possesses all, or at least part, of the capital necessary for carrying on a business enterprise. In practice, the rate of profit goes hand in hand with the rate of interest and is calculated in the same way, viz. as a certain "per cent " of the capital employed. It is considered natural that the entrepreneur who has " put into " an enterprise $1,000,000 should realize ten times as much profit as an entrepreneur who has employed only 1100,000. This interpretation, however, must be abandoned, for although the entrepreneur is generally also a capitalist, this is not so because of any necessary connection between their functions ; but, as we shall see, only because capital confers 623 624 PRINCIPLES OF POLITICAL ECONOMY on its possessor a kind of monopoly. The part of the entrepreneur and that of the capitalist are nevertheless distinct in theory and sometimes separate in practice ; for there are entrepreneurs who are not capitalists and who carry on business only by means of borrowed capital. (2) French economists, on the other hand, and first of all J. B. Say, clearly separated the part of the entrepreneur from that of the capitalist, and regarded the former as economi- cally distinct from the latter; they invented the name by which he is now known. In their opinion, the predominant characteristic of the entrepreneur is the performance of a certain kind of labor. Profits, therefore, are the remunera- tion of labor ; but of a particular kind of labor, different from manual labor, superior to it from the standpoint of productivity, and consisting of the following elements : (a) Invention, which, as we have seen, is the primordial act of production (page 74). All great industrial fortunes are the result of inventions (Bessemer steel, Singer sewing- machines, etc.). The truly productive act is thought, the conception of ideas. The entrepreneur must have ideas, not necessarily sparks of genius, but business ideas, and, above all, he must discover what will please the public. It is not enough for the entrepreneur to invent new com- modities or new varieties of commodities ; he must, so to speak, invent new wants. (5) Superintendence. It is a fundamental law of political economy that collective labor is more productive than isolated labor, on condition, however, that it be organized, disciplined, and commanded by some one. There must be somebody to divide the work and give every laborer his proper place. This is the part of the entrepreneur, and for this reason he is called the "captain of industry." Business, in fact, is very much like war. The commander-in-chief wins or loses the battle. No doubt good soldiers and good weapons contribute to the victory, but they are the conditions of success, not the real cause. One proof of this consists in THE NATURE AND DEFINITION OF PROFITS 625 the fact that good troops with the best equipment will be beaten if they are badly commanded. In business matters, too, generalship is everything. Everyday experience shows that of two enterprises employing an equal number of work- men possessing the same ability, one succeeds and the other fails miserably, simply because one has better leadership. (c) Commercial speculation. It is no difficult matter to produce goods. The great problem is to sell them, to find a market for what has been produced. Hence, business enterprises now tend more and more to become speculative in character. In other words, business consists to an in- creasing degree of the art of buying and selling on the most favorable terms. This art is one of the principal accom- plishments of the successful entrepreneur. It is, moreover, of the greatest social importance, inasmuch as commercial speculation reestablishes the economic equilibrium constantly disturbed by production and consumption. There is much truth in this second explanation also. Nevertheless, it does not set forth clearly the essential nature of profits, nor does it entirely escape the suspicion that it was devised, at least in part, for the purpose of de- fending profits against the attacks of socialists. Every one of the tasks above enumerated as belonging to the entre- preneur invention, commercial speculation, and even superintendence may be committed to the exclusive charge of hired employees (engineers, chemists, buyers, com- mercial agents, managers, superintendents, etc.). And, as a matter of fact, all large enterprises organized as "com-* panics " employ men to perform the several tasks of the so-called entrepreneur. (3) A great many economists, finally, consider the entre- preneur as possessing a monopoly, somewhat like that of the landowner, yet differing from it in some important respects. Profits, therefore, are a monopolistic income or so-called "monopoly surplus." This monopoly may be a natural one, resulting from exceptional personal abilities or from certain 626 PKINCIPLES OF POLITICAL ECONOMY advantages of situation or opportunity. Or it may, on the other hand, be a legal monopoly, and be due, for example, to a protective tariff, or to the exclusive possession of certain inventions. It may be due to any of a host of cir- cumstances, for monopolies are by no means exceptional. The monopoly element is present everywhere. The small grocery store at the street corner enjoys a monopoly because of its location. A man's individuality, that is to say the simple fact that he is himself and not some one else, really constitutes a monopoly. This theory is most consistent with facts. It explains, moreover, why the entrepreneur generally happens to be also a capitalist. As no business can be undertaken without a certain amount of capital, and the necessary capital must often be borrowed, the possession of capital really consti- tutes a monopoly that can be made to provide a revenue for the owner. It also explains why exceptional personal qualities, such as those pointed out by the partisans of the theory that profit is due to labor, may be the source of large profits and of great wealth simply because these qualities also constitute monopolies. We must not conclude that profits are necessarily unjust ; we have, in fact, already admitted that in many cases mo- nopoly is more in conformity with the public interest than competition. (See page 152, etc.) Those who become wealthy because of exceptional personal ability do no harm to others. Again, the monopoly of entre- preneurs consists not in their being able to sell goods above the current prices, but in the possession of a secret or of some advantage which enables them to make goods at less than the ordinary cost of production ; and decreased cost is in perfect harmony with public welfare. 1 1 At all events, it should be noted that whenever there is any injustice on the part of entrepreneurs, the consumer, i.e. the purchaser of the goods, is usually the victim of the monopoly, rather than the workmen engaged in the enterprise. THE LAWS WHICH DETERMINE PROFITS 627 II. The Laws which determine Profits How are profits calculated? Nothing would seem to be easier. The manager or owner of the smallest enterprise knows perfectly well how to find out what his profits are. He simply subtracts the cost of production from the value of the finished product (i.e. its current price in the market), and calls the remainder his profit. Yet this apparently simple operation involves one of the difficult points of theoretical economics. The difficulty con- sists in determining precisely what should be included under the "cost of production." It should include, first, there is no difficulty on this score, the wages paid by the entrepreneur to the laborers in his employ ; it should also include, in case he has bor- rowed all or part of the capital, the interest he must pay to the capitalist. These are the two essential parts of the cost of production. If we let V represent the value of the fin- ished product, W the wages, and I the interest, then P, the profit, would be determined by this simple formula : P = V- (TT+J). But are not several elements missing from this formula? Why does it not include rent, as well as interest and wages ? The entrepreneur is supposed, theoretically, to unite the Profit differs from land-rent for two reasons : (1) Because the monopoly due to land-rent always possesses a real, im- personal, and more or less permanent character, while profit is of a personal and temporary nature. (2) Because land-rent arises either (as Ricardo thought) from the increase in the cost of, production, or (what is more strictly true) from the increase of human wants ; whereas profit, as we have just said, is generally due to a decreased cost of production in certain industries or establishments. Although the maximum cost of production alone governs the rent of land, the minimum cost of production sooner or later regulates the rate of profit, because the monopolist will ultimately be ousted from his privileged position by other entrepreneurs, and because, moreover, it is in his own interest to lower prices. (See page 589, note 1.) 628 PRINCIPLES OF POLITICAL ECONOMY factors of production, which include not only labor and capi- tal, but land also. In practice, moreover, he often has to rent land. Why, then, does the " cost of production " not include the expense of obtaining the third factor of produc- tion, as well as the cost of the other two ? Economists of the English school answer, basing their reply on Ricardo's theory that the rent of land is never a part of the cost of production, because it is the cost of pro- duction which determines rent. (See page 587.) But this doctrine is too absolute. In all cases where rent is the price of a genuine monopoly, such as buildings and land situated in cities or near a waterfall serviceable for produc- tive purposes, it is certainly part of the cost ; and if the entrepreneur is obliged to pay rent for such truly monopo- listic advantages, this rent should be counted as part of the cost of production, in addition to wages and interest. In brief, the entrepreneur should deduct from the value of the product the shares due to all his collaborators. Nothing could be plainer than this. 1 But the entrepreneur generally furnishes something him- self, perhaps the land and buildings, perhaps all or a part of the capital, and, in any case, the labor of a certain amount of organization and superintendence. Should not the rent of this land, the interest on this capital, and the wages for this labor also be reckoned as part of the cost of production? What does it matter that these elements happen to be furnished by the entrepreneur personally, and 1 It follows from the above that for the entrepreneurs the cost of produc- tion consists of the incomes received by their collaborators in production, that is to say, the incomes of the other classes of society : wage-workers, landowners, and capitalists. Must these incomes be counted as the cost of production for the nation as a whole ? Certainly not. For the nation, the cost of production is different from that of the entrepreneur. The cost of production for the nation consists of the sum total of values consumed {i.e. destroyed) in the process of production, the value of the circulating capital and only the cost of renewing fixed capital, and profit consists of the differ- ence between the values produced and the values consumed. WHAT IS THE COST OF PRODUCTION? 629 that he has no need to employ or borrow them ? Is he not a landlord or capitalist or wage-earner if he furnishes land or capital or labor ? If he had not applied this land, capital, or labor to his own business, he could have used them else- where ; he might have rented his land and buildings to a tenant, invested his capital in some one else's business, and applied his labor and intelligence in some other enterprise. His own business ought therefore to yield at least enough to pay him the equivalent of what he could have received in any other way, else he will not engage his land, capital, labor, or intelligence in this enterprise. 1 But how are we to ascertain the value of the various pro- ductive elements furnished by the entrepreneur personally ? As for land and buildings, nothing could be more simple. Find out what the entrepreneur would have been obliged to pay to obtain similar land and buildings from another landlord. As for the capital, the matter is equally simple. Find out the current rate of interest, that which the entrepreneur would be compelled to pay for borrowed capital, and what he probably does pay for capital that he actually borrows. As a matter of fact, in every accurate system of accounts the entrepreneur distinguishes the interest on his capital from the other receipts of an enterprise. This interest, however, should be estimated at a higher rate than the 1 Yet if we examine closely the enterprises that are carried on in any country, it would certainly not be difficult to find some that do not yield enough to pay the current rate of interest on the capital engaged in them. Why, in spite of this, are they still carried on ? This apparent anomaly is easily explained when we examine into the nature of the capital engaged in these businesses. If it consists largely of fixed capital, it is next to impossible to transfer this capital to some other business, even should the owner desire to do so. The only thing to be done, therefore, is : either to abandon this capital entirely and count it as just so much wasted wealth, or be content with whatever return it happens to yield, no matter how small. The second alternative is clearly preferable ; for it is better to lose part of one's capital than lose it all. This state of affairs occurs frequently with railroad companies, traction companies, mines, etc. 630 PRINCIPLES OF POLITICAL ECONOMY current rate of interest, because the return from capital engaged in direct, active production is variable, whereas the income arising from loaned capital is fixed. Take, for illustration, a business which yields returns so variable that every other year there are no profits. Should the current rate of interest on loans be jive per cent, the entrepreneur's return on his own capital must be ten per cent, in order to produce an income averaging as high as that due to the loan of capital at the current rate of interest. This difference in rates is a premium for insurance against risks. 1 The problem is a more difficult one with regard to the personal labor of the entrepreneur. What compensation ought he to receive? Economists answer that he should receive the same compensation as that which he would be obliged to pay an employee able to take his place (i.e. a manager or director), or whatever he himself could expect to receive if his services were engaged by another employer. This remuneration is, doubtless, fixed very arbitrarily. Many entrepreneurs, however, keep an account of the salary which they attribute to their own services, and enter this item on their books as part of their expenses. 