Here we have all the raw materials out of which to build a great nation. Already we have made marked contributions to civilization, and yet it should not be forgotten that our chief claim to national greatness rests upon the promise which we show of being able to perfect American democracy.

To what extent will this promise actually be realized? As a nation we are yet young, as a people we have scarcely begun the greatest experiment in democracy which the world has ever seen. Shall we endure, shall we attain to a half-success, shall we succeed gloriously?

Much depends upon the extent to which each of us assumes the responsibilities of citizenship. Those who have gone before us conquered a wilderness, expanded and preserved the Union. But it is not for us complacently to accept the result. Much has been done, but much more remains to be done. Our goal is the greatest possible perfection of our economic, social and political life. Each age may be said to have its peculiar burdens and responsibilities: the prime task of the colonist was to foster the tender shoot of democracy; that of the western pioneer was to fashion homes out of a wilderness; the burden of our generation is to grapple with the present-day problems of American democracy. Without a high sense of personal responsibility, coupled with an intelligent and consistent effort, we can never reach the high goal admittedly possible.

51. THE POINT OF VIEW IN PROBLEM STUDY.—To see American democracy and to see it as a whole should be our aim throughout the remainder of this book. Now this is not easy. The danger is that the unwary student will interpret the large amount of space devoted to "problems" as meaning that American life is preeminently unsettled and defective. This is a temptation to be guarded against. Though we shall uncover many defects, it should be remembered that we are predominantly a normal, healthy, prosperous people. But our virtues demand our attention less urgently than do our defects. If we seem to be overconcerned with the defects of American life, the student should not conclude that American life is primarily defective. Rather, he ought to realize that it is precisely because a situation involves a problem that our attention is challenged.

Nor should problems be looked upon as something to be ashamed of. Where life is dull and civilization static, there are relatively few problems; where life is progressive and civilization steadily advancing, problems are numerous and pressing. Problems imply adjustment, development, the desire for improvement and advancement. They are signs of progress, the growing pains of civilization. If we bear this in mind, we shall be in a fair position to see American democracy in true perspective, without undue distortion of our viewpoint, and without prejudice to our judgment.

QUESTIONS ON THE TEXT

1. Why is there nothing to be gained by debating whether or not American democracy is imperfect?

2. Why has the circle of our problems been steadily widening during the last century?

3. Trace the relation between an enlarged social conscience and the number of problems confronting us.

4. What is one danger of paternalism?

5. Give a definite example to illustrate the complexity of our modern problems.

6. Discuss the importance of the economic background in problem study.

7. What problems may be included under the term "industrial reform"?

8. What problems arise in connection with public interest in business?

9. Name some of the problems arising in connection with the need for effective government.

10. What is the importance of individual responsibility in studying the problems of American democracy?

11. Outline clearly the point of view to be maintained in studying these problems.

REQUIRED READINGS

1. Williamson, Readings in American Democracy, chapter v.

Or all of the following:

2. Bryce, The American Commonwealth, vol. ii, chapters ci, cxiv, cxix, and cxxii.

3. Dunn, The Community and the Citizen, pages vii-xii.

4. McLaughlin, Steps in the Development of American Democracy, chapter viii.

QUESTIONS ON THE REQUIRED READINGS

1. What, according to Lord Bryce, are the essential intellectual traits of the masses of the American people? (Bryce, pages 825-826.)

2. Lord Bryce says that "there are elements in the life of the United States which may well make a European of any class prefer to dwell there rather than in the land of his birth." What are these elements? (Bryce, pages 870-873.)

3. What comment does Lord Bryce make upon the quality of humor in the American character? (Bryce, page 876.)

4. What three advantages does the United States have over European countries in the matter of grappling with modern problems? (Bryce, page 912.)

5. Explain the statement that "Democracy rests on faith." (McLaughlin, pages 181-182.)

6. What is meant by the statement that "Democracy is fundamentally a matter of human relationships"? (McLaughlin, pages 189-190.)

7. What, according to Lord Bryce, are the four chief defects of American democracy? (Bryce, page 632.)

8. What are the essential qualities which civic education should aim to cultivate? (Dunn, pages xi-xii.)

TOPICS FOR INVESTIGATION AND REPORT

I

1. Make a list of the problems which in any way affect you as a citizen in the community. List these problems in the order in which they occur to you, or are discovered by you. Comment upon the confused and disorderly appearance of the problems so listed.

2. Classify the problems on your list according as they are economic, social or political.

3. Classify the problems on your list according as they are local, state or national.

4. Comment upon the complexity and inter-relationship of the problems so classified.

5. What agencies, public, semi-public, or private, are studying the problems on your list?

6. What difference of interest do the citizens of your community show in local, state and national problems?

II

7. Defects of democratic government the world over. (Bryce, Modern Democracies, vol. ii, pages 452-454.)

8. The background of the problems of American democracy. (Merriam, American Political Ideas, chapter i.)

9. The hindrances to good citizenship. (Bryce, Hindrances to Good Citizenship.)

10. The promise of American life. (Croly, The Promise of American Life, chapter i.)

11. Attitude of the individual in a democracy. (Hughes, Conditions of Progress in Democratic Government.)

12. The power of ideals in American history. (Adams, The Power of Ideals in American History.)

13. Ideals of citizenship. (Woodburn and Moran, The Citizen and the Republic, chapter xx.)

14. The future of democracy. (Bryce, Modern Democracies, vol. ii, chapter lxxx.)



PART II—AMERICAN ECONOMIC PROBLEMS

A. ECONOMICS OF AMERICAN INDUSTRY

CHAPTER VI

THE NATURE OF AMERICAN INDUSTRY

52. MAGNITUDE OF AMERICAN INDUSTRY.—In colonial times the major part of American industry was concentrated along the Atlantic seaboard; to- day it extends over a large part of the continent. A century and a half ago our industrial system was still a relatively simple one, giving rise to few pressing problems of national importance; at the present time it is a vast and complicated affair, closely bound up with many of the most vital problems which confront American democracy. The activities which are commonly grouped under the head of "American industry" are so numerous and so varied that a description of all of them would carry us beyond the limits of this chapter. Nevertheless, it is important that we secure some understanding of these activities. A few pages may profitably be spent, therefore, in discussing certain basic facts of American industry.

53. FAVORABLE LOCATION OF THE UNITED STATES.—Let us commence by noting that the location of the United States is favorable to the development of industry. Of the two American continents, the northern has the greater natural advantages. Each continent is roughly in the form of a triangle with the apex or smaller end pointing southward, but whereas the larger end of the South American triangle is within the tropic zone and only the tapering end is within the more favorable temperate zone, the greater part of the North American triangle is within the temperate zone. With regard to location for world trade the northern continent again has the advantage: the ports of South America face a relatively empty ocean on the west and the little-developed continent of Africa on the east; the ports of North America, in addition to being more numerous and more suitable for commerce than those of the southern continent, face the teeming Orient on the west, and the great markets of Europe on the east. Moreover, the United States occupies the choicest portions of the North American continent. Our neighbor Canada has a cold and snow-bound frontier on her north, while on our south Mexico and the Central American countries lie near the tropics. The heart of temperate America, on the other hand, is included within the territory of the United States.

54. POPULATION.—Scarcely less important than the favorable location of the United States is the character of the people occupying the country. From less than four million in 1790, our population has increased so rapidly that in 1920 there were 105,710,620 people within the bounds of continental United States. As the population has increased, it has spread over the Appalachians, into the great Mississippi basin, and westward to the Pacific Ocean. Accompanying the increase and westward spread of the population has come a greater variety of racial types. Although our population was varied in colonial times, the great majority of the settlers were from the British Isles and northwestern Europe. In the latter part of the nineteenth century immigration from northern Europe declined and more and more immigrants began to come from southern and southeastern Europe. So universal has been the attraction of America, that our present population includes elements from every important country in the world. From the industrial standpoint, the dominant Characteristics of this composite American people are energy and versatility.