2 1 This " insurance premium" against the entrepreneur's risks must not be confounded with the "premium" referred to as constituting part of the interest for capital as commonly understood (page 567). The latter con- cerns the possible loss of loaned capital, while the former has to do only with the variability of the entrepreneur's income. This premium plays no part in the case of the capitalist who invests in all the industrial enterprises of a nation, or in all the enterprises engaged in any one "branch of production, such as coal-mining. Careful capitalists do not "put all their eggs into one basket." 2 There can be no doubt that the salary which the employer will regard as a sufficient payment for his own services will be larger than that which he would pay to an employee of equal ability. It will even be greater than that which he could expect to receive if he were in the employ of another entre- preneur. This is natural and just ; for we must take into account the respon- sibilities, the anxieties, and risks of the entrepreneur's occupation. We do not now refer to the danger of losing his capital (which has already been taken into account), but the risk of losing his economic position and his THE LAWS WHICH DETERMINE PROFITS 631 These, then, are nearly all the elements in the cost of pro- duction. 1 All we have to do now is to add them, and deduct the total from the value of the product ; what remains is profit. But when we have taken into account all the ele- ments enumerated above, and deducted them from the gross results of an enterprise, it is not at all improbable how- ever surprising this may appear that there will be nothing left. There will be a remainder only when the value of the finished product exceeds the total cost of production, and this is possible only when the entrepreneur is in possession of some sort of monopoly. (See page 194, note.) But if there is no monopoly-element, if industry is entirely subject to free and full competition, that is to say, if the entre- preneur brings nothing on the market except what anybody business reputation. If a man could not earn more as an entrepreneur than as manager or superintendent for some one else, it would be better for him to enter some one's else employ ; he would at least gain peace of mind by the change. As a matter of fact, many persons offer their business intelli- gence and organizing abilities to others, rather than undergo the constant worry and mental strain involved in carrying on their own business under a system of keen competition and frequent industrial collapses against which even the wisest and most far-sighted men are unable always to make ample provision. 1 Should not the cost of the raw materials and the cost of transportation occupy an important place in a list of the expenses of production? From the standpoint of the individual entrepreneur, they must be counted. But when we are attempting to determine profits in general, i.e. for all enter- prises, they must be omitted, because the cost of raw materials is in turn made up of wages, interest, and the returns of the preceding entrepreneur ; this entrepreneur's raw materials are in turn made up of the same ele- ments, and so on until we reach the first links in the chain of productive activities. If our calculation of the costs of production is to be perfectly correct and complete, however, there are other elements which must be included, e.g. the cost of renewing capital which exists in the form of concrete goods, and taxes paid to the government, which may be regarded as an indirect col- laborator in production who insists on receiving a share of the proceeds. The cost of renewing capital plays no part in the case of money-capital, which is a kind of wealth neither perishable nor subject to wear and tear. (See page 572, note 3.) 632 PRINCIPLES OF POLITICAL ECONOMY else can offer, there is no profit. This fact need cause no surprise. It is a necessary consequence as well as a con- firmation of the definition of profits given in the preceding section. It is, moreover, both inevitable and just. It is, first, inevitable. For if competition among entre- preneurs is free and complete, they will always engage in those enterprises which hold out the inducement of a profit. Competition among entrepreneurs will tend to keep the value of products exactly on a level with their cost of production. (See page 139.) It is, in the second place, just. For when the entrepreneur has received above and beyond the parts of the product which he is obliged to give to his collaborators in production the interest on his own capital, an indemnity for all the risks he has incurred, and an equitable compensation for his labor of superintendence, what more can he properly claim ? 1 III. The Legitimacy of Profits In more than one sense, the entrepreneur plays a leading part in modern industrial life. For this reason he is the principal target of socialistic attacks. 1 Professor Walras employs a formula which at first seems astounding when he declares that the normal rate of profits is zero. By this statement he means that upon the supposition of absolutely free competition a hypothesis which serves as the very basis of this author's system of mathe- matical equations concerning economic forces the price which the entrepre- neur pays for productive services (including his own) must necessarily be equal to the price for which he sells the finished product ; profits must there- fore be equal to zero. This amounts to saying that the sole normal income of the entrepreneur is that which he receives as remuneration for his labor or for the use of his capital, and that the surplus (which is generally called profit) is purely accidental. Walras's theory, which at first appears paradoxical, will become plainer if we examine profit in its simplest form that of dividends. Take two capitalists, each of whom has invested the same amount in the same enter- prises, the first having purchased only shares of stock, the second only inter- est-bearing securities. In this case, the theory stated above means simply that in the long run say fifty years both of these capitalists will receive LEGITIMACY OF PROFITS 633 Robert Owen declared nearly a hundred years ago that profit is the fundamental cause of all economic ills, and endeavored to abolish profit by means of a "Labor Ex- change," 1 at which laborers could exchange their products for labor coupons and use these coupons to purchase what- ever they wanted, without having anything to do with an entrepreneur and therefore without having to pay him a tribute in the form of profits. But the socialistic objections to the entrepreneur were more or less vague and indefinite until the publication of Karl Marx's book on Capital. The arguments which this formidable adversary brings to bear against the institution of profits are summarized in the following paragraphs. 2 The comparison established by some economists between the entrepreneur and the laborer, says Marx, is absurd, or at least out of date. There was a time when the employer worked side by side with his workman, primus inter pares, and could properly be considered as a worker and a producer. The same condition of affairs may even now be found, by way of exception, in small scale industries. But under the exactly the same total income, despite the fact that one receives only interest and the other only dividends. This conclusion, we believe, will be accepted as true by experienced business men. It is even possible that when all is taken into account, the income consist- ing of dividends will be smaller than that in the form of interest, because men are usually disposed to overestimate the chances of success in an enter- prise, and to underestimate the possibilities of failure. 1 Owen's Labor Exchange must not be confounded with De Molinari's scheme of a kind of bureau where workers may obtain information regarding the demand and supply for various kinds of labor, although the latter scheme is also known as a labor exchange (Bourse de Travail). (See page 535, note 1.) 2 We have already pointed out, in connection with our discussion of the legitimacy of interest, that the so-called scientific socialists (Rodbertus, Marx, Lasselle, etc.) regarded the incomes of landlords, capitalists, and entrepreneurs as essentially of the same nature ; each of them is held to be due to the spoliation of the working classes. The essential features of the " exploitation theory " are the same with regard to profits as with regard to interest. (See page 500.) 634 PRINCIPLES OF POLITICAL ECONOMY system of large-scale production, manifestly the sole pro- ductive method of the future, the employer is exclusively a capitalist. He happens to be an employer simply because he is rich, just as under the ancien regime in Europe certain men became army officers simply because they belonged to the nobility. The employer derives profit from his capital just as any other merchant does, i.e. by buying and selling goods. What does he buy ? The productive power of the workman, known as labor. What does he sell ? The same power transformed and made concrete in the shape of com- modities. The difference between the two constitutes his profit. But how, according to Marx's theory, can there be any such difference or profit-constituting surplus ? For we must not forget that, according to Karl Marx, the sole value- producing factor is labor. Does it not follow that the fin- ished product cannot be worth more on the market than the labor of the workmen who made it, and that therefore profit cannot arise ? The solution of this knotty problem, this "mystery of iniquity," constitutes, in the opinion of many socialists, Marx's chief claim to scientific glory. Let us listen to the socialistic argument. The value of products offered for sale by the entrepreneur is determined by the labor which it cost to produce them. Suppose a workman takes ten hours to produce a given article : the value of that article is equal to ten hours of labor. But it does not follow that the entrepreneur must pay the workman a wage equivalent to ten hours' labor. He pays the workman just what his labor is worth. And the worth of his labor, like the value of a machine or any other commodity, is determined by the cost of production. When we have to do with the productive machine called " man," producing the commodity called " labor," the cost of production means simply the expense necessary to raise (i.e. to produce) a workman and to keep him fit for work (i.e. to support him). Let us assume that the expenditure PROFITS ARE LEGALIZED ROBBERY 635 necessary to support the laborer and to keep him in fit con- dition is equal to five hours' labor a day, on the average. In this case the employer, by giving the laborer wages equivalent to five hours' labor, pays him just what his labor is worth, according to the laws of value and exchange. Yet it is evident that the employer thus makes a large gain. He pays only the equivalent of five hours' labor, and by the sale of the product he realizes the equivalent of ten hours' labor. Hence he gets five hours' labor without pay- ing for it five hours' labor which the workman furnishes gratuitously for the benefit of his employer. The employer's profit, therefore, is a certain amount of unpaid labor. This is the whole secret of capitalistic exploitation. Is the objection raised that the above figures are arbitrary suppositions ? To be sure they are. But, says Marx, there is nothing arbitrary or imaginary in the general rule that the value produced by a man's labor is greater than the value required to support him. This is true even of the isolated laborer in primitive society; else civilization could never have begun, nor could population ever have increased. How much truer, therefore, it must be with regard to the civilized laborer whose productive power is multiplied by the divi- sion of labor and by collective organization! The employer, having acquired possession of this power by purchasing it, invents a multitude of ingenious schemes for increasing its productivity, such as lengthening the day of labor, stimu- lating the workman to increased effort by the deceptive device of "piece wages," and introducing machinery that enables him to make profitable use of the cheap 'labor of women and small children. The price which the employer pays for manual labor, moreover, varies directly with the laborer's cost of living ; and the progress of civilization tends constantly to decrease this cost. If it were possible, for example, to increase the productivity of labor so greatly that five minutes would be enough to produce a man's daily food, a day's work would 636 PRINCIPLES OF POLITICAL ECONOMY be worth the product of five minutes' labor. The employer, having control of the entire productive process simply be- cause he has control of that indispensable factor, capital, would pay a wage equivalent to five minutes' labor, keeping for himself all the rest, i.e. the value produced during the other nine hours and fifty-five minutes. 1 This elaborate display of dialectic, designed to prove that profit, by its very nature, is based on spoliation and cannot exist otherwise, is founded on the assumption that the value of manual labor, like that of merchandise, is determined solely by the cost of production. But if we refuse to accept this fundamental assumption as a true and 1 Rodbertus developed a theory closely resembling that of Marx. We quote the following passages, reminding the reader that Rodbertus defines the term rent (Rente) as "all income secured without personal exertion solely in virtue of possession"; rent, therefore, means all income except that due to personal labor. " As there can be no income unless it is produced by labor, rent rests on two indispensable conditions. First, there can be no rent if labor does not produce more than the amount just necessary to enable the laborers to con- tinue their labor ; for without such a surplus no one, unless he himself labors, can regularly receive an income. Secondly, there can be no rent if arrange- ments do not exist which deprive the laborers of part or all of this surplus arid give it to others who do not themselves labor ; for in the nature of things the laborers themselves are always the first to come into possession of their product. That labor yields such a surplus, is due to economic circumstances that increase the productivity of labor. That this surplus is entirely, or in part, withdrawn from the laborers and given to others, rests on grounds of positive law ; and as law has always united itself with force, it effects this withdrawal only by continual compulsion. *' This compulsion originally took the form of slavery, the origin of which is contemporaneous with that of agriculture and landed property. The laborers who created this surplus were slaves, and the master to whom the laborers belonged, and to whom consequently the product itself also belonged, gave the slaves only so much as was necessary for the continuance of their labor, keeping the remainder or surplus for himself. When all the land has passed into private property, and at the same time private property exists in all the capital of a country, then property in land and capital exert a simi- lar compulsion even upon freedmen or free laborers. Like slavery, this state of affairs means, first of all, that the product does not-belong to the laborers, but to the masters of land and capital. It means, in the second place, that laborers who possess nothing, while the masters possess land and capital, LEGITIMACY OF PROFITS 637 complete explanation of value, 1 if, as many economists maintain, this theory is inadequate even in the case of ordi- nary commodities and inapplicable to labor, the whole argumentative structure erected upon it collapses. In spite of this, the socialistic argument possesses consider- able critical value as a scathing and partly justifiable arraign- ment of the present social organization based on the employer system and the wage system. There is especially a large share of truth in the contention that labor has been treated as a commodity to be bought and sold like any other com- modity. Employers have, as a matter of fact, tried to obtain labor as cheaply as possible ; and during many cen- turies they have been wonderfully successful in this endeavor. But in reply to these charges we may call attention to those new phenomena that were pointed out when we discussed the subject of wages : trades unions, labor laws, cooperation, and the whole group of measures tending to regulate the rate of wages by other laws than those which govern the price of merchandise. Nevertheless, while insisting that profits are not neces- sarily illegitimate, nor the employer necessarily a spoliator, we may raise the question whether the office or " social func- tion " of the entrepreneur is an indispensable and permanent one, as most economists would have us believe, or whether it is, on the other hand, merely a "historical category," i.e. the result of forces and exigencies which arise in the course of economic evolution and may sooner or later disappear. are glad to receive a part only of the product of their own labor, in order that they may support life with it, i.e. sustain their power to labor. Thus, instead of the commands of the slave-owner, we have a contract between laborer and employer ; but this contract is a free contract only in name, not in reality, and hunger makes a good substitute for the whip. What was formerly called food is now called wages." Rodbertus regarded the income of the capitalist, entrepreneur, and land- lord, as plunder ; or, as he himself said, legalized robbery of the products of others' labor. 1 See pages 59 ff. 638 PRINCIPLES OF POLITICAL ECONOMY This is quite a different question from that regarding the present legitimacy of profits. We have seen that in the last analysis the function of the entrepreneur is to buy productive services in order to sell them again in the form of commodities ; he serves as an intermediary between laborers, capitalists, and landowners, on the one hand, and the consumers of goods, on the other hand. But the role of intermediary, or go-between, is not of such paramount social importance that its suppression is inconceivable. Indeed, the general tendency to-day is in favor of the abolition of all intermediaries. We have called attention to this tendency with regard to tradesmen and storekeepers; the same tendency is equally perceptible and desirable with regard to entrepreneurs. 1 ' There are even now many successful stock companies and corporations which appear to get along without the entre- preneur or employer. This, in fact, is the strongest argu- ment used by collectivists to prove that the employer or entrepreneur is no longer a necessary productive agent, but 1 This would not be true if profits were, as Professor J. B. Clark main- tains, " the lure to invention and to all the improvements which enlarge the general product of industry." With regard to Clark's position on this point, Mr. J. H. Hobson aptly remarks that the entrepreneur "certainly has the habit of collecting and utilizing inventions, but he does not as entrepreneur make the main body of them, neither does he make the main body of other industrial improvements. He is a middleman in regard to these matters. The great accessions to our wealth are due not so much to monopoly of capital and labor and the organization of it, as to specific appli- cations of the natural sciences to methods of industry. That is to say, the work is commonly done by the servants of the entrepreneur, who get a very small proportion of what would be equal to the actual value of the increased productivity which their labor creates. A great many inventions, including the greatest inventions of all, are not made for profit, and would be made if no profit attached to them. Those which do require some incentive of profit do not require the enormous profit which the entrepreneur is often able to take for them." ("Proceedings of the American Enconomic Association," 1902, page 144.) The function of the inventor is of great social importance ; but it cannot be held that the suppression of the class of entrepreneurs would mean the suppression of inventive activity. ELIMINATING THE ENTREPRENEUR 639 simply a social parasite. According to collectivists, the fact that nowadays the most important business concerns are not designated by the names of the individuals at their head, as formerly, but generally constitute joint-stock companies or corporations having no personal identity, is sufficient evi- dence that the entrepreneur no longer exists if we use this term as political economists use it, i.e. to designate the person who is both the owner and director of an enterprise, and who receives profits in payment for daily work of a particular kind. The individual employer has been done away with ; or, rather, his place is taken by a multitude of idle stock-holders. If we do away with these stock-holders as well, the enterprise will continue precisely as before. Present economic evolution, by which large-scale production is everywhere being substituted for small-scale methods, and by which impersonal corporations and large stock companies are taking the place of small individual enterprises, will soon reduce all employers and entrepreneurs to mere stock-holders whose sole task is to detach coupons and collect dividends. Whereupon, according to the collectivists, their uselessness being patent to everybody, their social function will be at an end. It is perfectly evident that mere stock-holders the " sleeping partners " of a business concern do not play a very active part in business life. For this reason we have said repeatedly that the rise of this new kind of property (called shares of stock) and this new variety of income (called dividends) jeopardizes the existence not only of the class of employers and entrepreneurs, but also the institution of private property itself. It may indeed be said, in agreement with most economists, that these corporations extend the ownership of capitalistic enterprises to a large number of persons and thus introduce a democratic element into mod- ern industrial life ; but in our opinion a much more note- worthy characteristic of this state of affairs is that stock companies constitute an easy transitional step toward collec- tivistic expropriatino. 640 PRINCIPLES OF POLITICAL ECONOMY The conclusions drawn by collectivists from the present tendency toward corporate forms of enterprise are, how- ever, largely illusory. Two points in particular should be noted : (1) All stock companies, no matter how impersonal or how large they may now be, were originally founded by private individuals with a view to reaping profits; nearly all of them, moreover, are still managed and controlled financially, if not technically, by one leading shareholder who is really an employer or entrepreneur. 1 (2) In stock companies and corporations, moreover, the absence of an employer or entrepreneur (in the strict sense of the term) is really the cause of a marked inferiority, and involves disadvantages resembling those that are noticeably inherent in public administration. The hired superintendent of an industrial concern owned by a corporation is, indeed, like a government official : he is usually not so zealous as the man who looks after his own private affairs. The dis- advantages which would doubtless soon become apparent under collectivism, if ever it were introduced, are as follows : The absence of individual initiative and of that feeling of personal responsibility which prompts men to do their very best ; bureaucratic methods and " red tape " ; the waste of time and energy, of labor and capital a memorable exam- ple of which is furnished by the early history of the Panama 1 We do not deny that enterprises established a long while ago, and now perfectly organized for the transaction of business along well-defined lines such as insurance companies and railroads can get along very well without entrepreneurs or employers. Such enterprises are, in fact, entirely fit for transfer to governmental management. We maintain simply that the time is still far distant when we shall be able to dispense with the entrepreneur as a, creator of new enterprises. In all dynamic, progressive nations, the entrepreneur will continue to be an indispensable power. He will be unnecessary only when human societies have attained a static, per- manent condition which is not an altogether impossible state of affairs. Nor do we maintain that it is possible to get along without shareholders, that is to say, without the help of the savings of persons not directly con- cerned in the management of an enterprise. EXAGGERATION OF PROFITS 641 Canal. We by no means share M. de Molinari's opinion that stock companies are the ideal future form of productive enterprise. (See page 160.) Although economic evolution seems to point to the ulti- mate elimination of the class of employers and entrepreneurs, as well as the abolition of the wage system (of which em- ployers and entrepreneurs are an essential part), the time does not yet seem ripe for accomplishing this step. We shall presently find sufficient proof for this in the difficulties which cooperative societies for production, the purpose of which is precisely to do away with the employer, experience in organizing and carrying on their work. It should be noted, in conclusion, that there is a general tendency to exaggerate the rate of profits. The circumstance that the profits of an enterprise all go to one man or to a few men, while the wages are distributed among hundreds or thousands of sharers, leads to false ideas regarding the mag- nitude of profits as compared with wages. If all employers and entrepreneurs were done away with, and their profits divided among all the laborers, the latter would be surprised to discover how small an increase of their incomes would be the result of this expropriation. 1 1 Mr. S. H. Adams, in an article in Scribner's Magazine for January, 1897, quotes the manager of a large department store to the effect that the profits of these stores are represented by the cash discounts on their bills. As it is well known that 5 per cent is a high average discount, we have here an index as to yearly profits. There was a time when 10 per cent profit was regarded as nothing extraordinary. Now it is considered decidedly advan- tageous. The Twenty-first Annual Report of the Massachusetts Bureau of Labor Statistics, based on returns from over 10,000 establishments in that state, declared that 7.61 per cent of these establishments did not make any net profit. The result for all industries indicated a net profit amounting to 3.90 per cent of the selling price, and equivalent to 4.83 per cent on the capital invested. It should be added, however, that this report, like all statistics of profits, has been severely criticised. All figures on this subject must be suspiciously viewed. Indeed, it is extremely doubtful whether trustworthy data are obtainable. The term "profits' 1 is so variously understood as to preclude 642 PRINCIPLES OF POLITICAL ECONOMY IV. Profit-sharing In our discussion of the wage system as a method of re- muneration, we pointed out that one of its principal disad- vantages was the conflict to which it inevitably gave rise between employer and laborers. This is due largely or entirely to the fact that other things being equal the higher wages are, the lower profits will be, and vice versa. 1 This is what Ricardo meant when he declared that " every diminution in the wages of labor raises profits," whereas " a rise of wages invariably lowers profits." Constant strikes furnish ample evidence of this antagonism of interests. Under the existing economic organization of society, em- ployers and workmen constitute two separate groups, facing each other in an attitude of mutual opposition, yet each unable to get along without the other ; they are, almost in spite of themselves, bound together by ties of interdepen- dence. Another undesirable result of the wage system, of which statistical uniformity, even if entrepreneurs were able and disposed to tell the precise truth. The precariousness of profits, moreover, must be taken into account, inas- much as one bad year may wipe out the accumulations of several good business years. According to Leroy-Beaulieu, "experience proves that of every ten indus- trial or commercial entrepreneurs, two or three become bankrupt or are obliged to quit business ; five or six make just enough to live comfortably on the modest remuneration which they receive, but are unable to put aside much, if anything at all ; and only one, or two at the outside, really succeed in building up a fortune of any size." In 1902 the number of commercial failures in the United States (i.e. ex- cluding bank failures) reached 9,639. Since 1876, in fact, the number of annual failures has rarely fallen below 10,000, and has twice exceeded 15,000. 1 We emphasize the condition "other things being equal." For it is evident that if productivity changes, and the total output of an enterprise is, let us say, doubled, it is possible for both wages and profits to be doubled simultaneously. It frequently happens that in new countries, where produc- tivity is greatest, wages and profits are both high. In a paper read before the American Economic Association in 1902, Pro- PROFIT-SHAKING 643 mention has already been made, is the nature of the wage contract, by which the laborer is confined to a purely passive part and has no direct interest in the success or failure of the enterprise with which he is connected. Workmen can- not be dissuaded from the idea that they have some claim to the wealth that issues from their hands. Nor can they be prevented from contemplating with bitterness the fact that successive generations of employers or stock-holders grow rich from the proceeds of factories or mines in which they the laborers have worked faithfully from generation to gen- eration without ever rising above a condition of apparently unchangeable poverty. It is true, perhaps, that they have been mere manual laborers, simple " hands " in the employ of their masters. But the great misfortune of our social organ- ization consists in just this fact that men may be regarded as mere instruments for other men. 1 Profit-sharing is that method of remunerating labor which aims to do away with the above disadvantages of the wage system by making the wage-earner a kind of partner with the fessor J. B. Clark suggested the possibility of " labor organizations and trusts cooperating in such a way that the two consolidations together could impose on the public a monopolistic tax which neither could impose if it acted by itself. Workmen and employers are antagonists in one part of the distribu- tive process, and allies in another part. They may fight the employers fiercely enough when the issue at stake is how much of what is extorted from the public shall be made over to labor ; but in making the extortion the interests of employer and employed are in harmony." High wages do not necessarily mean low profits. It is quite probable that the employer will find it profitable to hire better-paid laborers or to increase the wages of those already in his employ, if only the increase of wages coin- cides with a sufficient increase of productivity to result in greater net profits. What the entrepreneur cares about is not the gross expenditure, but the total net profits. High-priced labor is not necessarily the dearest labor. (See page 494. ) 1 Kant's first moral precept, called the "supreme practical principle," is as follows : " Remember at all times that we must regard the person of our neighbor as an end in itself, not as a means." It is evident that the present social organization, under which laborers in the employ of an entrepreneur are a means for his enrichment, is a violation of this elevated maxim. 