55. NATIONAL WEALTH.—Generations of industrious people have helped to make the United States the wealthiest nation in the world. It has been estimated that in 1850 our national wealth amounted to $8,000,000,000. By 1900 the remarkable progress of American industry had increased this figure to more than $88,000,000,000. In 1912 our wealth was probably in excess of $180,000,000,000. Industrial and financial disturbances during the period of the World War make later estimates hazardous, nevertheless it is interesting to note that in 1921 the wealth of the United States was estimated as being between $350,000,000,000 and $400,000,000,000. According to this estimate, the wealth of this country exceeded, in 1921, the combined wealth of Great Britain, France, Germany, Italy, and Belgium. In weighing the value of this comparison, however, we must take into consideration the heavy destruction of wealth in western Europe because of the World War.

56. WHAT THE AMERICAN PEOPLE ARE DOING.—A large percentage of the inhabitants of the United States are engaged in some form of productive work. According to the most recent estimates there are approximately fifty million persons, male and female, over ten years of age, engaged in gainful occupations in this country. Of these about fourteen million are engaged in agriculture and allied industries, while more than eleven million are busy in manufacturing pursuits. Almost four million are found in some form of trade, and another four million are employed in domestic and personal service. Transportation, clerical work, and professional callings utilize the services of several additional million. The great majority of those employed in American industry are men, although the number of women in industry is steadily increasing. Children have been found in industrial pursuits since colonial times, but of recent years there is a growing movement to restrict or prohibit the employment of children in gainful occupations.

57. FORESTS AND MINERALS.—The natural resources of the United States play a large part in our industrial life. One fourth of the territory of the United States is still covered with timber. We are abundantly supplied with coal and iron, the two most important industrial minerals. Our coal deposits outrank, both in quantity and in quality, those of any other country. Iron is found in most of the states in the Union, the high-grade deposits of the Lake Superior area being of special importance. We produce more than half of the world's supply of copper, which, after coal and iron, is the most important industrial mineral. Our supply of petroleum and natural gas is large, and in spite of the waste which has characterized our use of these important commodities, our production of both is still great. Gold, silver, zinc, lead and phosphates are produced in the United States in large quantities. Indeed, we have ample supplies of practically all of the minerals of importance to industry, except platinum, tin, and nickel.

58. AGRICULTURE.—Until very recently, at least, agriculture has been by far our most important industry. Of the two billion acres comprising continental United States, approximately half are under cultivation. In most sections of the country the quality of the soil is good, and rainfall is ample. We have long led the world in the value of farm crops grown. Our production of wheat, corn, oats, barley, rye, and dairy products totals an enormous figure. The steady enclosure of lands formerly used for grazing stock is restricting our production of food animals, but we are still important as a producer of meats. Most of the world's tobacco is grown in this country. The world's supply of cotton is derived mainly from southern United States. Finally, our soil is of such variety, and our climate so diversified, that the danger of a general crop failure is slight. A loss in one part of the country is almost certain to be offset by good crops in another.

59. MANUFACTURING.—In colonial times American manufactures were subjected to more or less restraint by Great Britain, but after the Revolution these industries entered upon a period of free and rapid development. Modern machinery was introduced rapidly after 1800, large scale production was developed, transportation was fostered, and larger and larger markets were supplied with the products of American manufacturers. Particularly since the Civil War has the importance of our manufactures increased. This increase has been due chiefly to the large scale production of foodstuffs, including meats and flour; textiles; iron and steel products; shoes; chemicals; and agricultural machinery. According to recent census figures it would appear that we are passing from a predominantly agricultural life to a stage in which manufacturing is of relatively greater importance.

60. TRANSPORTATION AND COMMUNICATION.—The physical geography of the United States encourages the development of adequate means of transportation and communication. The St. Lawrence-Great Lakes system gives easy access to the most fertile section of the continent. The Mississippi and its tributaries drain a million square miles of farm land. We have, in addition to 18,000 miles of navigable rivers, a greater coast line available for commerce than has the whole of Europe. New York is the world's greatest seaport.

Few mountain ranges hamper the development of transcontinental railroads in this country, and of these only one, the Rockies, is a serious obstacle to effective transportation. Our railroad mileage is enormous, a half dozen transcontinental lines being supplemented by numerous smaller roads and feeding lines. We have more than 2000 miles of canals in operation. Cheap and rapid transportation between the different parts of the country, supplemented by adequate means of communication by telephone, telegraph, and the postal service, undoubtedly has been one of the greatest factors in our national prosperity.

61. DOMESTIC AND FOREIGN TRADE.—The great majority of our products are not shipped to foreign markets, but are utilized within the country. We are still so young and so undeveloped a country that our manufacturers have been kept busy supplying the domestic market. This fact, together with the American manufacturer's lack of knowledge concerning the possibilities of foreign trade, explains our neglect of foreign markets. In proportion as our manufacturers catch up with the domestic market, and in proportion as their knowledge of foreign markets increases, it is likely that they will give more and more attention to customers in other countries.

But though a very small proportion of our products are sent abroad, the foreign trade of the United States exceeds in value the foreign trade of any other country. This predominance is due, not so much to our search for foreign markets, as to the steady demand in other countries for three classes of goods in the production of which we have a distinct advantage. These three classes of goods are, first, raw materials of which we have a great abundance, such as cotton and copper; second, specialties invented and patented by Americans, such as inexpensive automobiles, typewriters, and phonographs; and, third, commodities which may be advantageously produced by large-scale methods, such as agricultural machinery and the cheaper grades of textiles.

62. SUMMARY AND FORECAST.—We have very briefly surveyed some of the basic facts of American industry. On the one hand, the favorable location and the rich natural resources of the United States have furnished a substantial basis for industrial progress. On the other hand, we must note that the American people are energetic and versatile,—combining, to a happy degree, the qualities of initiative and originality, perseverance and adaptability. The great wealth and prosperity of the country as a whole have been the result of the combination of a favorable land and an able people.

This is not the whole of the story, of course. It must be admitted that, with all of our wealth, we continue to face serious charges of poverty and industrial maladjustment. These charges are of great importance, but it should be remembered that no problem can be solved, or even intelligently attacked, until the essential facts are well in hand. We have briefly described the nature of American industry. What we have now to do, as a preliminary to considering the problem of poverty and industrial reform, is to analyze the economic laws in accordance with which American industry has developed. The essential facts of the next four chapters cannot be weighed too carefully.

QUESTIONS ON THE TEXT

1. To what extent has the character of American industry changed in the last century and a half?

2. Compare North America with South America with respect to natural advantages.

3. Outline the changes which have occurred in the population of the United States since 1790.

4. Trace briefly the increase in our national wealth since 1850.

5. What are the chief occupations of the American people?

6. Name three important industrial minerals, and comment on our supply of each.

7. What are the chief characteristics of American agriculture?

8. Outline the growth of our manufacturing industries.

9. How are transportation and communication encouraged by the physical geography of the United States?

10. Why is our domestic trade of relatively greater importance than our foreign trade?

11. To what three types of goods is our predominance in foreign markets due?

12. What qualities of the American people have contributed to their industrial success?

REQUIRED READINGS

1. Williamson, Readings in American Democracy, chapter vi.

Or all of the following:

2. Bishop and Keller, Industry and Trade, chapters i and ii.

3. Bogart, Economic History of the United States, chapter i.

4. Fetter, Modern Economic Problems, chapter i.

5. King, Wealth and Income of the People of the United States, chapter iii.

QUESTIONS ON THE REQUIRED READINGS

1. Describe briefly each of the six regions into which continental United States may be divided. (Bogart, pages 11-12.)

2. Why has the animal life of the North American continent declined in significance since colonial times? (Bogart, page 8.)

3. Into what five divisions may the forests of the United States be classified? (Bishop and Keller, pages 27-28.)

4. What may be said as to the temperature of the United States? (Bogart, pages 12-13.)

5. What may be said as to the extent of rainfall in the United States? (Bogart, page 13.)

6. Explain the importance of water power in the United States. (Bogart, pages 3-4.)

7. What changes in farm land values have been brought about in the last century? (King, pages 22-27.)

8. Discuss the value of urban land in the United States. (King, pages 15-21.)

9. Why is it extremely difficult to measure the wealth of the United States? (Fetter, pages 6-10.)

TOPICS FOR INVESTIGATION AND REPORT

I

1. Trace the growth in the population of your state since 1880. What have been the chief sources of this increase?

2. To what extent has the population of your state been affected by immigration from Europe? What attracts immigrants to your state? Have there been any changes in the character of this immigration since 1880?

3. Classify the population of your state on the basis of occupation. (Secure data from the State Board of Labor, or State Bureau of Statistics.)

4. Estimate the material wealth of your community. What light does the result throw upon the difficulties of summarizing the wealth of the nation?

5. Discuss the importance in the economic life of your section of

(a) Agriculture,

(b) Mining,

(c) Forestry,

(d) Manufacturing.

II

6. The economic geography of your section. (Consult Dryer, Elementary Economic Geography.)

7. A comparison of America three hundred years ago with the America of to-day. (Price, The Land We Live In, chapters i and ii.)

8. Character of the American population. (Burch and Patterson, American Social Problems, chapter ix.)

9. An analysis of the American character. (Bryce, The American Commonwealth, vol. ii, chapters cxiv and cxv.)

10. Ways of getting a living. (Carver, Elementary Economics, chapter xv.)

11. Geographical distribution of cities and industries in the United States. (Semple, American History and Its Geographic Conditions, chapter xvi.)

12. Agricultural industries in the United States. (Bishop and Keller, Industry and Trade, part ii. Smith, Commerce and Industry, chapters i, in, iv, v, and vi.)

13. Animal industries in the United States. (Bishop and Keller, Industry and Trade, part iii. Smith, Commerce and Industry, chapter ii.)

14. Power. (Smith, Commerce and Industry, chapter ix.)

15. Mineral industries in the United States. (Bishop and Keller, Industry and Trade, part iv. Smith, Commerce and Industry, chapters viii, xiii, xiv, and xv.)

16. Manufacturing industries in the United States. (Bishop and Keller, Industry and Trade, part v.)

17. Trade routes of North America. (Smith, Commerce and Industry, chapter xvi.)

18. The foreign trade of the United States. (Dryer, Elementary Economic Geography, chapter xxxii. See also any other recently published text on this general field.)



CHAPTER VII

WHAT IS MEANT BY PRODUCTION

63. WHY MEN WORK.—Ultimately everyone depends upon work for his living. Young children commonly live upon the earnings of their parents; most normal adults, on the other hand, depend upon their own efforts for their living. Since every individual probably works because of a combination of motives, it is possible somewhat to analyze the reasons why men work. The most fundamental reason for working is in order to preserve one's life. This assured, the individual is in a position to work in order to preserve the lives of those who are near and dear to him. When the necessities of life have been provided, work is commonly continued for the sake of acquiring comforts or luxuries.

Under a well-regulated legal system these efforts of the individual also benefit the community, but until he is able to support himself and his family, the average individual does not consciously make the public interest the chief end of his labors. However altruistic a man may be, he will not be able to labor consistently in behalf of others, unless he will thereby serve his own interests as well, or unless his personal needs have already been met.

64. THE OLD WAY OF GETTING A LIVING.—The economic history of eighteenth century England illustrates two rather distinct methods of getting a living, one of which may be called the old, and the other the new. Up to about the middle of the century, the masses of Englishmen, in common with the people of other countries, got a very poor living. Most common necessities were made in the home and for purely family use. Shoes, clothing, tools, and similar articles were produced laboriously and on a small scale. In comparison with industrial conditions in the nineteenth century, there was at that time little industrial coperation [Footnote: By coperation is here meant simply the working together of different persons or groups of persons. Coperation in this sense is to be distinguished from coperation as discussed in Chapter XII.], little division of labor, little suspicion that men were, in spite of hard work engaged in for long hours, getting a very poor living. The trouble was, partly, that men had not yet fully realized the possibilities of helping one another, and partly that they were ignorant of how to make Nature really an efficient aid in getting them a living.

65. THE NEW WAY OF GETTING A LIVING.—After the middle of the eighteenth century the invention of a series of remarkable machines enabled Englishmen greatly to increase their productivity, first in the manufacture of textiles, and later in numerous other industries. By subdividing their labor more and more minutely, and by each specializing in the particular type of work which he could do best, men found that their total output could be greatly increased. This complex division of labor, made possible by the use of water and steam power to run machines and to move vehicles of transportation, reduced the difficulty of getting a good living, that it constituted a veritable revolution in industry. Indeed, this change is known in history as the Industrial Revolution.

66. EFFECTS OF THE INDUSTRIAL REVOLUTION.—In the last century and a half the Industrial Revolution has spread to every important civilized country in the world, everywhere encouraging the application of machine methods to more and more industries. This change from production on a small scale, and often by hand, to large-scale production in factories equipped with complex machines, has had important results. It has so increased our control over Nature that even the humblest workman of to-day enjoys many comforts denied kings a few centuries ago. On the other hand, the Industrial Revolution has tended to create a numerous class which depends entirely upon wages, and to set off against this class an employing group which possesses and controls most of the income-producing equipment of industry. The significance of this last development will become clearer as we go along.

67. NATURE OF MODERN PRODUCTION.—In the study of modern production two fundamental facts confront us. The first is that the economist does not define production as merely the making of material objects. We desire material objects only if they will satisfy our wants. Since, also, the satisfaction of wants is the important thing, it is clear that the performance of a service, such as teaching or painting, may be more important than the manufacture of a material object which no one wants. Production may thus be defined as the satisfaction of human wants. The manufacturer of a material object is productive only if that object is wanted by someone; he who supplies personal or professional service is productive if that service satisfies the wants of someone.

The second fundamental fact which confronts the student of modern production is the complexity of our industrial system. Three hundred years ago most of the commodities in daily use were made, either in the home and by the family members, or by small groups of artisans working together under relatively simple conditions. To-day production is a vast and complicated process. To the eye of the untrained observer a great mass of factories, farms, railroads, mills, machines, ships, and busy laborers appears without order and, often, without purpose. The task immediately before us is to analyze this mass, and to point out the nature of the various factors which contribute to the productive power of a community.

68. NATURE A FIRST FACTOR IN PRODUCTION.—Nature is defined by the economist as inclusive of all of the materials and forces furnished in the form of land and its products, oceans, lakes, rivers, rain, humidity, and climate. Since Nature is rather a vague term, and since, also, the economist looks upon land as the most important element in Nature, we may lump together all of the materials and forces of Nature and apply the term "land."

Taken in this sense, land is clearly of great importance in production. We build houses and factories upon it, we use it as a basis of transportation, we harness its motive power, and we make extensive use of the innumerable raw materials which it furnishes. Without land there could be no production, in the sense in which the economist understands the word.

69. MAN'S LABOR A SECOND FACTOR IN PRODUCTION.—Something besides land, or Nature, is necessary before our wants can be satisfied. Nature is often careless of our needs and desires. True, she offers us berries, coal, firewood, and many other commodities which are practically ready to use, but even these articles will not satisfy our wants unless we go to the trouble to secure possession of them. In an important sense Nature is passive, and if she is to furnish us with a living, we must engage in labor. This labor may be mental or physical, the important point being that it is effort undertaken to increase our control over Nature. Savages are content to use products in substantially the form in which Nature provides them; civilized peoples work over the products of Nature until the utility or want- satisfying power of those products has been greatly increased. Man's living improves as he progresses from indolence to hard physical labor, then from hard physical labor alone to a combination of physical and mental labor intelligently directed.

70. CAPITAL A THIRD FACTOR IN PRODUCTION.—Land to furnish raw materials, and man to make use of those materials,—what more is necessary? Nothing else would be necessary if all of Nature's gifts were readily accessible, and if man unaided could make the best use of them. But Nature hides or disguises many of her treasures, and man is physically weak. Hence he has hit upon the device of making tools to help him in his contest with Nature. During the period of the Industrial Revolution many simple tools were supplanted by complicated devices run by power and called engines and machines. To the economist tools and similar devices are a form of capital, capital being defined as inclusive of everything which man has created, or caused to be created, in order to help in further production. [Footnote: Land has not been created by man but is a gift of Nature. Land, therefore, is not a form of capital.]