644 PRINCIPLES OF POLITICAL ECONOMY employer. Profits, instead of .'falling exclusively to the latter, are divided, according to some system of sharing, between employer and employees, the workmen thus receiv- ing an addition to their regular wages if the enterprise has been successful. This arrangement has existed among fishermen from time immemorial. It may also be said that the " metayer " sys- tem in agriculture is simply a kind of profit-sharing. But the first experiment of this kind to achieve a noteworthy success was that made in 1842 by Leclaire, a Parisian house- painter. Leclaire came to the conclusion that there are in the common workman moral qualities to which the simple wage system makes slight appeal because it leaves the inspir- ing word " profit," with all its implications of ambition, zeal, and persistence, out of the workman's vocabulary. He be- lieved that the energy called forth by the prospect of profits would (by increasing the quantity of the product, by improv- ing its quality, by promoting care of implements and ma- chinery, and economy of materials, and by diminishing labor difficulties and the cost of superintendence) create a return beyond the average, a return not only sufficient to pay a bonus to the workman, but also to increase the profits of the employer. There are now probably over a hundred establishments in France which apply the system of profit-sharing. The most interesting of them is the largest department store in Paris, the Bon Marche, employing over three thousand persons and doing a business of $30,000,000 a year. The results of the system have generally been less satisfactory in England and the United States, although many experiments along this line have been tried in both countries. 1 1 For a more detailed discussion of the nature and history of profit-sharing, the student may refer to the following books : N. P. Gilman, " Profit-sharing between Employer and Employee" ; Sedley Taylor, " Profit-sharing between Capital and Labor" ; the article on Profit-sharing in Bliss's " Encyclopaedia of Social Reform." PROFIT-SHARING 645 The fundamental idea of profit-sharing is susceptible of the most varied application, but the name is usually confined to those cases in which it is not simply a spontaneous gift on the part of the employer, but a contractual arrangement. In other words, profit-sharing must be set down as a part of the rules governing a business enterprise ; it must be granted to employees as a right, without distinction of persons, and subject only to conditions prescribed in advance. It usually provides that the distributed profits shall be shared among the employees in proportion to their respective wages and with some regard for the length of their service. The shares given to the laborers may either be paid to them in money or placed to their credit in a savings-bank or insurance association. In France, where profit-sharing appears to be most successful, the latter method prevails; the laborer's share of the profits is generally paid into a fund for providing insurance against sickness, disability, or death. This method has the merit of assuring the good use of the workman's supplementary remuneration ; but by postponing to some distant time the actual enjoyment of these advan- tages, it diminishes the good results that are usually attrib- uted to profit-sharing. The objects of profit-sharing, numerous from both the moral and economic point of view, are as follows : (1) To reconcile labor and capital, and to increase the laborer's dignity by transforming him from a mere productive instrument into a partner. (2) To increase the productivity of labor by stimulating the workman's activity, furnishing him an incentive for faithful work, and leading him to feel a direct, personal interest in the success of the enterprise in which he is employed. (3) To increase the laborer's income by adding to his ordinary wages (which continue to be devoted to his running expenses) an annual dividend that can be saved or used to meet extraordinary expenses. 646 PRINCIPLES OF POLITICAL ECONOMY (4) To avoid loss of employment by attaching the laborer more closely and more permanently to the enterprise in which he is employed. It must be admitted, however, that the great hopes aroused by this system have not been realized. The number of firms which practise profit-sharing tends in most countries rather to diminish than to increase. It has, moreover, met with little encouragement or approval either from socialists or from conservative economists. On the part of socialists, this is readily comprehensible. Socialists regard profits as a robbery, committed by employ- ers to the disadvantage of laborers. A supposed reform, they declare, which consists in righting such robbery by giving back a share of the booty to the victim, is the height of impertinence ! Conservative economists, without expressly condemning profit-sharing, hesitate to acknowledge its utility. Professor Leroy-Beaulieu ironically calls it a device for making the wage system more "palatable," and declares that laborers really have no right to a share in the profits, inasmuch as profits are due to no merit or exertion of theirs, but are ex- clusively the result of the entrepreneur's management and circumspection. This argument is valid if we hold that profits are the wages of invention and superintendence ; for the laborers take no part in either of these activities, and are therefore not entitled to share in their results. But if we maintain that profits, strictly speaking, are generally the result of a mo- nopoly-element of some sort (see page 625), it is only just that the laborers should participate in the advantages due to a monopoly which is useless without their help. Note especially that share-holding capitalists are supposed to be fully entitled to a proportionate part of the proceeds of an enterprise, although there can be no doubt that the profits resulting from a monopoly-element are due much less to their work than to that of the employees. OBJECTIONS TO PROFIT-SHARING 647 Another serious objection which has been raised is that if the laborers share the profits, they should also share the losses; but as the latter is impracticable, the former is unjustifiable. This argument, however, is not conclusive. It goes without saying that if there are losses, the laborers will receive no profits. But is it equitable to go further than this, and reduce wages by the amount of the losses ? When the man- agers of an enterprise discover at the end of a business year that there has been a loss instead of a profit, is the interest due the capitalist for borrowed money reduced for this rea- son ? By no means ! Now the workman has just as much right to the stipulated wages as the capitalist has to the stipulated interest ; for the laborer also has furnished one of the requisites of production. As a matter of fact, however, if the business does not prosper, the workman's wages will probably be reduced, while the capitalist will continue to receive the same interest. The objection may still be raised that when an enterprise fails, the capitalist loses his capital, whereas the laborer does not. This is true simply because the laborer has no capital to lose. But he does lose his place and the means of earning a living ; and certainly this loss is quite as great as that experienced by the capitalist. Capital- ists and laborers have their own distinct risks, and there is no reason for confounding them. 1 The institution of profit-sharing is not gaining much ground, because it is subject to the disfavor which now attaches to all forms of the wage system, to paternalism, 1 The arguments of conservative, "liberal" economists against profit- sharing are stated with considerable detail by Leroy-Beaulieu in his Econ- omic Politique, Vol. II. Kefer also to Hadley's " Economics," pages 373 ff. A summary of the case against profit-sharing, evidently from the stand- point of a more radical economist, may be found in Bliss's, " Encyclopaedia of Social Reform." Here the argument is presented that profit-sharing is unjust because it reduces the proportionate share of the laborers by leading them to create, by their greater activity, not only a bonus for themselves but also additional profit for the employer. It says, *' If yo?e, the worker, will work a little harder, we, the management, will give you a slight share of your in- creased earnings." 648 PRINCIPLES OF POLITICAL ECONOMY to the industrial sovereignty of the employer, and, in fact, to every device which tends to strengthen the bonds between employer and employee. Labor and capital are each in quest of greater independence of the other. The prerequisite of profit-sharing, however, is a spirit of fellowship and friendly collaboration the spirit that is every day becoming rarer. Laborers as a rule prefer such a system as " job contracts," to which we have already referred. Thus profit-sharing is a modification, an improvement, of the wage contract ; it is not the complete and perfect associa- tion of capital and labor, the laborers having neither any responsibility for the losses incurred, rior any share in the management. Profit-sharing may be transformed into the association or quasi-partnership of labor and capital, by con- verting the share allotted to the laborer into part-ownership of the enterprise ; in other words, by making the laborer a stock-holder. 1 This more radical variety of profit-sharing, which has been tried in a number of establishments, is some- times called industrial co-partnership, or labor co-partnership. V. Productive Cooperation A still more radical scheme is that which contemplates the abdication and gradual disappearance of the employer, by transferring all the stock of an enterprise to the laborers themselves. Thus profit-sharing is transformed into produc- tive cooperation. Industrial co-partnership may be regarded as the transition-stage between the two systems. The Le- claire establishment (to which we have referred), and the celebrated " Familistery " at Guise, founded by Godin, have gradually been transformed into societies for productive 1 This transformation of the laborer into a stock-holder may be either elective or obligatory in the latter case the laborer's share in the profits becomes ipso facto a share of the stock. The latter method appears some- what autocratic ; but, unfortunately, experience shows that it is the sole effec- tual method of accomplishing the aim in view. The Familistery at Guise (in France) was built up by this method. PRODUCTIVE COOPERATION 649 cooperation. But societies for productive cooperation may also be formed spontaneously by groups of workmen them- selves, without passing through these transitional stages. France is regarded as the classic land of institutions of this nature, and seems to have taken the first steps toward produc- tive cooperation. The first cooperative society for production was founded in 1834 by Buchez, a French publicist. At the close of the Revolution of 1848, the movement in favor of productive cooperation assumed great vigor, and more than two hundred labor societies for production were founded in France, particularly in Paris. But only four of them have survived. There was, however, a temporary recrudescence of the movement in 1866, and in recent years the number of these organizations has increased with considerable rapidity. 1 In the United States, the first productive cooperative asso- ciation of which we have any record was the Boston Tailors' Associative Union, which was formed in 1849, but did not last long. The best known American cooperative enter- prises of a productive character are those among the coopers of Minneapolis. As early as 1868 the experiment of renting a small shop and selling the product directly to the mills was tried by a few journeymen coopers ; they allowed themselves the ordinary rate of wages, calculated on the piece system, and then divided the profits in proportion to the work done. Successful instances of productive cooperation may be found among boot and shoe companies. Cooperative creameries and dairies have also had considerable develop- ment in the United States. 2 The obstacles encountered by productive cooperative socie- ties are numerous, and account only too well for their want 1 In 1902 there were in France 323 cooperative societies for production, some of which were very prosperous. The Report of the Thirty-fourth Annual Cooperative Congress (1902) recorded 136 "productive societies" in Great Britain; in addition, there were thirty cooperative societies for farming. 2 Consult Professor F. Parsons's article in the Arena for August, 1903. 650 PRINCIPLES OF POLITICAL ECONOMY of success and for their comparatively short duration in many cases. (1) The first and greatest obstacle consists in the lack of economic education among the working classes. Laborers are rarely able to find among their own numbers men capable of managing a business enterprise. Again, assuming that such men can be found, the laborers do not know enough to choose them and keep them as managers ; the very superiority of such men frequently leads to their exclusion. Further- more, even supposing that such men are chosen as man- agers, the rank and file of laborers are rarely willing to give the managers a share of the proceeds proportionate to the value of their services, the superiority of intellectual over manual labor not being sufficiently understood. (2) The second drawback is the want of capital. We know very well that although it may be possible to eliminate the capitalist from productive enterprises, it is, at ail events, impossible to get along without capital ; and large-scale production demands capital in larger and larger amounts. (See page 135.) How can mere laborers obtain the amount of capital requisite for successful production ? By putting aside a few cents day by day ? This, to be sure, is possible, and it has been done in the case of a few businesses con- ducted after the methods of small-scale industry ; but it is accomplished only at the cost of heroic sacrifices, and is alto- gether exceptional. Ought the government to lend them the requisite funds ? This experiment was tried in France in 1848, but the $400,000 distributed for this purpose among various productive societies brought little success to these organiza- tions. Nothing is easier than to waste money that is freely received, especially when the government is the donor. 