The fashioning of hammers and saws, the construction of railways, and the manufacture of machinery, all these operations create capital. The systematic creation and use of capital is one of the distinguishing features of modern civilization. The laborer alone can produce little; aided by capital he can produce much. Capital is not important if one is willing to live like a savage; on the other hand, it is indispensable if one wishes to enjoy the benefits of civilization.

71. CORDINATION A FOURTH FACTOR IN PRODUCTION.—Land, labor, and capital are factors in production. Two hundred years ago nothing else was essential to production. The average individual had his own land, produced his own tools or capital, and relied chiefly or entirely upon his own labor.

But the Industrial Revolution enlarged and complicated production. It created an industrial system in which the individual is generally a specialist, producing a surplus of his one product, but dependent upon numerous other persons for most of the things which he personally consumes. To-day, for example, there are numerous individuals raising cattle, the hides of which are to be made into shoes; other individuals are perfecting means of transportation so that those hides may be carried to market; still other persons concern themselves only with the building of factories or with the manufacture of machines with which to work those hides into shoes. These various individuals and groups may never see each other, nevertheless they aid one another.

The secret of this often unseen and unconscious coperation is that there are individuals who specialize in the work of connecting up, or cordinating, the other factors which are necessary to the production of shoes. These individuals, about whom we shall have more to say in the next chapter, constitute an important economic group. They cordinate, in the example given above, the cattle grower, the railroad manager, the tanner, the factory builder, and the manufacturer, and thus make possible a kind of national or even international coperation which would otherwise be impossible. Those whose function it is to promote this coperation are, therefore, indispensable factors in modern production.

72. GOVERNMENT A FIFTH FACTOR IN PRODUCTION.—A cursory examination of modern industry would convince the observer that land, labor, capital, and cordination are important factors in production. There is, in addition, a factor which is so fundamental, and of such essential value, that it is sometimes overlooked altogether. This is the work of the government in protecting productive enterprises. Government aids in production by suppressing theft, violence, and fraud; by allowing individuals to engage in helpful businesses; by enforcing contracts entered into legally; and by punishing many kinds of monopolistic abuses. [Footnote: We shall take up the problem of monopoly in Chapters XXVII and XXVIII.] The whole fabric of American prosperity is built upon the foundation of law and order.

73. SUMMARY AND FORECAST.—Production in the economic sense consists in doing that which will satisfy human wants. Modern production is a vast and complicated process, involving the coperation of five factors: land, labor, capital, cordination, and government. In a later chapter we shall find that there are wide differences of opinion as to the relative importance of some of these factors. We shall find, indeed, that the most vital economic problems which confront American democracy depend for their solution upon a clear understanding of the facts stated or implied in this chapter. The student ought not, therefore, to accept hastily the statement that land, labor, capital, cordination, and government are necessary in production, but ought rather to reason out just how and why each is actually helpful in American industry.

QUESTIONS ON THE TEXT

1. What are the chief reasons why men work?

2. Describe the "old way of getting a living."

3. Just what is meant by the "new way of getting a living"?

4. What were the chief effects of the Industrial Revolution?

5. What is the economist's definition of production?

6. Just how does Nature help in production?

7. Explain the relation of Nature to land.

8. Show how man's labor is necessary in production.

9. What is the nature and function of capital?

10. Discuss cordination as a factor in production.

11. Name a fifth factor in production.

REQUIRED READINGS

1. Williamson, Readings in American Democracy, chapter vii.

Or all of the following:

2. Carver, Elementary Economics, chapters ix-xiii.

3. Adams, Description of Industry, chapter v.

4. Ely, Outlines of Economics, chapter viii.

5. Smith, Wealth of Nations, Book I, chapters i and ii.

QUESTIONS ON THE REQUIRED READINGS

1. What instinct in man gives rise to the division of labor? (Smith, chapter ii.)

2. Name and distinguish between the two kinds of division of labor. (Carver, pages 77-82.)

3. How does pin making illustrate the principle of the division of labor? (Smith, chapter i.)

4. How does the meat packing industry illustrate the principle of the division of labor? (Ely, page 125.)

5. To what extent does the cotton mill illustrate the principle of the division of labor? (Ely, pages 124-125.)

6. What are the three fundamental advantages which result from the division of labor? (Smith, chapter i; Carver, pages 75-76; Ely, page 126.)

7. What are the effects of the complex division of labor upon the worker? (Ely, pages 127-128.)

8. Describe the chief sources of power utilized by man. (Carver, chapter x.)

9. Discuss the origin of capital. (Carver, chapter xi.)

10. What are the two factors which give value to land? (Carver, page 111.)

11. Explain the statement that thousands of individuals coperate to furnish the humblest workman with food and clothing. (Smith, chapter i.)

12. What is the secret of modern industrial efficiency? (Adams, page 87.)

TOPICS FOR INVESTIGATION AND REPORT

I

1. Visit a factory, mill or shop in your vicinity and study the organization of the plant with regard to the application of the principle of the division of labor. Secure the amount of output per man by dividing the total product by the number of workmen coperating in its production. Compare the output per man under these conditions with the probable output per man if each workman were working separately, without material assistance from other workmen.

2. Study, both by inquiry and by observation, the effects of the division of labor upon the health and spirits of the workmen in the factory, mill or shop visited.

3. Classify the industries in your locality on the basis of whether they rely chiefly or entirely upon human, animal, water, steam or electric power. Why does each industry not utilize some other form of power than that actually used?

4. Classify some of the familiar occupation groups in your community according as they derive their incomes chiefly or entirely from land, labor, capital, or the process of cordinating land, labor, and capital. Test the productivity of each group by the standard advanced in section 67 of the text.

5. Attempt to show to what extent each of the five factors of production has contributed toward the erection and furnishing of your schoolhouse.

II

6. The Industrial Revolution in England. (Ely, Outlines of Economics, chapter iv. Cheyney, Introduction to the Industrial and Social History of England, chapter viii.)

7. Colonial industries. (Lessons in Community and National Life, Series A, pages 73-83; Series B, pages 17-25; Series C, pages 17-25. See also Bogart, Economic History of the United States, chapter iv.)

8. The Industrial Revolution in the United States. (Bogart, Economic History of the United States, chapter xii. Ely, Outlines of Economics, chapter vi. Marshall and Lyon, Our Economic Organization, chapter viii.)

9. The significance of the cotton gin. (Consult an encyclopedia.)

10. Cyrus McCormick and the reaper. (Consult an encyclopedia.)

11. The story of a loaf of bread. (Wood, The Story of a Loaf of Bread. Additional material on this subject may be secured by writing to the International Harvester Company, Chicago.)

12. The story of iron and steel. (Smith, The Story of Iron and Steel, pages 23-126.)

13. Development of business organization. (Lessons in Community and National Life, Series A, pages 169-178.)

14. Economic work of the United States government. (Dryer, Economic Geography, chapter xxxiii.)



CHAPTER VIII

EXCHANGING THE PRODUCTS OF INDUSTRY

74. RELATION OF THE DIVISION OF LABOR TO EXCHANGE.—In the self- sufficing stage that existed in industry a few hundred years ago, there was generally little necessity for the exchange of products. Each family produced most of the commodities which it needed, and depended relatively little upon the products of persons outside the family circle.

But the complex division of labor which developed out of the Industrial Revolution has made the exchange of products increasingly important. To-day the typical workman concentrates upon one particular kind of work, and is content to exchange a share of his earnings for the numerous goods and services which he cannot supply for himself. Exchange thus increases the total output of the community or nation by permitting individuals to specialize in those commodities which they can produce most effectively.

75. RELATION OF TRANSPORTATION AND COMMUNICATION TO EXCHANGE.— Exchange is largely dependent upon transportation and communication. In the United States, for example, not only do the individuals of a particular community specialize in various types of work, but the different sections of the country are devoted to the production of those commodities for which they are best suited. Thus it is largely true that New England is best suited to manufacturing, the South to the growing of cotton, and certain parts of the West to the production of lumber and foodstuffs. The suitability of a region to a particular class of products is due, partly to location, partly to the nature of the soil and the climate, and partly to the inclination and training of the people. But whatever its causes, this territorial division of labor could not be carried out without an efficient system of transportation and communication. Communication by mail, telephone, and telegraph is necessary to allow producers and consumers in different parts of the country to keep in touch with one another. Transportation by land and water is necessary if the surplus products of one section are to be exchanged for the surplus products of other sections.

76. TYPES OF CORDINATORS.—Those who perform the work of cordination in industry are commonly referred to indiscriminately as business men, middlemen, or entrepreneurs. [Footnote: the term "entrepreneur" is awkward and little known, but no more satisfactory term is available.] The meaning of these three terms is distinguished with difficulty, but to avoid confusion later on the essential character of each should be pointed out here. The term business man is very wide, and is commonly inclusive of all who actively engage in any sort of business. The primary function of the middleman is to act as a connecting link between various industrial enterprises. The entrepreneur, on the other hand, is primarily an individual who cordinates land, labor, and capital with the intention of initiating and conducting a business enterprise. In so far as he acts as a connecting link between other industrial agents, the entrepreneur is a middleman, but the middleman is usually thought of as an individual who connects up existing businesses, rather than initiating a new enterprise. To the functions of the entrepreneur we shall return in the next chapter; here it is the middleman proper who is our chief concern.

77. IMPORTANCE OF THE MIDDLEMAN.—The chief stages of shoe manufacture may serve to illustrate the great importance of the middleman in exchange. The middleman, anticipating a demand for beef and hides, connects the cattle grower with the live-stock market. Still later it is a middleman who offers raw hides to the tanner, and who sees that the wholesale leather merchant comes into business contact with the tanner. The banker or broker who connects the entrepreneur with the money with which to set up a shoe factory may be called a middleman, as may the individual who aids the entrepreneur in getting the required amounts of land and labor with which to start manufacturing. When, under the direction of the entrepreneur, the shoe has been manufactured, it is often a middleman who connects the shoe wholesaler with the finished product. The jobber who buys large quantities of shoes from the wholesaler and sells them to the retailer in small lots is a middleman. The advertising man whose description and pictorial representation of the shoe causes the consumer to buy it of the retailer is also a middleman.

78. NOT ALL MIDDLEMEN ARE SOCIALLY NECESSARY.—By cordinating the work of these various individuals, many of whom are themselves middlemen, the middlemen whom we have been describing allow the community to secure the full benefit of the division of labor and of exchange. Where there exist just enough middlemen to cordinate with maximum efficiency the various industrial agents of a community, the community gains. When, on the other hand, there are more middlemen at work than are really needed to perform the work of industrial cordination, the community loses. This loss is a double one: first, the working energy of the superfluous middlemen is wasted, or at least is applied uneconomically; second, middlemen are paid, directly or indirectly, out of the product which they handle, so that the handling of a commodity by an unnecessarily large number of middlemen means higher prices for the ultimate consumers of that commodity. [Footnote: The existence of superfluous middlemen constitutes a grave problem, to which more and more attention is being given. Various aspects of this problem are discussed in Chapters XII and XXV.]

79. BARTER.—We have seen what the middleman does; it remains to point out how, or by means of what mechanism, he performs his functions. When savages, and civilized peoples living under primitive conditions, wish to exchange their surplus goods, they generally resort to barter, i.e., they exchange one commodity directly for another. Where the division of labor has been so little developed that the goods to be exchanged are relatively few, this may work very well, but in modern industry barter would be inexpedient, if not impossible. The farmer who had a surplus of cattle and desired a piano might have great difficulty in finding a man who had a surplus piano and who also desired cattle. Even though the farmer liked the piano in question, and even though the owner of the piano were pleased with the farmer's cattle, it might be impossible to measure the value of the piano in units of cattle.

80. NATURE AND FUNCTION OF MONEY.—To facilitate exchange civilized peoples make an extensive use of money. Money may be defined as anything that passes freely from hand to hand as a medium of exchange. [Footnote: The terms "money" and "capital" are often used interchangeably. Strictly speaking, however, money is a form of capital. Moreover, it is only one form of capital] In modern times gold, silver, nickel, and copper coins have been the most familiar forms, though paper currency is also an important form of money. There is nothing mysterious about money: it is simply a means of facilitating exchange by saving time and by guaranteeing accuracy in measuring the relative values of commodities.

Let us see how money actually aids in the exchange, say, of cattle and pianos. The farmer disposes of his cattle to a middleman, receiving in return money, the authenticity of which is guaranteed by the government's stamp upon its face. There is no difficulty in making change, for money can be so minutely divided as to measure the value of an article rather exactly. The farmer does not fear that he could not use the money received for the cattle, for money is generally accepted in exchange for any commodity. The farmer now offers the money to the piano-owner, who is probably a middleman. Again the fact that money is finely divisible allows an accurate money measure of the value of the piano. The owner of the piano, if he is satisfied with the amount of money offered, does not hesitate to accept the farmer's money, since he, too, realizes that he can use the money to purchase the things that he in turn desires.

81. VALUE AND PRICE.—We have used the term "value" several times; as part of our preparation for the study of the great problem of industrial reform, we must understand precisely what is meant by the term.

Suppose, for the sake of clearness, that we speak of a market as a definite place where goods are bought and sold. Individuals take or send their surplus products to the market for sale; individuals desiring to buy commodities likewise resort to the market. In the market commodities are said to have value, that is to say, they have power in exchange. The power of a commodity in exchange is measured in money, and the amount of money for which a commodity will exchange is called its price. Price is thus a measure, in terms of money, of the value of a commodity.

The value of a commodity in the market is dependent, partly upon its utility, or want-satisfying power; and partly upon its scarcity. In other words, the value of a commodity depends partly upon the intensity with which it is desired by persons able and willing to purchase it, and partly upon its available supply. Price is set as the result of the interaction of the forces of supply and demand, this interaction commonly taking the form of a bargaining process between prospective sellers and prospective buyers.

QUESTIONS ON THE TEXT

1. Explain clearly the relation between the division of labor and exchange.

2. To what extent is exchange dependent upon transportation and communication?

3. Name three types of cordinators, and distinguish between them.

4. Illustrate the functions of the middleman with reference to the shoe industry.

5. Where there exist in a community more middlemen than are really needed, what double loss results?

6. What is barter?

7. Why is barter not extensively used in modern industry?

8. Define money.

9. What is the primary function of money?

10. Give an illustration of the service performed by money.

11. Define value. Distinguish between value and price.

12. Upon what two factors is value dependent?

13. How is price set or determined?

REQUIRED READINGS

1. Williamson, Readings in American Democracy, chapter viii.

Or all of the following:

2. Adams, Description of Industry, chapter viii.

3. Carver, Elementary Economics, chapters xix, xx, xxi, xxii, and xxiv.

4. Hayward, Money, What It Is and How to Use It, chapter viii.

5. Smith, Wealth of Nations, Book 1, chapters iii and iv.

QUESTIONS ON THE REQUIRED READINGS

1. Name some commodities which at one time or another have been used as money. (Carver, pages 215-216.)

2. Why were precious metals first coined? (Smith, chapter iv.)

3. What is meant by the phrase "Time is money"? (Carver, page 183.)

4. What is the function of the bank check? (Hayward, pages 58-60.)

5. Explain the meaning of scarcity. (Carver, page 203.)

6. What are the characteristics of a modern market? (Adams, pages 139- 148.)

7. What is meant by the "higgling of the market"? (Adams, page 139.)

8. What is the "first law of the market"? (Carver, page 201.)

9. What are the four industrial agencies on which the organization and practice of the modern market depend? (Adams, pages 148-152.)