1 1 The socialists maintain that all successful enterprises must be equipped with the best appliances, machinery, etc., and that these appliances cost large sums of money. The workers, however, do not possess sufficient money, and for this reason they cannot carry on their own productive enterprises. All that is needed, therefore, in order that they shall prosper, independently REACTIONARY EFFECTS OF COOPERATION 651 We do not, however, regard this difficulty as insur- mountable. Carefully organized and firmly established workmen's productive associations, when once they have given proof of their economic vitality, would easily be able to borrow all the capital they might require. They could do this either through the agency of cooperative banks (such as are already in existence in Germany, Italy, and France) or by seeking help from other cooperative organizations (such as distributive cooperative societies) having considerable cap- ital at their disposal. (See pages 396 and 677.) (3) The third danger, finally, is that they tend to re- establish the very institutions which they seek to eliminate, namely, the class of employers and the wage system. This shows how difficult it is to modify the organization of society. Too often, when cooperative associations have proved successful, they close their ranks, refuse to accept new members, and engage hired workmen (i.e. wage-earners), thus becoming nothing more than stock companies or part- nerships made up of small employers. 1 This is the principal objection that socialists raise against productive cooperation, and we must admit that it is well founded. On the other hand, would it not require exceptional disinterestedness on of capitalist and entrepreneur, is the requisite capital. Ferdinand Lassalle proposed that the government should meet this difficulty by advancing several millions of capital to associations of workmen who would guarantee to make good its value at the close of the period of production. Lassalle believed that productive associations thus aided by the state could drive private busi- nesses out of the field and gradually lead to a reorganization of society on a collectivistic basis. 1 The Cooperative Barrel Company of Minneapolis, for example, regarded as a noteworthy example of cooperative production, had a number of em- ployees working for wages. The same was true of the Rochdale Pioneers, in England. Even now some productive works of the English Cooperative Wholesale Society are carried on by hired laborers that have no share in either profits or management. One of the Parisian cooperative societies for production (that of the spectacle- makers) has fifty members and twelve hundred employees working for wages, and the value of a share of its stock has increased from 60 to $10,000. Clearly, such a society is cooperative only in name. 652 PRINCIPLES OF POLITICAL ECONOMY the part of those workmen who have succeeded by dint of privations and perseverance in founding a prosperous bus- iness, if we should expect them to admit on a footing of equality all those who wish to enter at the eleventh hour, when the difficult task of organization has already been accomplished ? Yet there is reason to hope that these obstacles in the way of productive cooperation may be avoided by first traversing a stage of preparation ; this preparation could be provided in these ways : (1) By profit-sharing. Sometimes the employer will con- sent to withdraw gradually from the leadership of an enter- prise by enabling the laborers to become partners during his lifetime, and his successors after his death. The most cele- brated examples of this method are furnished by M. Godin in the Familistery at Guise, and by Madame Boucicaut in the case of the Bon MarchS, a Parisian department store. (2) By trades unions. Several productive associations in France owe their origin to trades unions. Again, the Sovereigns of Industry and the Knights of Labor, two organ- izations of workingmen in the United States, founded a number of enterprises for cooperative production. When trades unions take this step, they do not set to work all the members of the organization simultaneously, having nei- ther capital nor markets sufficient to do this, but only those members of the union who happen from time to time to want employment. (3) By consumers' cooperative societies. When these societies are sufficiently developed, and united into larger federations, they can undertake cooperative production, and furnish this new departure with the three requisites of suc- cess : capital, which they are able to lend ; experienced men suitable for managers; and regular customers, consisting of the consumers' societies themselves. These three elements, be it noted, are precisely those which have hitherto been wanting. Some consumers' cooperative societies in England, FEDERALISM AND INDIVIDUALISM 653 where a number of prosperous productive societies have already been established, pursue this policy. It is by the last-named method that productive coopera- tion may achieve greater successes in the future. In this connection it is important to note the difference between the federalist and the individualistic systems as they are designated in England. Under the federalistic system, consumers' cooperative so- cieties, either separately (when they are strong enough) or in groups, establish workshops or factories for producing, on their own account, some of the articles they require. In this case the laborers in their employ are simply wage-earners, and in no wise co-proprietors of the concern; usually, more- over, they have no share in the p'rofits, these being reserved exclusively for the members. 1 There has been much oppo- sition to this system, on the ground that the laborers should have a share both in the profits and in the ownership of the workshop or factory. This step has already been taken in the case of the Scottish Wholesale Society. Under' the individualistic system, which had better be called the autonomous system, the first steps are taken by the laborers themselves, who form independent productive societies ; the consumers' societies only lend them the capital, provide a market, and protect them from competition. 2 As the conclusion of this chapter, and of the whole book on Distribution, we venture to assert that there is a paral- lelism between the political and the economic evolution of 1 It goes without saying that if these employees are members of the con- sumers' society which employs them, they participate, as such, in the profits of the factory or shop. 2 In England these independent productive societies numbered about one hundred in 1901, with a capital of over 7,000,000 and an output valued at nearly $15,000,000. The productive enterprises founded directly by the consumers' societies, either separately or through wholesale societies, produced $36,000,000 worth of goods, or more than twice as much as the preceding societies. (Consult the Book on Consumption for a further treatment of consumers' societies.) 654 PRINCIPLES OF POLITICAL ECONOMY society. Political evolution embraces the three successive stages of absolute monarchy, constitutional monarchy, and republic. There are many sound reasons for believing that economic evolution follows step by step along correspond- ing lines, and includes, first, the stage of coercive organi- zation (slavery) ; second, the rule of the employer (the wage system) ; third, the rule of the employer modified by profit-sharing and certain concessions to the laborers with regard both to the ownership and management of business enterprises ; and, finally, cooperative production. There are, however, equally good reasons for believing that the advent of democracy in the domain of economic life will be slower and more difficult, and will involve even more disappoint- ments, than in the political sphere. 1 1 John Stuart Mill regarded independent productive cooperation as the means of solving the social problem. Despite Lassalle's advocacy of it, collectivists are now openly opposed to productive cooperation. Productive societies, although they aim to abolish the wage system, retain the individual ownership of capital as the basis of their organization, inasmuch as they expressly endeavor to make the work- men co-proprietors of the instruments of production. Collectivism, on the contrary, aims to "socialize" the instruments of production, i.e. to with- draw them from individual ownership even by the laborers themselves. This antagonism was clearly shown in the recent strike at Carmaux, in France, when the proposal was made to start a glass-works belonging to the glass- workers themselves. The socialists protested that the works should belong to the entire laboring class ; and their plan was ultimately adopted. Liberal economists regard productive cooperation with the same ironical attitude of condescension as profit-sharing and cooperation in general. As they do not admit either the desirability or the possibility of abolishing the wage system, they cannot admit the possibility of getting along without a class of employers. BOOK V. CONSUMPTION I. The Nature and Laws of Consumption To consume wealth is to utilize it for the satisfaction of our wants, to apply it to the uses and purposes for which it was produced. Consumption is, therefore, the ultimate aim of all economic activity, of production, exchange, and dis- tribution. Its importance is far greater than is indicated by the meagre space devoted to it in most treatises on political economy. It is, moreover, a field of investigation rich in curious facts, but very largely unexplored. A greater knowledge of this field is likely some day to transform economic science. Logically, economics should begin with the study of consumption. Did we not begin this volume with a study of wants and utility, matters which clearly belong to the domain of consumption ? The tendency of modern economic theory, especially of investigations concerning the subjective nature of value, has been in the direction of giving added importance to con- sumption as a necessary part of the edifice of economic science. The so-called Austrian school studies consumption and value from the standpoint of final utility (see pages 59 and 182) and emphasizes the principle that in the consump- tion of wealth the maximum of gratification is reached when the final utilities of the last increments consumed are equal. Everybody consciously or unconsciously employs his income and makes his purchases according to this law. It is a law so important that we shall devote some space to a more detailed explanation of it. As we have already said, the purpose of economic activity is human welfare, human gratification ; or, to be more strictly 655 656 PRINCIPLES OF POLITICAL ECONOMY accurate, its ultimate purpose is either to produce positive pleasure or to avoid pain. Men seek to minimize pain and to maximize pleasure. But these two aims to minimize pain and to maximize pleasure are in a sense antagonistic. More wealth means more pleasure, and if there were no effort or pain involved in the acquisition of wealth, our con- sumption of it would be limited only by satiety. 1 But in the example of the man drawing water from a well (see pages 55 and 82) we saw that whereas the utility of each successive bucket decreases, the effort or pain necessary to obtain it increases because of growing fatigue. Most of the commodities that we consume are, to be sure, not the direct product of our own labor, but are procured by the use of money. Therefore it seems strange to speak of the pain or effort necessary to produce them. Yet this expression is perfectly correct, viewed in its deeper significance. For, in the first place, it is by labor that we get the money; and when we exchange this money for goods we are really exchanging our labor and effort (see page 212) for the labor and effort of others; and, in the second place, when- ever we spend money for one commodity in preference to another we are really sacrificing that other commodity, which we might have purchased. If under given circumstances we buy oranges rather than peaches, we do this because oranges afford a greater gratification than we can obtain from peaches. Concrete examples will make this matter clearer. And in order that the factors of the problem of consumption may be clearly distinguished from each other, let us begin with the simplest possible example and subsequently introduce the elements that further complicate the problem. 1 It is, perhaps, necessary to point out that the term " pain," as we have used it and as it is coming to be used very generally among economists, merely means the opposite of pleasure. There are objections to its use in this sense, because of its association with disease or other abnormal physical conditions. The term simply means disutility. DECREASING UTILITIES 657 Take the consumption of water, of which there is an abundant supply. Let us suppose that it costs absolutely nothing. What, in such a case, would be the limit to our consumption of it? Clearly we should consume just as much as afforded us any gratification whatever. 1 A certain amount would be indispensable. Still more would, up to a certain point, be highly agreeable. Additional quantities would decrease rapidly in utility, down to the point where we should have absolutely no use for more water. If, now, the acquisition or employment of each portion involves some effort, say the time and effort of turning a spigot and carry- ing the water away, we will cease consuming water at pre- cisely the point where the utility is still somewhat greater than the effort, but beyond which it would not be " worth our while " to get more of it. This condition of affairs may be represented by the following diagram : ABCDEFQR JT, The line AX represents the amount of the commodity; that is to say, in this case, the supply of water. The lines 1 This statement requires some qualification. The limit to consumption is fixed not only by the point of satiety, and, as we shall point out later, by the actual " cost " of the commodity, but also by the time at our disposal if we intend to consume any other goods, and by the fact that the continued con- sumption of this commodity may be incompatible in kind with other pleasures from different sources. A man will cease consuming water before further increments possess no utility, if it is his intention to consume other goods that provide a greater utility-surplus than additional increments of water. To consume more water will decrease a man's capacity for consuming other goods and will always take a certain amount of v his time (which is one of his valuable possessions). 