10. What is meant by the "widening of the market"? (Carver, page 171.)

11. Explain the statement that "the division of labor is limited by the extent of the market." (Smith, chapter iii.)

TOPICS FOR INVESTIGATION AND REPORT

I

1. In the production of what commodities do the people of your section tend to specialize? To what extent is this specialization due to the nature of the soil and climate? To geographical location? To the training of the people?

2. What becomes of the surplus products of your section? Trace these products as nearly as possible to the ultimate consumer.

3. List the articles of food which appear on your dinner table and attempt to discover the source of each.

4. To what extent does the exchange of products in your section take place by means of canals, inland waterways, ocean-going vessels, motor truck, horse teams, railroads?

5. To what extent are the telephone and telegraph used to facilitate exchange in your section?

6. Visit a near-by market and study the operations there, with reference to the facts discussed in this chapter.

7. List and classify the middlemen of your community.

II

8. Internal trade and transportation in the United States a century ago. (Bogart and Thompson, Readings in the Economic History of the United States, pages 240-251.)

9. Transportation and communication in the United States since 1860. (Bogart, Economic History of the United States, chapters xxiv and xxv.)

10. Early forms of money. (Bullock, Selected Readings in Economics, pages 387-399.)

11. Forms of money at the present time. (Adams, Description of Industry, chapter x.)

12. Why coinage is necessary. (Bullock, Selected Readings in Economics, pages 399-400.)

13. The minting of coins. (Lessons in Community and National Life, Series C, pages 177-185.)

14. Paper money. (Lessons in Community and National Life, Series C, pages 185-192.)

15. Functions of money. (Adams, Description of Industry, chapter x.)

16. The commercial bank. (Lessons in Community and National Life, Series A, pages 187-192.)

17. An English fair in the eighteenth century. (Bullock, Selected Readings in Economics, pages 325-333.)

18. The development of business organization. (Marshall and Lyon, Our Economic Organization, chapters ix and x.)



CHAPTER IX

DISTRIBUTING THE INCOME OF INDUSTRY

82. THE PROBLEM PRIOR TO THE INDUSTRIAL REVOLUTION.—The distribution of industrial income has to do with dividing the products of industry, or the money which represents those products, among the various individuals who have aided in their creation.

The problem of distribution has existed ever since men first combined for purposes of production, but until the period of the Industrial Revolution the question was relatively unimportant. When, three hundred years ago, most necessities were produced within the family circle, there was little or no question as to whether or not individuals outside the family ought to be rewarded for having helped in the production of those commodities. If one member of the family made an entire pair of shoes, for example, he was clearly entitled to those shoes, at least so far as economic principles are concerned. Even where different members of the family combined to produce a pair of shoes or an article of clothing, the small number of persons involved, as well as the close identity of interests among the family members, kept the problem of distribution from becoming a serious one.

83. EFFECT OF THE INDUSTRIAL REVOLUTION UPON THE PROBLEM.—The Industrial Revolution greatly increased the importance of the problem of distribution. Indeed, the growth of the factory system, and the greater and greater complexity of the division of labor, have made the distribution of industrial income the basic problem in our economic and social life. Many commodities are still produced by individuals working independently, or by the joint efforts of the members of a family, but the vast majority of commodities are now produced by the joint efforts of numerous individuals who are not bound together by family ties. The production of a factory-made shoe, for example, involves large numbers of people, including the cattle grower, the transportation agent, the tanner, numerous laborers, the individuals who supply land and capital to the entrepreneur, and the entrepreneur who conducts the enterprise. The welfare of millions of people is involved in the distribution of industrial income among individuals who coperate in such enterprises as this.

84. DIFFICULTY OF THE PROBLEM.—Under modern industrial conditions most commodities are produced by the combined efforts of large numbers of people. All these people help along the productive process, though in different ways and to a varying degree. Since all help, all are entitled to payment. But this is less simple than it sounds. How shall we determine how much each one helps, and how shall we decide how much each one is to receive?

At the outset of the discussion, we can be sure of at least one fact, i.e. that since all the individuals involved in a given enterprise must be paid out of the value of the finished product, the combined sums received by them cannot long exceed the total value of that product. Unfortunately, this fact is often overlooked. Many of the individuals who aid in production often become so intent upon securing their share, that they are over-ready to explain their contribution to the product, but loath to give due credit to those who have coperated with them. It is the belief that some individuals receive too little of the joint income of industry, while other individuals receive too large a share, which has given rise to the charge of injustice in the distribution of wealth.

85. SIGNIFICANCE OF THE ENTREPRENEUR IN DISTRIBUTION.—For the sake of clearness, let us continue to illustrate the nature of distribution by reference to the shoe industry, carried on under conditions which are not unduly complicated.

The individual having control of the actual manufacture of the shoes is the entrepreneur. It is he who, in anticipation of a demand for shoes, has initiated the enterprise. Suppose, for the sake of simplicity, that the entrepreneur has secured land from the land- owner, capital from the capitalist, and labor from the workmen. Protected in a legitimate enterprise by the government, he has set himself up as a manufacturer of shoes. Since he is in control of the enterprise, it is he who pays the land-owner, the capitalist, and the laborers, for their respective contributions toward the finished shoes.

The amounts received by the individuals coperating with the entrepreneur are not, however, arbitrarily determined. The entrepreneur must bow to economic law, and give these individuals what free competition in industry sets as a proper reward for their respective services. Let us examine into this conformity to economic law.

86. THE LAND-OWNER RECEIVES RENT.—The land-owner is rewarded because he extends the use of land to the entrepreneur. A land-owner could not be expected to, and will not, allow the entrepreneur free use of this land. The land-owner must therefore be paid for the use of the land. The entrepreneur, on the other hand, is able and willing to pay for the use of the land because upon it he expects to build a factory in which to manufacture shoes. He therefore pays the land-owner an amount of money called rent. The amount of rent paid for a piece of land depends partly upon how much the entrepreneur wants the land, and partly upon the available supply of land of the type wanted. This is equivalent to saying that rent is determined by the interaction of the two forces of supply and demand.

87. THE CAPITALIST RECEIVES INTEREST.—Besides land, the entrepreneur needs machinery, office equipment, raw materials, the services of laborers, and numerous other aids in production. Let us assume that the entrepreneur borrows of a capitalist the money required to procure these necessities. The entrepreneur can afford to pay interest for the use of this money, since with the aid of the goods and services which it will buy, he can produce more shoes than would otherwise be possible. Not only can he afford to pay interest, but he is obliged to pay it, since otherwise he could not secure the required loan. Though some people tend carelessly to overlook this fact, saving and abstinence are necessary to the accumulation of money. The individual who has money, therefore, cannot be expected to allow the entrepreneur to use it without payment, especially not when, as we have just seen, the entrepreneur can acquire wealth by the use of the goods and services which that money will buy.

The amount of interest which the capitalist receives for the use of his money will depend, as will rent, upon the law of supply and demand. If there is a large amount of funds available for investment, and at the same time few borrowers, then a given capitalist must be content to accept a relatively low rate of interest, lest his refusal cause the entrepreneur to close a bargain with a competing capitalist. If, on the other hand, available funds are scarce and entrepreneurs are greatly in need of money, then capitalists are at an advantage and entrepreneurs must offer relatively high rates of interest.

88. THE LABORERS RECEIVE WAGES.—The payment which the laborers receive for their part in the production of the shoes is called wages. Since the laborers help in shoe manufacture, the employer can afford to pay them. Not only can he afford to pay them, but he must pay them. Otherwise the laborers would not work for this particular entrepreneur, but, in a freely competitive market, would offer their services to a competing employer.

Wages, like rent and interest, depend upon the conditions of supply and demand. If, in comparison with other aids in production, the services of laborers are wanted badly, and if, at the same time, there is a scarcity of the desired type of labor, then wages will be high. If, on the other hand, there is an over supply of laborers, and also a small demand for that type of labor, then wages will tend to be low.