658 PRINCIPLES OF POLITICAL ECONOMY A 1, B 2, (73, etc., represent the utility of successive portions used. The consumer in this illustration will use eight units because the utility of the eighth unit is still a positive quantity. As a matter of fact, we consume as much water as we think we have any use for. But water is an exceptional commodity as regards supply. Most commodities are not obtainable in sufficient quantity to satisfy entirely the wants of all mankind. Take, for example, suits of clothes. Would not any of us willingly accept more suits of clothes if he might obtain as many as he could use? Why, then, do we not possess more? Because they cost money. And, as our supply of money is limited, we cannot obtain additional suits without spending money that might be used for the purchase of some other commodity of which our present supply is also insufficient to satisfy our wants entirely. We are certainly willing to pay a large sum of money to obtain at least one suit ; for this is absolutely necessary. We probably will not hesitate to pay the price for a second suit. The money that we must sacrifice to obtain it would, to be sure, buy something else which we may desire keenly ; yet our desire to be well clothed outweighs our longing to possess the object that we might otherwise purchase with the cost of the second suit. There are, as a matter of fact, persons who buy not merely one or two suits, but half a dozen, before they feel that a greater gratification may be procured by employing their money in some other way than in buying an additional suit. This fact may be represented in the form of a diagram (see page 659), as follows : Here AX, as before, represents the supply of the com- modity in question, and the lines -4.1, -B2, etc., indicate the utility of each successive suit of clothes for a given consumer. MN is the cost line, and the part of each line Al, .#2, etc., which falls below JOT indicates the cost of each suit. If suits cost absolutely nothing, this consumer would find satisfactory employment for nine of them ; but WHAT DETERMINES CONSUMPTION? 659 in view of the fact that they cost the amount represented by AM, he will purchase only five. The cost of the sixth [f suit is greater than the utility of the money which would have to be paid for it. The point of marginal utility comes after the fifth suit, but before the sixth. 1 In the world of actual business we have a choice among almost innumerable uses of our money, and we are con- stantly called upon to make some decision with regard to the relative utilities of a multitude of commodities. The problem, then, is : How much of each commodity shall we consume? This depends partly on our desire for them, that is to say, on the utility or gratification which their possession involves; and partly on the cost (effort, pain, or sacrifice) necessary under given conditions to obtain them. The principles which govern our choice of the kinds of goods and the amounts thereof that we shall consume may be made clear by the following example : Take four commodi- ties that are offered for sale on the market. Let us desig- nate them as A, J9, (7, and D. The first increment of A yields ten units of gratification ; that of B, eight units ; that 1 If instead of a series of vertical lines of decreasing length we indicate the decline of utility by a curved line running downward, the point of mar- ginal utility will be the intersection of this curve wtyh the cost line. It is of course possible that the cost may not remain the same, as assumed in the diagram given above. In agriculture the line of costs would be a rising curve, not a straight line ; in manufactures it would, for a while at least, be a falling curve. Consult Marshall's "Principles of Economics," Vol. I, pp. 441 ff. 660 PRINCIPLES OF POLITICAL ECONOMY of (7, six; and that of Z>, three. Successive increments of each commodity will of course afford less gratification. The successive increments of A, including the first, will probably represent a decreasing scale, 10, 9, 8, 7, etc., units of utility. The successive increments of B represent utilities of 8, 7, 6, etc. The increments of commodity represent utilities of 6, 5, 4, etc., units. The increments of Z>, finally, possess utilities of 3, 2, 1, 0. This scale of diminishing utilities may be arranged in this form : A B Q D 10 9 8 8 7 7 666 555 444 3333 2222 1111 0000 If we assume, for convenience, that there are only these four commodities from which to choose, it is obvious that two increments of A will be desired before there willbe any thought of applying our purchasing power to the acquisition of any of the other commodities. When four increments of A have been consumed, and two of B, there will be room for hesitation with regard to the advisability of beginning to con- sume some of O. If each increment represents what can be secured by one hour's labor, and if A stands for food, B for clothing, C for shelter, and D for ornament, the scale would express the following facts : That two hours' labor would be devoted to the production (or securing possession) of food before any other commodity could be considered; that the third hour would produce an equal utility whether devoted PRINCIPLES OF CONSUMPTION 661 to clothing or food, so that half of it would probably be given to each; that only after six hours' labor, of which four had been given to food and two to clothing, could sufficient pleasure be derived from shelter to furnish an induce- ment to devote a portion of the time to the task of secur- ing shelter. The corresponding numbers in the different columns represent different utilities, equal in amount and equally difficult of acquisition. If each separate desire could be completely satisfied, it would be found that ten incre- ments of A, eight of B, six of <7, and three of D had been consumed. 1 From this discussion two fundamental principles may be deduced concerning the order and quantities in which goods will be consumed: (1) We will first procure and consume those goods which yield the greatest surplus of utility over costs. (2) We will endeavor to reach a maximum of grati- fication by making the final utilities of the last increments of all commodities as nearly equal as possible. If a man drinks ten glasses of beer and smokes ten cigars a day, this means that the gratification afforded by the tenth glass of beer is subjectively equal to that of the tenth cigar. For if the tenth cigar did not afford a pleasure equal to the last glass of beer, he would evidently prefer smoking one cigar less and drinking one more glass of beer ; for thus the total gratification would be increased. 2 Before leaving this aspect of the problem of consumption we must point out that although in the management of our expenses, and particularly in large-scale transactions, we con- stantly make careful estimates of the comparative utility and the comparative cost of commodities, yet seldom can judg- ments be made with the exactness that the above discussion 1 A considerable part of this last illustration is taken from Dr. Devine's little book on Economics (Macmillan, 1898). 2 A further discussion of the principles of consumption in their economic bearing will be found in : Patten, " The Consumption of Wealth " (Philadel- phia, 1889); E. T. Devine, "Economics" (New York, 1898). 662 PRINCIPLES OF POLITICAL ECONOMY appears to take for granted. Some authorities (despite Pro- fessor Jevons' able defence of the use of mathematics in his " Theory of Political Economy ") deny that it is possible to express such subjective matters as desire and utility in quan- titative terms. It is objected moreover that men are not so much creatures of reason as creatures of habit or impulse (both of which oftentimes prompt irrational conduct). Wants are often aroused by advertisements, show-windows, and circumstances of an accidental nature. There are, furthermore, cases in which the utility of additional units of a commodity is not necessarily less than that of the first increment cases which are indicated by the proverb : " Appetite comes by eating;" Yet it must also be pointed out that there is a striking uniformity in the habits of consumption of large classes of people. An investigation made by the United States Com- missioner of Labor (Report for 1891) gave the following results concerning the percentage of expenditure for "nor- mal " families : OBJECT OF EXPENDITURE Income under $200 Income $300 and under $400 Income $500 and under $600 Income $700 and under $800 Income $900 and under $1000 Income $1200 and over Per Cent Per Cent Per Cent Per Cent Per Cent Per Cent Food . . . 49.64 45.59 43.84 38.89 34.34 28.63 Kent . . . 15.48 14.98 15.15 15.60 14.96 12.59 Clothing . Fuel . . . 12.82 7.07 14.14 6.04 15.27 5.63 16.33 4.42 16.84 4.00 15.71 2.57 Lighting . All other 1.01 .98 .97 .88 .74 .45 purposes . 13.98 18.27 19.14 23.88 29.12 40.05 It is evident that the scientific value of such tables as these depends largely on the number of cases studied and the accuracy of the data employed. Careful investigations of this sort, however, have been made by Le Play (1855), Ducpetiaux (1851), and Dr. Engel (1857), and subsequently THE MEANING OF CONSUMPTION 663 by a number of other investigators. The general results seem in the main to agree with the inferences drawn by Dr. Engel, viz. : (1) As the income of a family increases, a smaller per- centage is expended for food. (2) As the income of a family increases, the expenditure for clothing remains approximately the same. (3) In all the cases investigated, the percentage of expen- diture for rent, fuel, and light, was nearly the same. (4) As the income increases, a constantly growing per- centage is expended for education, health, recreation, amuse- ments, etc. 1 The word " consumption " may give rise to errors which we must be careful to avoid. In the first place, it must not be supposed that all consumption necessarily implies destruction. This is indeed true in the case of some things ; such wants as food and warmth can be satisfied only by the destruction of food and fuel. To utilize bread, i.e. to change it into flesh and blood, we must eat it ; to warm ourselves with coal we are obliged to burn it, i.e. to reduce it to smoke and ashes. 2 1 Mr. G. B. Waldron, in "A Handbook on Currency and Wealth" (New York, 1896), page 100, gives the following estimates for the consumption of wealth in the United States in 1890 : Necessaries, $6,100,000,000, of which $3,305,000,000 was for food, $1,233,000,000 for clothing, $319,000,000 for furniture, $475,000,000 for fuel and lighting, and $768,000,000 for other nec- essaries. For luxuries the total expenditure was $3,584,000,000, of which $900,000,000 was for liquors, $450,000,000 for tobacco, and $2,234,000,000 for other luxuries. Tor capitalistic uses, $3,717,000,000; 'of which $2,- 436,000,000 was to renew old capital, $1,196,000,000 to increase the sup- ply of capital, and $85,000,000 sent out of the country in payment for the use of foreign capital. In addition to these items, the permanent govern- ment expenses, aside from salaries and other payments, which figure as consumed by other persons, were $240,000,000. Probably no two authori- ties would agree on the amount which is annually withdrawn from con- sumption in order to maintain capital, and to make good the wastes of time and use. 2 Economically, combustion is tantamount to destruction, but it is of course impossible to destroy matter itself. Just as man in production is powerless really to create anything (see page 73), he is also unable really to 661 PRINCIPLES OF POLITICAL ECONOMY But there are fortunately many other wants the satisfac- tion of which does not involve the destruction of wealth. The statue of the Venus of Milo will provide aesthetic enjoy- ment for all generations of mankind without thereby losing an atom of its substance ; its power to provide pleasure may be destroyed by vandals, never by "consumers." Undoubt- edly time itself is a destroyer of nearly all things except coins, bronze objects, and statues ; and even these do not entirely escape "the tooth of time." Tempus edax rerum. But we must take care not to confound the effects of time with those of consumption. As a matter of fact, we strive to make things last as long as possible. If we could make all things indestructible (clothes, houses, furniture, etc.), they would not be worse, but better, adapted to economic pur- poses ; for in such an event they could be utilized perpetu- ally, and we should have attained the ideal of consumption. On the other hand, we must not confound consumption with production. It is true that the production of wealth in- volves the constant consumption of raw material, coal, etc. ; economists generally designate this consumption as repro- ductive consumption, to distinguish it from the consumption which serves for the direct satisfaction of our wants, and which is called unproductive consumption. But only the latter is consumption proper, and the name should be con- fined to it. The act of sowing seed, for example, must not be regarded as an act of consumption, but as the type of pro- ductive activity ; to designate it as consumption, and to apply the same term to two acts so opposite as sowing wheat destroy anything. The chemist finds that not an atom of the " consumed " object has been lost. Even -when consumption results in the destruction of utility, it is often possible by means of economical methods and devices to make use of the res- idues of consumption. Paper is made of old rags, slag and swill are used to make fertilizer, coal dust is employed in the manufacture of dyes and perfumes. The possibility of using residual substances, even in small quan- tities, is one of the reasons for the superiority of large productive plants. In an absolutely perfect economy, no utility would be lost, and the consump- tion of wealth would be simply its metamorphosis. KINDS OF CONSUMPTION 665 and eating it, can be explained only by the paucity and inaccuracy of economic terminology. Without doubt, the economic process forms a complete cir- cuit. Man produces in order to consume, and he must con- sume in order to produce. This is so true that some economists have actually regarded sowing as an act of con- sumption, while others (such as Jevons) regard eating as an act of production, because they consider the food of the workman the very type of capital. Yet if we want to reason clearly in this matter we must draw a line some- where. Man is both the beginning and the end of all economic processes. But man does not consume in order to produce ; he produces in order to consume. The purpose of wealth is to be consumed, that is, to satisfy human wants. Consumption is not the first but the last stage of the eco- nomic process. 