89. THE GOVERNMENT RECEIVES TAXES.—In addition to paying the land- owner, the capitalist, and the laborers for their share in producing the shoes, the entrepreneur must pay taxes to the government. These taxes may be considered as payment for that maintenance of law and order without which the economical manufacture of shoes would be impossible. The share which goes to the government is determined by a unique method: the government does not try to secure as large a share of the product as possible, but strives, on the contrary, to exact as little as possible, and still meet its expenses. The subject of taxation requires special treatment [Footnote: See Chapter XXXII.] and does not, therefore, call for further mention in this chapter.

90. THE ENTREPRENEUR RECEIVES PROFITS.—That share of the income derived from the sale of the shoes which goes to the entrepreneur is called profits. It is only fair that the entrepreneur receive some reward, for it is he who conceived the idea of shoe manufacture and then carried out the project. Without his efforts the land-owner, the capitalist, and the laborers would not have combined in this enterprise, with the result that there would have been fewer shoes in the community. Fewer shoes would probably mean more expensive shoes. And not only does the entrepreneur deserve some reward for thus adding to the well-being of the community, but if he did not receive that reward, he would not go to the trouble of initiating and maintaining a shoe manufacturing establishment.

The share going to the entrepreneur is determined less exactly than is the share of the land-owner, the capitalist, and the laborers. In dividing up the income of the business, the shoe manufacturer must, in an important sense, put himself last. Before there are finished shoes to sell, he must pay the land-owner rent, the capitalist interest, and the laborers wages. Before he is allowed to count out his own share he must also pay taxes to the government, pay insurance on his plant, and set aside an amount sufficient to keep his buildings and machinery in repair. He cannot evade the payment of rent, interest, or wages on the plea that these payments will diminish his profits. He has contracted to pay the landlord, the capitalist, and the laborers, and he must fulfill that contract. If, after paying all of his expenses, there is anything left, the entrepreneur retains it as profits. Sometimes this share is very large, sometimes it is so small as to force the entrepreneur out of business. In any case, the chief risks and responsibilities of the whole enterprise are concentrated upon the entrepreneur, rather than upon the land-owner, the capitalist, or the laborers.

91. THE DETERMINANTS OF EACH SHARE.—To sum up, the share of the joint industrial income going respectively to the land-owner, the capitalist, and the laborers is determined by the interaction of the forces of supply and demand, operating under conditions of free competition. The entrepreneur's demand for land, labor, or capital will depend upon whether or not he sees an opportunity, under a particular set of circumstances, to add to his product by the employment of each or all of these factors. Where the supply of laborers is large, relatively to demand, the promised product of any one laborer is likely to be relatively small, and in this case the entrepreneur or employer will be unwilling or even unable to offer a particular laborer high wages. Under these circumstances the competition of the many laborers for the few jobs will accordingly bring about lower wages. Where, on the other hand, the supply of laborers is small, relatively to demand, the chances that a particular laborer will be able to add to the product are relatively great, and the competition of employers for laborers will result in higher wages. The same reasoning is applicable to rent and interest. The automatic operation of the law of supply and demand, functioning in a freely competitive market, determines the shares which go to land, labor, and capital. The share going to the individual entrepreneur is, as has already been pointed out, a residual share, i.e. what is left over.

QUESTIONS ON THE TEXT

1. What is meant by the distribution of industrial income?

2. Why was this distribution of relatively small importance prior to the Industrial Revolution?

3. In what way did the Industrial Revolution accentuate the importance of the problem of distribution?

4. What are the chief difficulties which confront the student of this problem?

5. What belief has given rise to the charge of injustice in the distribution of wealth?

6. Explain the significance of the entrepreneur in distribution.

7. What is the nature of rent?

8. Why does the capitalist receive interest?

9. Why does the laborer receive wages?

10. What is the government's share in distribution?

11. What is the nature of profits, and how are they determined?

REQUIRED READINGS

1. Williamson, Readings in American Democracy, chapter ix.

Or all of the following:

2. Carver, Elementary Economics, chapters xxx and xxxi.

3. King, Wealth and Income of the People of the United States, chapter vii.

4. Thompson, Elementary Economics, chapters xx to xxiv inclusive.

QUESTIONS ON THE REQUIRED READINGS

1. What is meant by non-competing groups? (Thompson, page 296.)

2. What are the chief causes of the difference in wages in different occupations? (Carver, page 268.)

3. Upon what factors does the efficiency of the laborer depend? (Thompson, page 303.)

4. What is the functional theory of wages? (Carver, pages 261—262.)

5. Have wages increased or decreased since 1850? (King, page 173.)

6. What is the relation of risk to interest? (Thompson, pages 351— 353.)

7. What is meant by the term "unearned increment"? (Thompson, pages 335—337.)

8. Define profits. (King, pages 155—156.)

9. Have profits increased since 1880? (King, page 177.)

10. Name some of the characteristics of the business man. (Thompson, pages 357—358.)

TOPICS FOR INVESTIGATION AND REPORT

I

1. Select for study some common commodity which passes through all or most of the stages of manufacture in your community, as, for example, a hammer, a shoe, flour or canned goods. Make a list of the various individuals who are connected with the production of this commodity. By whom are these various individuals paid? Does it appear to you that their services bear a close relation to the sums which they receive? Explain fully.

2. Select for study a plot of land which the owner has leased to a tenant in your community. Why is the tenant willing to pay rent for this plot? Why is he able to pay rent? Do you believe that under the existing circumstances he would be able to pay an increase of 10% in the rent? An increase of 50%? Explain.

3. Select for study an enterprise in your community in which the employer utilizes various groups of workmen. Classify the workmen on the basis of the amount of wages received. Why does the employer pay some high wages and others low wages?

4. Select for study a successful entrepreneur in your community. Outline, either as the result of hearsay, or personal interviews with him, the qualities to which he apparently owes his success.

5. Make a study of an enterprise in your community which has either recently failed, or which is not now in a thriving condition. Attempt to discover the reasons for the failure to progress.

II

6. The law of variable proportions. (Carver, Elementary Economics, chapter xxix.)

7. The nature of income. (King, Wealth and Income of the People of the United States, chapter v.)

8. Relation of public education to income. (Thompson, Elementary Economics, pages 299-303.)

9. Reasons for the scarcity of capital. (Carver, Elementary Economics, chapter xxxvi.)

10. The productivity of capital. (Taussig, Principles of Economics, vol. ii, chapter xxxviii.)

11. Historical changes in the rate of interest. (Bullock, Selected Readings in Economics, pages 563-568.)

12. The rent of land. (Carver, Elementary Economics, chapter xxxiii.)

13. Causes of the scarcity of labor. (Carver, Elementary Economics, pages 270-271.)

14. Historical changes in the rate of wages. (Bullock, Selected Readings in Economics, pages 533-543.)

15. The nature of profits. (Carver, Elementary Economics, chapter xxxvi.)

16. Relation of profits to risk. (Taussig, Principles of Economics, vol. ii, chapter xlix, section 1.)

17. Qualities of a successful entrepreneur. (Taussig, Principles of Economics, vol. ii, chapter xlix, sections 3 and 4.)

18. Motives of business activity. (Taussig, Principles of Economics, vol. ii, chapter xlix, section 6.)

19. The government's share in distribution. (Carver, Elementary Economics, chapter xxxvii.)



CHAPTER X

BASES OF THE CAPITALISTIC SYSTEM

92. THE "CAPITALISTIC SYSTEM."—Modern industry is sometimes said to be headless, because the numerous individuals engaged in it are not systematically controlled or directed by a single agency. It is often said to be planless, since laborers, employers, and other industrial agents concentrate upon their individual desires and needs, rather than upon the needs of the community or nation as a whole.

And yet there is in modern industry a certain regularity of outline, and a general tendency to follow the economic laws discussed in the preceding three chapters. This circumstance prevents us from concluding that our industrial life is entirely a haphazard affair. It may, indeed, be said that we have an industrial system. Because of the great importance in it of capital, this system is commonly known as the "capitalistic system." The underlying principles of this system have already been mentioned or implied; nevertheless it will be to our interest in this chapter to develop and organize these principles so as to indicate just how they constitute the bases of capitalism.

93. ATTITUDE OF GOVERNMENT TOWARD INDUSTRY.—"It is the duty of the government," Gladstone once said, "to make it easy for the people to do right, and difficult for them to do wrong." According to the theory of the capitalistic system, that is "right" which renders the individual and the community stronger, happier, and more prosperous in useful pursuits, while that is "wrong" which weakens or demoralizes the citizen and the community. The chief economic function of government is thus to discourage men from harmful and destructive acts, and to encourage them in activities which are helpful and productive.

Professor Carver points out that the method by which animals get their living is either destructive, deceptive, persuasive, or productive. Any one of these four methods may at least temporarily increase the well-being of the individual, but only the productive method is certain to benefit the community as well. A good government will therefore seek to prevent people from advancing their individual interests by killing, robbing, or deceiving their fellows. This suppression of violence and fraud leaves open to individuals only the productive method of getting a living, so that they cannot benefit themselves without at the same time adding to the prosperity of the community. From the standpoint of capitalism, thus, a good government maintains an attitude toward industry which is primarily negative: such a government hampers the economic activities of individuals very little or not at all, so long as they do not practice harmful methods of getting a living.

94. PRIVATE PROPERTY.—Most men are self-centered. In even a highly developed society, men ordinarily will not work consistently except in their own behalf, or in the behalf of a very few people for whom they care intensely. This instinct of self-interest is the kernel of industrial progress, but it can result in material prosperity only when government suppresses violence and fraud. The lowest savages are undoubtedly self-centered, but so long as they must rely upon brute force to retain their possessions, there is little inducement to acquire wealth. It is only when law suppresses robbery and fraud, and otherwise protects the individual in his property rights, that the acquisitive instinct will cause him to exert himself in productive ways. Because it satisfies the individual's desire to secure the good things of life, the institution of private property is the greatest known spur to economic activity, It is only in those countries where individuals are protected in their property rights that we find an active, progressive, and prosperous people.

95. ENFORCEMENT OF CONTRACTS.—We have already seen that among the members of a modern industrial society there is a high degree of interdependence, corresponding, in an important sense, to the interdependence between the parts of a machine. As we have seen, the typical individual in industry is a specialist, concentrating upon one particular kind of work, and depending upon his fellows to supply him with goods and services which he cannot supply for himself. Now, such a condition of interdependence could never have arisen were it not for the fact that government fosters the spirit of confidence among individuals. Many persons can be trusted to fulfill the agreements or contracts which they make with their fellows, but many cannot. A prime function of government, therefore, is to enforce contracts entered into voluntarily and in legal form. This is clearly essential to our material prosperity, for if men are to rely upon the word of those who sell them goods or services, or to whom they sell goods or services, all of the individuals concerned must be dependable.

96. COMPETITION.—A good government will shunt men into productive activities, and it will insist upon the fulfilment of lawful contracts. Subject to these two limitations, individuals are relatively free to seek their own well-being. But an earmark of economic goods is scarcity, that is, there are at a given time and place fewer of them than are desired. Men must therefore compete with one another for goods and services. The lower animals compete for food with tooth and claw; among civilized men government tries to raise competition to an ethical plane by tending to suppress all but the productive methods of competition.

Where competition is so restricted and safeguarded, advocates of capitalism assert that the results are overwhelmingly good. Where there is free competition, i.e. free competition in productive enterprise, employers commonly pay their laborers as high a wage as they feel is justified under the particular circumstances, lest their workmen abandon them for rival employers. Under similar conditions, laborers will generally endeavor to render the best possible service, so that the employer will prefer them to other laborers. This assumes, of course, that competition is effective, i.e., that there is neither an oversupply or an undersupply of either employers or employees.

Where, again, there is free competition in productive enterprise, the price of commodities produced by a given concern cannot rise too far, for consumers will either buy those commodities of rival producers, or will use substitutes. If, on the other hand, prices drop so low that producers make little or no profits, they will withdraw from business.

Free and effective competition thus means rivalry in satisfying wants, that rivalry being engaged in for the sake of private gain. Competition tends to harmonize the interests of the individual with the interests of the community, by making the success of the individual depend primarily upon what he accomplishes for his fellows.

97. VALUE UNDER CONDITIONS OF FREE COMPETITION.—In a competitive market, as we have seen, value depends upon scarcity and utility. No one will ordinarily pay for a commodity unless it will satisfy his wants, i.e. unless it has utility. But even though a commodity has utility, no one will ordinarily pay for it unless it is so scarce that he cannot get as much of it as he wishes without paying for it. Air, for example, has great utility, but it is so abundant that it can ordinarily be secured without payment. Hence it has no value.

Price, the measure of value in terms of money, will be determined, under conditions of free competition, by the interaction of utility and scarcity. Diamonds are high in price because they satisfy intense desires and are scarce; bread is cheap because while possessing great utility, it is relatively abundant. Skilled labor receives high wages because in addition to its utility it is relatively scarce; unskilled labor often receives low wages because while possessing utility it is relatively abundant. This principle is of the very greatest consequence, and in considering the programs of industrial reform we shall come back to it again.

98. FREEDOM.—A large measure of personal liberty is a characteristic of the capitalistic system, To an increasing extent, government is restricting economic activity to productive channels, but with this qualification, the individual is comparatively free to do as he likes. The laborer is free to move about in search of work, free to seek a better job, free to accept or to reject work offered him. He may abandon his job when he chooses, and remain idle as long as he chooses, or is able. He is repressed by no paternalistic government, embarrassed by no feudal system. He is part and parcel of the competitive system, guiding his own actions and accepting responsibility for them. To a large extent, the employer is similarly free to hire or discharge men as he sees fit, to initiate a new business, or to withdraw from business altogether. In every case the individual is free, so far as legal restrictions are concerned, to use his money as he chooses. Whether it is hoarded, invested, or wasted is largely a matter for him to determine.

99. BENEFITS OF THE CAPITALISTIC SYSTEM.—The material prosperity of the modern world has been attained under the capitalistic system of industry. The system was not invented, but has developed and spread from small beginnings because the experience of centuries has proved it to be the best known system which is applicable to human industry. The starting point of all material prosperity has been the gradual development of government which suppresses violence and fraud, which enforces contracts, and which makes possible the rise of the institution of private property. The inception of the Industrial Revolution, and its spread beyond England to Europe, America, and, later, to Asia, were possible only because these bases of capitalism were already laid. To a large extent, thus, the steam engine, the railroad, the steamship, the electric light, and countless other inventions which have helped to revolutionize the world we live in, may be traced directly or indirectly to individual freedom and to the protection of property rights. In so far as science, art, and literature depend, to a considerable degree, upon material prosperity, we may go so far as to say that capitalism is the most important single basis of modern civilization.

100. DEFECTS OF THE CAPITALISTIC SYSTEM.—But capitalism is not without its defects. The lack of centralized control in industry allows of planless production. [Footnote: During our participation in the World War, it is largely true that much of the productive energy of the country was organized and directed as a unit. This was a temporary expedient, however, resorted to for the purpose of winning the war.] Entrepreneurs frequently produce without adequate knowledge of demand, and without knowledge of rival production. When business is booming and profits are high, it often happens that so many individuals go into business that eventually there is over-production, i.e. there are more goods at a particular time than can be sold at a profit. Crises, unemployment, and "hard times" are often the direct result of this over-production. Malnutrition, disease, vice, crime, and pauperism are often its indirect results.

In still other ways the capitalistic system allows of an uneconomical expenditure of labor and capital. There is no adequate method of directing labor and capital toward the production of durable and helpful commodities, and away from the production of luxuries and such harmful commodities as have not been made illegal. Under competitive conditions, too, a number of shops or stores may exist in a community that might easily be served by a single firm. This is wasteful duplication, just as advertising is a waste when it goes beyond the point of informing the public as to whereabouts and character of commodities. Still another source of waste is traceable to an excessive number of middlemen, each of whom adds to the price of the product as it passes through his hands.