1 At all previous stages, wealth is still being produced. Consumption is of two kinds : First, it is direct or immediate when it satisfies present wants. As under present economic conditions most of what we consume is purchased from others, this kind of consump- tion is effected by means of the use of money and is called spending. Secondly, it is postponed when it is intended to provide for the satisfaction of future wants. Since under present conditions value is stored in the form of money, this opera- tion is called saving. We shall study each of these kinds of consumption in turn. But before doing so, we must say a word about another cele- brated problem due to the unfortunate circumstance that the gratification of the most important human want the need of food involves the destruction of wealth. 1 " A fertilizer is useful to enrich a meadow ; the meadow is useful to pro- duce hay ; hay is useful to feed horses ; and horses are useful to do service. From the fertilizer to the man are several steps, but it is the final step which makes all the others count." GREGORY, "Political Economy." 666 PRINCIPLES OF POLITICAL ECONOMY II. Whether Production will always keep pace with Consumption Malthus, an English economist, in a formula that has since acquired great celebrity, affirmed that the population tends to increase more rapidly than the means of subsistence. 1 Far from anticipating that production would keep up with consumption, he declared that production would always lag behind far behind the demands of consumption. He concluded that the equilibrium could be brought about only by a frequent reduction of the population, effected by means of wars, epidemics, famines, pauperism, prostitution, and plagues, all of which, regarded from a higher point of view, Malthus considers really providential. 2 Malthus, however, hoped that in the future men would learn to prevent the intervention of these "immediate checks " upon population and make them unnecessary by 1 In an illustration which many writers have erroneously regarded as intended to be taken literally, Malthus says that the population increases in a geometrical progression, while the food-supply increases in an arithmetical progression : Population increases thus : 1 : 2 : 4 : 8 : 16 : 32 : 64 : 128 : 256. Subsistence increases thus : 1:2:3:4: 5: 6: 7: 8: 9. The average period in which the population could be doubled Malthus estimated as twenty-five years. He therefore concluded that : "In two cen- turies the population would be to the means of subsistence as 256 to 9 ; in three centuries it would be as 4096 to 13 ; and in two thousand years the difference would be almost incalculable." " In this supposition no limits whatever are placed to the produce of the earth. It may increase forever and be greater than any assignable quantity ; yet still the power of population being in every period so much superior, the increase of the human species can only be kept down to the level of the means of subsistence by the constant operation of the strong law of necessity, acting as a check upon the greater power." 2 These evils are providential, according to Malthus, not only because they maintain the equilibrium of production and consumption but also because they exterminate the weak and the incapable, and thus contribute to perfect- ing the human race. It is known that the work of Malthus prompted Darwin to undertake his investigation of the evolution of species ; Darwin himself tells us so. MALTHUS ON POPULATION 667 voluntarily limiting the number of their offspring. To ac- complish this Malthus advised them to use moral restraint, i.e. to marry only when they possess sufficient resources to support children, and, once married, to have only as many children as they can properly provide for. A century has elapsed since the publication of this remark- able doctrine, and experience has not yet justified the pessi- mistic prophecies of its author. 1 On the contrary, in almost all countries, whether we consider new nations like the United States or old nations like France, wealth has in- creased more rapidly than population. To-day our princi- pal anxiety is of quite the inverse nature. Markets are now so encumbered with manufactured and agricultural prod- ucts that governments have been obliged to raise barriers of customs duties against the influx of foreign goods; the problem is how to find a market for products, rather than how to produce sufficient goods to consume. The enormous and growing excess of production over con- sumption during recent years may of course be due to causes that will not recur, such as the cultivation of virgin land in new countries, and the great cheapening of transportation by the use of steam. It is, after all, perfectly evident that the earth cannot provide food for an unlimited number of people; the law of diminishing returns will sooner or later give rise to a serious problem of population. No speculation concerning the economic future of mankind can ever be anything more than what Nitti cleverly calls a sort of demographic eschatology without scientific value. Yet the following considerations are perhaps of a nature to reassure us concerning the economic destiny of our race : (1) Statistics prove that the birth-rate is lower among the rich than among the poor, and that the birth-rate tends to decrease with the growth of prosperity. The rise of a multi- tude of new wants probably diminishes the intensity of sexual appetite, which, next to food, is the principal desire 1 See page 11, note. 668 PRINCIPLES OF POLITICAL ECONOMY of the poorer classes. It is therefore not unlikely that the increase of wealth among all classes will result in a decrease in the birth-rate. Indeed, such a decrease is already percep- tible in almost all countries. (2) Statistics also appear to show that the birth-rate is lower in democratic communities than in others. Among the native-born population of the United States, and, strangely enough, in Australia also, the birth-rate has fallen as low as in France. Perhaps the cause of this lies in the fact that in such communities as these the opportunities for social advancement are considerably curtailed whenever a person is hampered by a large family. Dumont calls this fact the law of capillarity. It influences women as well as men. The woman's fights movement, which is simply one aspect of modern democratic thought, tends to diminish the impor- tance of the natural function of women as wives and mothers, by opening up new pursuits and new social functions. (3) Biology teaches that in general the fecundity of a species is inversely proportionate to the development of the individual, the inferior animals being much more prolific than the superior animals, especially man. As this law seems to be due to a sort of physiological antagonism or incompati- bility between sexual activity and cerebral activity, it is reasonable to hope that the fecundity of the human race will diminish in proportion to the intellectual and moral develop- ment of individuals, especially of women. 1 (4) The physiological laws of the variety, limitation, and substitution of wants (see pages 40 fT.) suggest the possi- bility of satisfying an increasing number of wants ; for although nature provides us with only a limited quantity of each kind of wealth, it is easy to conceive of an unlimited number of new wants and new combinations of wants, so that the possibilities of our development in this direction are lim- itless. The need for food, for example, will of course never 1 Consult "The Evolution of Sex," by Patrick Geddes, Chap. XX, and Nitti, "Population." THE FOOD SUPPLY 669 be replaced by another want, but the need for a particular kind of food may always be replaced by the need for some other kind of food. If men had to live on wheat alone, there would sooner or later not be enough of it ; but as they are acquiring the habit of eating less of it and consuming in its stead an increasing variety of other aliments, and as new varieties of food are constantly being invented, there is no reason for thinking that we shall ever reach the limit of our food supply. CHAPTER I SPENDING I. Whether spending helps Business WE hear nothing more frequently than the statement that " spending promotes business." Hence public opinion is very indulgent, even sympathetic, toward all expenditure, even though it partakes of wastefulness. A man may break all the things he cares to, provided he pays for them. Innumer- able moralists and dramatists have pitilessly ridiculed the miser, while making almost a hero of the spendthrift. The man who saves is little loved by his neighbors, and incurs the risk of being regarded as a public enemy ; whereas the man who spends his money, even though he squanders it in riotous living, generally enjoys a considerable degree of popularity. One may admit that the spendthrift or the drunkard acts foolishly by emptying his purse or ruining his health; in which case, so much the worse for him. But at all events, his misfortune is the advantage of others, of the merchants, laborers, and producers who receive his money and profit thereby. Certainly money that is spent, i.e. used in making pur- chases, benefits those that receive it. It enables them to continue and expand their business. But Bastiat long ago pointed out that this money would have been expended anyway, for the simple reason that money can be used in no other way, save for hoarding; and not only is the amount of wealth that is hoarded comparatively small, but it is not destined to be hoarded forever. Spending is simply a transfer of money, the removal of wealth from one branch of production to another ; it results in the appli- cation of labor and capital to other branches of production. 670 FALLACIES REGARDING SPENDING 671 It must not be supposed that spending or consumption is a matter of indifference from the economic point of view. On the contrary, it is the most important of all economic opera- tions. Spending is beneficial when it turns capital and labor from relatively unproductive channels into those that are more productive ; if it does the opposite, it is economically harmful. By means of spending, the rich man, even though he lives entirely on his income, exerts a great influence on productive activity. The productive factors, land, labor, and capital, are in his control. Like the centurion in the gospel, when he says to one "Come," he comes, and to another " Go," he goes. This commanding power is precisely what imposes especial responsibilities and unusual duties. But we are mistaken when we believe : (1) That because only spending encourages production, spending is more useful than saving. We shall see that saving also leads to consumption, to spending. Money that is saved is always ultimately spent for some purpose. Onty, instead of being spent by its owner, it is, perhaps, spent by those who received it from him as borrowers, as laborers, or as sellers of goods. What does it matter, from the standpoint of social production, whether money be spent by me or by another person ? The above fallacy is due to the fact that consumption is the purpose, justification, and ultimate goal of all production. When men cease to consume, they will also cease to pro- duce; when they no longer need bread to eat, they will cease sowing wheat. But to argue that therefore consumption is the efficient cause of production, or that consumption neces- sarily means production, is to deduce an absurdity from an axiomatic truth. The three factors of production are already familiar to us, land, labor, and capital, and it is perfectly evident that consumption cannot create or increase any one of them. Nay, consumption constantly tends to undo the work of these factors and to decrease the supply which they store up. If the supply of accumulated wealth were increased 672 PRINCIPLES OF POLITICAL ECONOMY by a constant influx of commodities so that the more we took from it the more would be added, the error which con- sists in believing that increased consumption means increased production might be pardonable. But such is not the case. No one would dare maintain that the more apples we pick, the more will grow; or that the more fish we catch, the more the sea will provide ; or that the more wood we burn, the thicker the forest will grow. (2) That spending is always an advantage, even though it involves the useless destruction of wealth. This popular misconception is defended by the assertion that the destruction of wealth, although it may necessitate replacing the wealth that was destroyed, furnishes additional work for laborers and new opportunities for capitalists. Many people, after reading of a fire, console themselves with the thought that it will furnish builders with work. Undoubtedly, the money that is spent for any purpose whatsoever is not lost ; but the house that is burnt is really lost, and there is no gain to compensate for the loss. Builders, to be sure, may rejoice, but not society as a whole. The money (or the capi- tal, labor, and material) that is used to build another house would have been used anyway. The fire has necessitated doing again what was already done once. There has, in fact, been an expenditure of labor and material sufficient to build two houses. Yet because of the fire we have but one ; the other is irretrievably lost. 1 To show the absurdity of this argument, moreover, let us carry it further. If it be based on sound reasoning, we must regret that things are not destroyed ten times as quickly and easily as they are : that clothes last longer than a week, that houses are not destroyed every ten years by means of earthquakes, that war does not more frequently reduce our national wealth, and that we do not die sooner, since the rapid succession of human generations also involves a great consumption of wealth! 1 Consult Bastiat's celebrated essay on " La Vitre Cassee." THE NATURE OF LUXURY 673 II. Luxury In its ordinary use the word " luxury " means the gratifica- tion of a superfluous pant. This definition does not imply the condemnation of luxury, for, as Voltaire said, the super- fluous is exceedingly necessary. We may properly wish that everybody, even the poorest people, might have a little of the superfluous, and consequently a little luxury. Nature herself furnishes examples of magnificent and sometimes extravagant luxury, in the way she decorates the petals of flowers, the wings of butterflies, and the bodies of small insects. Again, history teaches us that every new want was at first regarded as superfluous. New wants, in truth, are superfluous ; because, first, no one has previously felt them, and, second, because to satisfy them probably means con- siderable labor, inasmuch as the work of providing for them is new and therefore somewhat difficult. The linen we wear, for instance, is now regarded as an absolutely indispensable part of our apparel ; to say that a man is reduced to his last shirt, is a proverbial way of expressing his dire poverty. There have been epochs, however, when a shirt was regarded unquestionably as an object of luxury, and fit for a royal present. The same may be said of thousands of other objects. If, therefore, we had been prevailed upon from the beginning to accept the ascetic doctrine, and suppressed all desire for luxuries, we should have prevented the development of all those wants that constitute civilization, and we should to-day still be living as our ancestors lived in the stone age. 1 Luxury is condenmable only when it degenerates into wastefulness. But how shall we recognize wastefulness? This is an interesting, although difficult, question. 1 Forks, watches, bicycles, are examples of such objects as these, originally regarded as luxuries. As for forks, it is by no means certain that they are preferable to the chop-sticks of the Chinese and Japanese, which are better adapted to the need of cleanliness and elegance, and cost much less. 674 PRINCIPLES OF POLITICAL ECONOMY In answering it, public opinion generally considers only the amount spent. But the economist must abandon this point of view entirely. When a person spends thousands of dollars to purchase bric-a-brac, or when he pays his cook the salary of a general, he may be culpable from the private point of view of his own family; but from the economic stand- point of society as a whole, the money spent is simply trans- ferred from his pockets to those of the persons whose goods or services he buys. From the point of view of society, the sole criterion is not the amount of money spent, but the quantity of wealth or labor consumed in the satisfaction of a given want. It must always be borne in mind that the sum total of existing wealth is insufficient to satisfy even the elementary wants of the greater part of mankind, and that the productive forces which provide and increase our stock of wealth, land, labor, and capital, are all limited in quantity. Whence it is evidently an unquestionable duty not to apply to the satisfaction of a superfluous want too large a share of our productive forces or of the wealth at our disposal. All this a problem of proportion. Unjustifiable luxury or prodigality consists in a disproportion between the amount of social labor consumed, and the degree of individual satisfaction obtained. A few examples will make this clear. The desire for flowers, entirely unknown to our ancestors, is certainly a luxury in the proper sense of the word, inas- much as flowers are by no means necessities ; yet they are a charming, elevating luxury, and one that is accessible even to the poor. But when we decorate our drawing-rooms with orchids brought from distant countries at an expense of thousands of dollars and perhaps at the cost of human life, or with blue dahlias raised in hot-houses which required more coal than would have provided warmth for ten families during the winter, this kind of luxury falls under the second definition that we have given. For a lady to wear a dress that is elegantly made, is not JUSTIFIABLE LUXURY 675 necessarily objectionable, although the dress may have cost several hundred dollars; for as we have said, we are not concerned with the sum spent (that simply passes from one person to another) but with the amount of material or labor involved. It is not probable that this dress required more cloth or much more labor than an ordi- nary dress. But if, on the other hand, a lady has her dress covered with several yards of lace, representing many years of a working-woman's toil, we may rightfully raise objec- tions on both moral and economic grounds. 1 It is perhaps justifiable for an English nobleman to spend several millions in the purchase of paintings for his private gallery, although it would be better to give them to a public museum. But when, like the rough barons of the Middle Ages, he consumes enough meat and wine at his meal to pro- vide for twenty ordinary mortals, or when, in order to offer the pleasures of the chase to his guests, he converts into hunting grounds land that would have produced food for hundreds of human beings, his luxury is not justifiable. In all these examples the consumer of the luxury does not contribute to social progress. 2 It must not be supposed that the deplorable effects of luxury which wastes labor and wealth are imputable only to the rich. There are luxuries among the poor which are no less detrimental to society. The sums that the poor spend daily for drink amount to much more than the value of the pearl which Cleopatra threw into her wine-cup, and which 1 M. Leroy-Beaulieu says that perhaps a man has saved millions in order that his wife may wear laces and jewellery. This is possible. But if he has earned these millions only to employ them in this manner, of what use has he been to society ? 2 The pro and con of the matter have been discussed ever since antiquity. For the arguments against luxury, consult Laveleye's "Le Luxe " ; for the opposite argument, Leroy-Beaulieu' s "Traite" d'F,conomie Politique." M. Baudrillart has given a mass of information in four volumes entitled " His- toire du Luxe." It is well known that in Antiquity and in the Middle Ages (and some of our colonies) sumptuary laics were passed, prohibiting expendi- ture for luxury. Cf. Reseller's " Political Economy." 676 PRINCIPLES OF POLITICAL ECONOMY is supposed to have cost 300,000 sesterces. The queen, more- over, was not poisoned by it. 1 What should be said of art ? Is it a luxury ? This is in- deed the general opinion, and economists are somewhat at a loss how to justify art. If, however, we recall the defini- tion we have given of luxury, we shall see that it implies no condemnation of art, even though we regard it from the 1 Drunkenness is a terrible form of luxury, more ruinous than any other, at least for the poorer classes of society most other luxuries being inacces- sible to them. According to the United States Census of 1900, the capital invested in the production of all kinds of alcoholic liquors was over $457,- 000,000, and the annual product was valued at about $340,000,000. The materials used were valued at $70,000,000, and the average number of per- sons employed the whole census year was over 52,000. The total consumption in this country for the year 1900, taking into account exports and imports, was 1,322,166,685 gallons, or 17.3 gallons per capita. It is probable that not more than 1 per cent of this was consumed in the arts, manufactures, and for medicinal purposes. Carroll D. Wright estimates that the 161,483 places or establishments in the United States which pay a federal tax to engage in the traffic have a capital of nearly $960,000,000, in the hands of 191,000 pro- prietors or firm members, with nearly 242,000 employees. But the direct economic expenditure of labor and capital is insignificant when we consider the incalculable loss through disease, incapacity for work, insanity, crime, and suicide due to drink. Intemperance is one of the gravest social problems and has been made the subject of numerous investi- gations. Probably the two most important remedies proposed are : (1) Private initiative and propaganda by means of temperance societies, such as have succeeded in reducing the use of alcohol in the United States and England. In Sweden and Norway, private societies with state assistance have taken the place of the ordinary saloon-keepers; there are no saloons near factories, and liquors are not sold by the glass, but only by the quart. (2) Government intervention, limiting the number of saloons or forbidding the rum-traffic entirely. Sometimes the government itself, as in Russia and Switzerland, has a monopoly of the trade in alcohol, in order to restrict its sale or at least to prevent adulteration. In three states of the Union the laws prohibit the sale of intoxicating drinks Kansas, Maine, and North Dakota. (New Hampshire and Vermont have recently abandoned prohibi- tion in favor of local option.) In most of the states each local commu- nity decides the question whether it will permit the sale or not ; this is called local option. The Norwegian or Gothenburg system of monopoly under gov- ernment control has been adopted in a modified form in South Carolina. (See Carroll D. Wright's "Practical Sociology," 2d edition, Chapter 23.) ART AND LUXURY 677 purely economic point of view. Genuine art does not require an amount of labor disproportionate to the result. Quite the contrary ! A piece of marble and a chisel, a square yard or more of canvas and a few tubes of paint, added to a few hours of labor, are sufficient to provide exquisite enjoyment that may be repeated throughout innumerable generations of mankind. If a lover of art spends half a million for one of Raphael's paintings, this may be a folly from the purely per- sonal point of view. But from the social point of view the question is : Did the painting cost the artist an amount of labor or of capital disproportionate to the pleasure it pro- vides ? Certainly not. Art is characterized by the produc- tion of great effects through very simple means ; and this is precisely the contrary of luxury. 1 III. Consumers' Associations Men generally do not like to deprive themselves of any- thing useful ; they would fain find some means of reducing their expenses and " putting aside " a larger share of their income, without reducing the quantity or lowering the quality of the objects they consume. This apparent impossibility is accomplished by various kinds of associations, some of which are exceedingly important. (1) The common household. When several persons join together in the use of one house and garden, or for the com- mon enjoyment of the same imperishable goods, or for the common hire of a cook, they can certainly obtain the same gratification with less expense. The economy of life in con- vents, military barracks, and boarding-houses is proof enough. This economy is due to the same causes that make large- scale production cheaper than isolated, small-scale produc- 1 In another sense, however, it may be said that art is a luxury. Every important art always presupposes the waste of a great quantity of productive energy, inasmuch as there is only one successful artist for a hundred whose time and labor are spent uselessly. But the same is true of all careers that appeal to human vanity, politics, for example. 678 PRINCIPLES OF POLITICAL ECONOMY tion, causes which (see page 161) find a similar appli- cation with reference to consumption. For this reason communists have held that the present method of living in small, separate family groups, is extremely wasteful of wealth and energy. Each separate family now has, or endeavors to have, its own house, its own garden, its own domestic ser- vants, its own horses and carriages, although it would be to every one's infinite advantage to constitute larger groups of consumers which could make better use of all their oppor- tunities and economize an enormous amount of wealth and labor. Consider the great waste of food and fuel alone when each of the innumerable small families in the same town provides its own meals, buys its cooking utensils, stoves, etc., and hires a cook. Would it not be infinitely better, cheaper, and simpler, to group a score or more families in a large, well-equipped apartment-house, having but one set of cook- ing utensils, a better equipment than any separate family could have, and employing enough expert servants to do the work better than before ? It is maintained that this would be an almost incalculable saving of energy and wealth, a great step forward, and an unquestionable benefit for humanity as a whole. No one has developed this scheme more brill- iantly or in greater detail than Fourier, in describing his " phalanstery." The system of living together, although it offers the incon- testable advantage of effecting a great saving, unfortunately suppresses family life by destroying the home, and the home has ever been one of the most important wants of man. Human nature has always found something repugnant in group-life and even in " boarding " in common. Nor must we lose sight of the fact that the real aim of wealth is to pro- vide enjoyment. Ought we to sacrifice all the blessings of family intimacy, the happiness and the moral influences of home life, simply in order to save part of our expenditure ? (2) Purchase in common. Without binding ourselves to a life in common, or forming the habit of sleeping under the COOPERATIVE PURCHASE 679 same roof and eating at the same table, many of the advan- tages of living together may be realized, at least in part, by cooperative associations in which a number of persons unite to make their purchases jointly, and thus obtain the advan- tages of buying at wholesale rates. Robert Owen appears to have been the inventor of this kind of association. But the development of cooperative consumption is most closely con- nected with the history of the celebrated Rochdale Equitable Pioneers, founded in 1844. More than one-fifth of the whole British population now purchases its goods in part or entirely at the stores of cooperative associations. The members of these associations meet annually in a congress, publish periodicals and newspapers, and constitute a power in the nation. Most of the local associations are grouped into a large federation, called the Cooperative Union, which has its own wholesale society, transacting an enormous amount of business each year. The English Wholesale Society in 1902 sold $92,000,- 000 worth of goods, and the Scottish Wholesale Society sold over $30,000,000 worth ; about 120,000,000 of the goods thus sold were manufactured by the wholesale societies themselves. These societies, which own a fleet of merchant vessels that go to all parts of the world to purchase goods, do not limit themselves entirely to commerce, but engage in production and banking. 1 Cooperative consumption (or, as it is some- times called, distributive cooperation) is carried on in many 1 See the annual reports of the Congress of the Cooperative Union, pub- lished by the secretary, J. C. Gray. An interesting article on cooperation in Italy may be found in the 1902 Annual of the Cooperative Wholesale So- cieties, published at Manchester. A brief but fairly complete account of cooperation and kindred movements for social betterment may be found in Gide's report on "^conomie Sociale " at the Paris Exposition of 1900 (Paris, Imprimerie Nationale, 1902). Consult also : Hubert Valleroux, " La Cooperation," Paris, 1904; and the articles by Prof essor F. Parsons in the Arena for July and August, 1903. The well-known Belgian cooperative society, "Vooruit," of Ghent, de- votes the greater part of its profits to socialistic propaganda, and the share of profits distributed to the members is not paid in cash, but in coupons, good for merchandise at the cooperative stores. 680 PRINCIPLES OF POLITICAL ECONOMY other countries, but usually on a smaller scale than in Great Britain. There are probably about 200 retail " cooperative stores" in the United States, where the whole cooperative movement is now developing with surprising rapidity. Most consumers' associations are patterned after the so- called Rochdale type, which is characterized by these fea- tures : (a) Sales for cash only ; () sale not at the cost price, but at the customary retail price, thus bringing* a profit ; (